BOCH.L Regulatory News (BOCH)

BANK OF CYPRUS HOLDINGS

INTERIM FINANCIAL REPORT 2024

INTERIM MANAGEMENT REPORT 2024

The Interim Financial Report relates to Bank of Cyprus Holdings Public Limited Company (the Company) and together with its subsidiaries the Group, which was listed on the London Stock Exchange ('LSE') and the Cyprus Stock Exchange ('CSE') as at 30 June 2024.

Activities

The Company is the holding company of the Group and of Bank of Cyprus Public Company Ltd ('BOC PCL' or the 'Bank'). The principal activities of BOC PCL and its subsidiary companies involve the provision of banking, financial, and insurance services and the management and disposal of property predominately acquired in exchange of debt.

All Group companies and branches are set out in Note 38 to the Consolidated Condensed Interim Financial Statements. The Group has established branches in Greece. There were no acquisitions of subsidiaries and no material disposals of subsidiaries during the six months ended 30 June 2024. Information on Group companies and acquisitions and disposals during the period are detailed in Note 38 to the Consolidated Condensed Interim Financial Statements.

Group financial results on the underlying basis

Commentary on underlying basis

The financial information presented in this section provides an overview of the Group financial results for the six months ended 30 June 2024 on the 'underlying basis', which management believes best fits the true measurement of the performance and position of the Group, as this presents separately any non-recurring items and also includes certain reclassifications of items, other than non-recurring items, which are done for presentational purposes under the underlying basis for aligning their presentation with items of a similar nature.

Reconciliations between the statutory basis and the underlying basis to facilitate the comparability of the underlying basis to the statutory information, are included in section 'Reconciliation of the Interim Consolidated Income Statement for the six months ended 30 June 2024 between the statutory basis and the underlying basis' and 'Alternative Performance Measures Disclosures' of the Interim Financial Report 2024.

The main financial highlights for the six months ended 30 June 2024 are set out below:

Interim Consolidated Income Statement on the underlying basis

Group financial results on the underlying basis (continued)

Interim Consolidated Income Statement on the underlying basis (continued)

Interim Consolidated Balance Sheet on the underlying basis

Group financial results on the underlying basis (continued)

Interim Consolidated Balance Sheet on the underlying basis (continued)

Group financial results on the underlying basis (continued)

Reconciliation of the Interim Consolidated Income Statement for the six months ended 30 June 2024 between the statutory basis and the underlying basis

* Net insurance result per underlying basis comprises the aggregate of captions 'Net insurance finance income/(expense) and net reinsurance finance income/(expense)', 'Net insurance service result' and 'Net reinsurance service result' per the statutory basis.

The reclassification differences between the statutory basis and the underlying basis are explained below:

· 'Net gains on derecognition of financial assets measured at amortised cost' of €1 million under the statutory basis comprise net gains on derecognition of loans and advances to customers included in 'Loan credit losses' under the underlying basis as to align their presentation with the loan credit losses on loans and advances to customers.

· 'Provisions for pending litigations, claims, regulatory and other matters (net of reversals)' amounting to €3 million presented within 'Operating profit before credit losses and impairment' under the statutory basis, are presented under the underlying basis in conjunction with loan credit losses and impairments.

· 'Credit losses on financial assets' and 'Impairment net of reversals of non-financial assets' under the statutory basis include: i) credit losses to cover credit risk on loans and advances to customers of €17 million, which are included in 'Loan credit losses' under the underlying basis, and ii) credit losses of other financial assets of €0.3 million and impairment net of reversals of non-financial assets of €25 million, which are included in 'Impairment of other financial and non-financial assets' under the underlying basis, as to be presented separately from loan credit losses.

Balance Sheet Analysis

Capital Base

Total equity excluding non-controlling interests totalled €2,607 million as at 30 June 2024 compared to €2,467 million as at 31 December 2023. Shareholders' equity totalled to €2,387 million as at 30 June 2024 compared to €2,247 million as at 31 December 2023.

The regulatory Common Equity Tier 1 capital (CET1) ratio on a transitional basis stood at 18.3% as at 30 June 2024 compared to 17.4% as at 31 December 2023. Throughout this Interim Management Report, the regulatory capital ratios as at 30 June 2024 include reviewed profits for the six months ended 30 June 2024 in line with the ECB Decision (EU) (2015/656) on the recognition of interim or year-end profits in CET1 capital in accordance with Article 26(2) of the CRR, net of distribution accrual at the top end of the Group's approved distribution policy in line with Commission Delegated Regulation (EU) No 241/2014 principles, (such ratios are referred to as regulatory). As per the latest SREP decision, any distribution is subject to regulatory approval. Such distribution accrual in respect of 2024 earnings does not constitute a binding commitment for a distribution payment nor does it constitute a warranty or representation that such a payment will be made. Since September 2023, a charge is deducted from own funds in relation to the ECB prudential expectations for NPEs, which amounted to 26 basis points as at 30 June 2024, compared to 32 basis points as at 31 December 2023. A prudential charge in relation to an onsite inspection on the value of the Group's foreclosed assets is being deducted from own funds since June 2021, the impact of which was 7 basis points on Group's CET1 ratio as at 30 June 2024 (compared to 12 basis points on Group's CET1 ratio as at 31 December 2023). In addition, the Group is subject to increased capital requirements in relation to its real estate repossessed portfolio, which follow a SREP provision to ensure minimum capital levels retained on long-term holdings of real estate assets, with such requirements being dynamic by reference to the in-scope REMU assets remaining on the balance sheet of the Group and the value of such assets. As at 30 June 2024, the impact of these requirements was 47 basis points on Group's CET1 ratio, compared to 24 basis points as at 31 December 2023. The above-mentioned requirements are within the capital plans of the Group and incorporated within its capital projections.

The regulatory Total Capital ratio on a transitional basis stood at 23.3% as at 30 June 2024 compared to 22.4% as at 31 December 2023.

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

On 30 November 2022, the CBC, following the revised methodology described in its macroprudential policy, decided to increase the CcyB from 0.00% to 0.50% of the total risk exposure amounts in Cyprus of each licensed credit institution incorporated in Cyprus effective from 30 November 2023. Further, in June 2023, the CBC announced an additional increase of 0.50% in the CcyB of the total risk exposure amounts in Cyprus of each licensed credit institution incorporated in Cyprus effective from June 2024, increasing the CcyB to 1.00%. As a result, the CcyB for the Group as at 30 June 2024 amounted to approximately 0.94%.

The Bank has been designated as an Other Systemically Important Institution (O-SII) by the Central Bank of Cyprus (CBC) in accordance with the provisions of the Macroprudential Oversight of Institutions Law of 2015 and the relevant buffer increased by 37.5 basis points to 1.875% on 1 January 2024. In April 2024, following a revision by the CBC of its policy for the designation of credit institutions that meet the definition of O-SII institutions and the setting of O-SII buffer to be observed, the Group's O-SII buffer has been reduced to 2.00% on 1 January 2026 (from the previous assessment of 2.25% on 1 January 2025) to be phased by 6.25 basis points annually, to 1.9375% on 1 January 2025 and 2.00% as of 1 January 2026 from the current level of 1.875%.

As at 30 June 2024, the Group's minimum phased-in CET1 capital ratio requirement is set at 11.36%, comprising a 4.50% Pillar I requirement, a 1.55% Pillar II requirement, the Capital Conservation Buffer of 2.50%, the O-SII Buffer of 1.875% and CcyB of approximately 0.94%. Likewise, the Group's minimum phased-in Total Capital ratio requirement is set at 16.06%, comprising an 8.00% Pillar I requirement, of which up to 1.50% can be in the form of AT1 capital and up to 2.00% in the form of T2 capital, a 2.75% Pillar II requirement, the Capital Conservation Buffer of 2.50%, the O-SII Buffer of 1.875% and the CcyB of approximately 0.94%. The ECB has also provided revised lower non-public guidance for an additional Pillar II CET1 buffer (P2G) compared to previous year.

Balance Sheet Analysis (continued)

Capital Base (continued)

Own funds held for the purposes of P2G cannot be used to meet any other capital requirements (Pillar I, Pillar II requirements or the combined buffer requirement), and therefore cannot be used twice.

The Group's minimum phased-in CET1 capital ratio requirement as at 31 December 2023 was set at 10.72%, comprising a 4.50% Pillar I requirement, a 1.73% Pillar II requirement, the Capital Conservation Buffer of 2.50%, the O-SII Buffer of 1.50% and the CcyB of approximately 0.48%. The Group's minimum phased-in Total Capital ratio requirement was set at 15.56%, comprising an 8.00% Pillar I requirement, of which up to 1.50% can be in the form of AT1 capital and up to 2.00% in the form of T2 capital, a 3.08% Pillar II requirement, the Capital Conservation Buffer of 2.50%, the O-SII Buffer of 1.50% and the CcyB of approximately 0.48%. Following the annual SREP performed by the ECB in 2022, ECB had also maintained the non-public guidance for an additional Pillar II CET1 buffer (P2G) for 2023 unchanged compared to 2022.

Distributions

In April 2023, the Company obtained the approval of the ECB to pay a dividend of €0.05 per ordinary share in respect of earnings for the year ended 31 December 2022. This was the first dividend payment after 12 years underpinning the Group's position as a strong and well-diversified organisation, capable of delivering sustainable shareholder returns.

In March 2024, the Company obtained the approval of the ECB to pay a cash dividend and to conduct a share buyback (together the 'Distribution'). The Distribution corresponded to a 30% payout ratio of FY2023 adjusted recurring profitability and amounted to €137 million in total, comprising a cash dividend of €112 million and a share buyback of up to €25 million. The proposed final dividend of €0.25 per ordinary share was declared at the Annual General Meeting ('AGM') which was held on 17 May 2024. The dividend was paid in cash on 14 June 2024.

In April 2024, the Group launched its inaugural programme to buy back ordinary shares in the Company for an aggregate consideration of up to €25 million (the 'Programme'). The purpose of the Programme is to reduce the Company's share capital and therefore shares purchased under the Programme will be cancelled. The Company has entered into non-discretionary agreements with Numis Securities Limited (trading as 'Deutsche Numis') and The Cyprus Investment and Securities Corporation Ltd ('CISCO') acting as joint lead managers, to conduct the Programme and to repurchase Shares on the Company's behalf and to make trading decisions under the Programme independently of the Company in accordance with certain pre-set parameters. The Programme takes place on both the London Stock Exchange and the Cyprus Stock Exchange and may continue until 14 March 2025 subject to market conditions, the ongoing capital requirements of the business and early termination rights customary for a transaction of this nature. The implementation of the share buyback programme complies with the Company's general authority to repurchase the Company's ordinary shares as approved by shareholders at the Company's AGM on 17 May 2024, and with the terms of the approval received from the ECB. The maximum number of shares that may be repurchased under the ECB approval is 1.6% of the total outstanding shares as at 31 December 2023 (i.e. up to 7,343,249 Shares).

The Distribution in respect of 2023 earnings was equivalent to approximately 130 basis points on CET1 ratio as at 31 December 2023.

Distribution policy

The Group aims to provide a sustainable return to shareholders. Distributions are expected to be in the range of 30-50% payout ratio of the Group's adjusted recurring profitability, including cash dividends and buybacks, with any distribution being subject to regulatory approval. Group adjusted recurring profitability is defined as the Group's profit after tax before non-recurring items (attributable to the owners of the Company) taking into account distributions under other equity instruments such as the annual AT1 coupon. In line with the Group's distribution policy, the Group is committed to delivering sustainably growing distributions through a combination of cash dividend and share buybacks while maintaining a robust capital base to support profitable growth and prudently prepare for upcoming potential regulatory changes. Supported by its continued progress towards its strategic targets, the Group intends to move towards the top-end of the 30%-50% range of its distribution policy (i.e 50% payout ratio) for 2024, subject to required approvals. Any proposed distribution quantum, as well as envisaged allocation between dividend and buyback, will take into consideration market conditions as well as the outcome of its ongoing capital and liquidity planning exercises at the time. Given the strong capital generation, the Group's distribution policy is expected to be reviewed with the full year 2024 financial results in the context of prevailing market conditions.

Balance Sheet Analysis (continued)

Capital Base (continued)

Share Capital

As at 30 June 2024, there were 444,812,058 issued ordinary shares with a nominal value of €0.10 each, compared to 446,199,933 issued ordinary shares as at 31 December 2023. The reduction since the beginning of the year relates to the share buyback programme that was launched in April 2024. For further details please refer to section 'Distributions' above.

Other equity instruments

At 30 June 2024, the Group's other equity instruments relate to Additional Tier 1 Capital Securities (the 'AT1 securities') and amounted to €220 million (31 December 2023: €220 million).

The Fixed Rate Reset Perpetual Additional Tier 1 Capital Securities constitute unsecured and subordinated obligations of the Company, are perpetual and are issued at par. They carry an initial coupon of 11.875% per annum, payable semi-annually and resettable on 21 December 2028 and every five years thereafter.

The Company will have the option to redeem these capital securities from, and including, 21 June 2028 to, and including, 21 December 2028 and on each interest payment date thereafter, subject to applicable regulatory consents and the relevant conditions to redemption.

Legislative amendments for the conversion of DTA to DTC

Legislative amendments allowing for the conversion of specific deferred tax assets (DTA) into deferred tax credits (DTC) became effective in March 2019. The legislative amendments cover the utilisation of income tax losses transferred from Laiki Bank to the Bank in March 2013. The introduction of the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD) IV in January 2014 and its subsequent phasing-in led to a more capital-intensive treatment of this DTA for the Bank. With this legislation, institutions are allowed to treat such DTAs as 'not relying on future profitability', according to CRR/CRD IV and as a result not deducted from CET1, hence improving a credit institution's capital position. The Law provides that a guarantee fee on annual tax credit is payable annually by the credit institution to the Government.

Following certain modifications to the Law in May 2022, the annual guarantee fee is to be determined by the Cyprus Government on an annual basis, providing however that such fee to be charged is set at a minimum fee of 1.5% of the annual instalment and can range up to a maximum amount of €10 million per year.

The Group estimates that such fees could range up to approximately €5 million per year (for each tax year in scope i.e. since 2018) although the Group understands that such fee may fluctuate annually as to be determined by the Ministry of Finance.

Regulations and Directives

The 2021 Banking Package (CRR III and CRD VI and BRRD)

In October 2021, the European Commission adopted legislative proposals for further amendments to the Capital Requirements Regulation (CRR), CRD and the BRRD (the '2021 Banking Package'). Amongst other things, the 2021 Banking Package would implement certain elements of Basel III that have not yet been transposed into EU law. In the case of the proposed amendments to CRD and the BRRD, their terms and effect will depend, in part, on how they are transposed in each member state. In December 2023, the preparatory bodies of the Council and European Parliament endorsed the amendments to the CRR and the CRD and the legal texts were published on the Council and the Parliament websites. In April 2024, the European Parliament voted to adopt the amendments to the CRR and the CRD, Regulation (EU) 2024/1623 (known as CRR III) and Directive (EU) 2024/1619 (known as CRD VI) were published in the EU's official journal in June 2024, with entry into force 20 days from the date of the publication. Most provisions of the CRR III will become effective on 1 January 2025 with certain measures subject to transitional arrangements or to be phased in over time. Member states shall adopt and publish, by 10 January 2026, the laws, regulations and administrative provisions necessary to comply with CRD VI and shall apply most of those measures by 11 January 2026. 

Balance Sheet Analysis (continued)

Regulations and Directives (continued)

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 ΙΙ came into effect and was required to be transposed into national law. BRRD II was transposed and implemented in Cyprus law in May 2021. In addition, certain provisions on MREL have been introduced in CRR ΙΙ which also came into force on 27 June 2019 as part of the reform package and were immediately effective.

In January 2024, the Bank received final notification from the SRB regarding the 2024 MREL decision, by which the final MREL requirement is now set at 25.0% of RWAs (or 30.3% of RWAs taking into account the expected prevailing CBR as at 31 December 2024 which needs to be met with own funds on top of the MREL) and 5.91% of Leverage Ratio Exposure (as defined in the CRR) and must be met by 31 December 2024.

The Bank must comply with the MREL requirement at the consolidated level, comprising the Bank and its subsidiaries.

In April 2024, the Bank proceeded with an issue of €300 million green senior preferred notes (the 'Green Notes'). The Green Notes comply with the MREL criteria and contribute towards the Bank's MREL requirement. For further details, please refer to section 'Funding and Liquidity' below.

The MREL ratio as at 30 June 2024, calculated according to the SRB's eligibility criteria currently in effect and based on internal estimate, stood at 33.4% of RWAs (including capital used to meet the CBR) and at 14.0% of LRE (based on the regulatory Total Capital as at 30 June 2024). The CBR stood at 5.31% as at 30 June 2024 (compared to 4.48% as at 31 December 2023), reflecting the increase of the CcyB from approximately 0.49% to approximately 0.94% in June 2024.

The CBR is expected to increase further as a result of the phasing in of O-SII buffer from 1.875% to 1.9375% on 1 January 2025 and to 2.00% on 1 January 2026.

Throughout this Interim Management Report, the MREL ratios as at 30 June 2024 include profits for the six months ended 30 June 2024 in line with the ECB Decision (EU) (2015/656) on the recognition of interim or year-end profits in CET1 capital in accordance with Article 26(2) of the CRR, net of distribution accrual at the top end of the Group's approved distribution policy in line with Commission Delegated Regulation (EU) No 241/2014 principles.

Funding and Liquidity

Funding

Funding from Central Banks

Following the repayment of €1.7 billion under the seventh TLTRO III operation in March 2024 and €0.3 billion under the eighth TLTRO III operation in June 2024, the Group's funding from central banks was reduced to nil as at 30 June 2024, compared to €2,044 million as at 31 December 2023.

Balance Sheet Analysis (continued)

Funding and Liquidity (continued)

Funding (continued)

Deposits

Customer deposits totalled €19,723 million at 30 June 2024, compared to €19,337 million at 31 December 2023 up by 2% since the beginning of the year. Customer deposits are mainly retail-funded and approximately 57% of deposits are protected under the deposit guarantee scheme as at 30 June 2024.

The Bank's deposit market share in Cyprus reached 37.5% as at 30 June 2024, compared to 37.7% as at 31 December 2023. Customer deposits accounted for 77% of total assets and 86% of total liabilities at 30 June 2024 (compared to 73% of total assets and 80% of total liabilities as at 31 December 2023). The increase since the beginning of the year relates to the repayment of €2.0 billion TLTRO and the 2% increase in customer deposits.   

The net loans to deposits (L/D) ratio stood at 51% as at 30 June 2024, compared to 51% as at 31 December 2023 on the same basis, flat since the beginning of the year.

Subordinated liabilities

At 30 June 2024, the carrying amount of the Group's subordinated liabilities amounted to €313 million, compared to €307 million at 31 December 2023 and relate to unsecured subordinated Tier 2 Capital Notes ('T2 Notes').

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

Debt securities in issue

At 30 June 2024, the carrying value of the Group's debt securities in issue amounted to €971 million, compared to €672 million at 31 December 2023 and relate to senior preferred notes. The increase of 45% since the beginning of the year relates to the issuance of €300 million green senior preferred notes ('Green Notes') in April 2024.

In April 2024, the Bank successfully launched and priced an issuance of €300 million green senior preferred notes. The Green Notes were priced at par with a fixed coupon of 5% per annum, payable in arrear, until the Option redemption date, i.e. 2 May 2028. The maturity date of the Green Notes is 2 May 2029; however, the Bank may, at its discretion, redeem the Green Notes on the Optional Redemption Date subject to meeting certain conditions (including applicable regulatory consents) as specified in the Terms and Conditions. If the Green Notes are not redeemed by the Bank, the coupon payable from the Optional Redemption Date until the Maturity Date will convert from a fixed rate to a floating rate and will be equal to 3-month Euribor plus 197.1 basis points, payable quarterly in arrear.

The issuance was met with strong demand, attracting interest from more than 120 institutional investors, with a final orderbook over four times over-subscribed at €1.3 billion and final pricing 50 basis points tighter than the initial pricing indication. The transaction represents the Bank's inaugural green bond issuance in line with the Group's Beyond Banking approach, aimed at creating a stronger, safer and future-focused bank and leading the transition of Cyprus to a sustainable future. An amount equivalent to the net proceeds of the Green Notes will be allocated to Eligible Green Projects as described in the Bank's Sustainable Finance Framework, which include Green Buildings, Energy Efficiency, Clean Transport and Renewable Energy.

Post this issuance, the Bank finalized its MREL build-up and created a comfortable buffer over the final requirements of 25% of RWAs (or 30.3% of RWAs taking into account the prevailing CBR as at 31 December 2024) and 5.91% of LRE which the Bank must meet by 31 December 2024. For further details, please refer to section 'Minimum Requirement for Own Funds and Eligible Liabilities (MREL)'.

Balance Sheet Analysis (continued)

Funding and Liquidity (continued)

Funding (continued)

Debt securities in issue (continued)

In July 2023, the Bank successfully launched and priced an issuance of €350 million of senior preferred notes (the 'Notes'). The Notes were priced at par with a fixed coupon of 7.375% per annum, payable annually in arrear, until the Optional Redemption Date i.e. 25 July 2027. The maturity date of the Notes is 25 July 2028; however, the Bank may, at its discretion, redeem the Notes on the Optional Redemption Date subject to meeting certain conditions (including applicable regulatory consents) as specified in the Terms and Conditions. If the Notes are not redeemed by the Bank, the coupon payable from the Optional Redemption Date until the Maturity Date will convert from a fixed rate to a floating rate and will be equal to 3-month Euribor + 409.5 basis points, payable quarterly in arrear. The Notes comply with the criteria for the Minimum Requirement for Own Funds and Eligible Liabilities ('MREL') and contribute towards the Bank's MREL requirements.

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

Liquidity

At 30 June 2024, the Group Liquidity Coverage Ratio (LCR) stood at 304% compared to 359% at 31 December 2023, well above the minimum regulatory requirement of 100%. The LCR surplus as at 30 June 2024 amounted to €7.5 billion, compared to €9.1 billion at 31 December 2023 as the issuance of €300 million of the green senior preferred notes in April 2024 and the increase in customer deposits partially offset the impact from the repayment of the remaining TLTRO III of €300 million in June 2024.

At 30 June 2024, the Group Net Stable Funding Ratio (NSFR) stood at 156% (compared to 158% at 31 December 2023), well above the minimum regulatory requirement of 100%.

Loans

Group gross loans totalled €10,318 million at 30 June 2024, compared to €10,070 million at 31 December 2023.

New lending granted in Cyprus totalled €1,227 million for the six months ended 30 June 2024 compared to €1,118 million for the six months ended 30 June 2023, driven mainly by corporate demand. New lending in the six months ended 30 June 2024 comprised €568 million of corporate loans, €402 million of retail loans (of which €236 million were housing loans), €120 million of SME loans and €137 million of shipping and international loans.

At 30 June 2024, the Group net loans and advances to customers totalled €10,085 million compared to €9,822 million at 31 December 2023.

The Bank is the largest credit provider in Cyprus with a market share of 43.2% at 30 June 2024, compared to 42.2% at 31 December 2023.

In December 2023, the Bank entered into an agreement with Cyprus Asset Management Company ('KEDIPES') to acquire a portfolio of performing and restructured loans with gross book value of approximately €58 million with reference date 31 December 2022 (the 'Transaction'). The Transaction was broadly neutral to the Group's income statement and capital position. The Transaction was completed in March 2024.

Balance Sheet Analysis (continued)

Loan portfolio quality

The Group has continued to make steady progress across all asset quality metrics. The Group's priorities focus mainly on maintaining high quality new lending with strict underwriting standards and preventing asset quality deterioration.

The loan credit losses for the six months ended 30 June 2024 totalled €16 million, compared to €24 million for the six months ended 30 June 2023. Further details regarding loan credit losses are provided in section 'Profit before tax and non-recurring items'.

Non-performing exposures

The high interest rate environment as well as inflationary pressures are expected to weigh on customers behaviour. Despite these elements, there are no material signs of asset quality deterioration to date. While defaults have been limited, the additional monitoring and provisioning for sectors and individuals vulnerable to the macroeconomic environment remain in place to ensure that potential difficulties in the repayment ability are identified at an early stage, and appropriate solutions are provided to viable customers.

Non-performing exposures (NPEs) as defined by the European Banking Authority (EBA) were reduced by €71 million to €294 million at 30 June 2024, compared to €365 million at 31 December 2023.

As a result, the NPEs reduced to 2.8% of gross loans as at 30 June 2024, compared to 3.6% of gross loans as at 31 December 2023.

The NPE coverage ratio stands at 85% at 30 June 2024, compared to 73% at 31 December 2023. When taking into account tangible collateral at fair value, NPEs are fully covered.

Overall, since the peak in 2014, the stock of NPEs has been reduced by €14.7 billion or 98% to approximately €0.3 billion and the NPE ratio by approximately 60 percentage points from 63% to below 3%.

Mortgage-To-Rent Scheme ('MTR')

In July 2023, the Mortgage-to-Rent Scheme ('MTR') was approved by the Council of Ministers and aims for the reduction of NPEs backed by primary residence and simultaneously protect the primary residence of vulnerable borrowers. The eligible criteria include:

· borrowers that were non-performing as at 31 December 2021, remained non-performing as at 31 December 2022 with facilities backed by primary residence with Open Market Value up to €250 thousand;

· borrowers that had a fully completed application to Estia Scheme and were assessed as eligible but not viable with a primary residence of up to €350 thousand Open Market Value; and

· all applicants that were approved under Estia Scheme but their inclusion was terminated.

Under the MTR, eligible property owners will voluntarily surrender ownership of their residence to Cyprus Asset Management Company ('KEDIPES') which has been approved by the Government to provide and manage social housing and will be exempted from their mortgage loan, as the state will be covering fully the required rent on their behalf. KEDIPES will carry out a new valuation and a technical due diligence for the eligible applicants' property and if satisfied will approve the application and pay to the banks an amount equal to 65% of the open market value of the primary residence in exchange for the mortgage release, the write off of the NPE loan and the transfer of the property title deeds.

The eligible applicants will be able to acquire the primary residence after 5 years at a favourable price, below the open market value.

The scheme has been launched in December 2023; it is expected to act as another tool to address NPEs in the Retail sector.

Balance Sheet Analysis (continued)

Fixed income portfolio

Fixed income portfolio amounts to €3,828 million as at 30 June 2024, compared to €3,348 million as at 31 December 2023. As at 30 June 2024, the portfolio represents 15% of total assets and comprises €3,429 million (90%) measured at amortised cost and €399 million (10%) at fair value through other comprehensive income ('FVOCI').

The fixed income portfolio measured at amortised cost is held to maturity and therefore no fair value gains/losses are recognised in the Group's income statement or equity. This fixed income portfolio has high average rating at Aa3. The amortised cost fixed income portfolio as at 30 June 2024 has an unrealised fair value loss of €29 million.

Reverse repurchase agreements

Reverse repurchase agreements amount to €1,015 million as at 30 June 2024, compared to €403 million as at 31 December 2023. The increase since the beginning of the year relates to the additional hedging activities the Group is carrying out in order to reduce its net interest income sensitivity. The average yield of reverse repurchase agreements is approximately 3.0% per annum and the average duration is estimated at approximately 2.5 years.

Real Estate Management Unit (REMU)

The Real Estate Management Unit (REMU) is focused on the disposal of on-boarded properties resulting from debt for asset swaps. Cumulative sales of repossessed assets since the beginning of 2019 amount to approximately €1.0 billion and exceed properties on-boarded in the same period of €0.5 billion.

During the six months ended 30 June 2024, the Group completed disposals (and transfers) of repossessed properties of €57 million (compared to €68 million in the six months ended 30 June 2023), resulting in a profit on disposal of approximately €3 million for the six months ended 30 June 2024 (compared to a profit of approximately €4 million for the six months ended 30 June 2023). Asset disposals are across all property classes, with almost two thirds in gross sale value in the six months ended 30 June 2024 relating to land.

During the six months ended 30 June 2024, the Group executed sale-purchase agreements (SPAs) for disposals of 258 properties with contract value of €65 million (including transfers of €3 million), compared to SPAs for disposals of 273 properties with contract value of €78 million for the six months ended 30 June 2023.

In addition, the Group had a pipeline of €49 million by contract value as at 30 June 2024, of which €18 million related to SPAs signed (compared to a pipeline of €66 million as at 30 June 2023, of which €38 million related to SPAs signed).

The Group on-boarded €14 million of assets in the six months ended 30 June 2024 (compared to additions of €6 million in the six months ended 30 June 2023), via the execution of debt for asset swaps and repossessed properties.

As at 30 June 2024, repossessed properties held by the Group had a carrying value of €790 million, compared to €862 million as at 31 December 2023.

Income Statement Analysis

Total income

Net interest income (NII) for the six months ended 30 June 2024 amounted to €420 million compared to €358 million for the six months ended 30 June 2023. The yearly increase is mainly attributed to higher interest rates on liquid assets and loans, partially offset by a moderate increase in time and notice cost of deposits and funding costs, as well as higher cost of hedging.

Quarterly average interest earning assets (AIEA) for the six months ended 30 June 2024 amounted to €23,064 million, broadly flat year-on-year.

Net interest margin (NIM) for the six months ended 30 June 2024 amounted to 3.66% (compared to 3.17% for the six months ended 30 June 2023), up 49 basis points year-on-year, supported mainly by the higher interest rate outlook compared to the prior year.

Non-interest income for the six months ended 30 June 2024 amounted to €129 million (compared to €153 million for the six months ended 30 June 2023), comprising net fee and commission income of €86 million, net foreign exchange gains and net gains on financial instruments of €13 million, net insurance result of €23 million, net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties of €2 million and other income of €5 million. The year-on-year reduction is mainly due to lower net foreign exchange gains and net gains on financial instruments, as well as lower net fee and commission income.

Net fee and commission income for the six months ended 30 June 2024 amounted to €86 million compared to €90 million in prior year, mainly due to lower transactional fees.

Net foreign exchange gains and net gains on financial instruments amounted to €13 million for the six months ended 30 June 2024, compared to approximately €5.5 million for the six months ended 30 June 2023. The year-on-year decrease is driven by lower foreign exchange gains on FX swaps and lower revaluation gains in financial instruments. Net foreign exchange gains and net gains on financial instruments are considered volatile profit contributors.

Net insurance result amounted to €23 million for the six months ended 30 June 2024, compared to €25 million for the six months ended 30 June 2023, due to negative claim experience in the non-life insurance business, arising from the severe weather-related events occurred in the first quarter of 2024, partly offset by better claims experience and reduction in loss component of the insurance contracts (in line with IFRS 17) in the life insurance business.

Net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties of €2 million for the six months ended 30 June 2024 (comprising net gains on disposal of stock of properties and investment properties of approximately €3 million, and net loss from revaluation of investment properties of approximately €1 million) compared to €5 million for the six months ended 30 June 2023. REMU profit remains volatile.

Total income amounted to €549 million for the six months ended 30 June 2024, compared to €511 million for the six months ended 30 June 2023, with the increase driven by higher net interest income as explained above.

Total expenses

Total expenses for the six months ended 30 June 2024 were €186 million (compared to €180 million for the six months ended 30 June 2023), 52% of which related to staff costs (€96 million), 38% to other operating expenses (€71 million) and 10% to special levy on deposits and other levies/contributions (€19 million). The increase year-on-year is mainly due to higher staff costs.

Total operating expenses amounted to €167 million for the six months ended 30 June 2024, compared to €162 million for the six months ended 30 June 2023, up 4% year-on-year, mainly due to higher staff costs.

Income Statement Analysis (continued)

Total expenses (continued)

Staff costs for the six months ended 30 June 2024 were €96 million (compared to €93 million for the six months ended 30 June 2023) and include approximately €5 million performance-related pay accrual (compared to approximately €3.5 million performance-related pay accrual and approximately €2.8 million termination cost in the six months ended 30 June 2023). Net of these accruals, staff costs increased by 5% year-on-year, reflecting salary increments and higher cost of living adjustments (COLA) as well as higher employer's contributions.

The performance-related pay accrual relates to the Short-Term Incentive Plan ('STIP') and the Long-Term Incentive Plan ('LTIP'). The Short-Term Incentive Plan involves variable remuneration to selected employees and will be driven by both, delivery of the Group's strategy as well as individual performance. The LTIP is a share-based compensation plan and provides for an award in the form of ordinary shares of the Company based on certain non-market performance and service vesting conditions.

The LTIP was approved by the 2022 AGM, which took place on 20 May 2022. The LTIP involves the granting of share awards and is driven by scorecard achievement, with measures and targets set to align pay outcomes with the delivery of the Group's strategy. Currently, under the plan, the employees eligible for LTIP awards are the members of the Extended EXCO, including the executive directors. The LTIP stipulates that performance will be measured over a 3-year period and sets financial and non-financial objectives to be achieved. At the end of the performance period, the performance outcome will be used to assess the percentage of the awards that will vest. In December 2022, the Group granted 819,860 share awards to 22 eligible employees under the LTIP, comprising the Extended Executive Committee of the Group. The awards granted in December 2022 are subject to a three year performance period for 2022-2024 (with all performance conditions being non-market performance conditions). In October 2023, 479,160 share awards were granted to 21 eligible employees, comprising the Extended Executive Committee of the Group. The awards granted in October 2023 are subject to a three-year performance period 2023-2025 (with all performance conditions being non market performance conditions). In April 2024, 403,990 share awards were granted to 21 eligible employees, comprising the Extended Executive Committee of the Group. The awards granted in April 2024 are subject to a three-year performance period 2024-2026 (with all performance conditions being non market performance conditions).

These shares will then normally vest in six tranches, with the first tranche vesting after the end of the performance period and the last tranche vesting on the fifth anniversary of the first vesting date.

As at 30 June 2024, the Group employed 2,860 persons compared to 2,830 persons as at 31 December 2023.

Other operating expenses for the six months ended 30 June 2024 amounted to €71 million, compared to €69 million for the six months ended 30 June 2023, impacted mainly by inflationary pressures and marketing expenses.

Special levy on deposits and other levies/contributions for the six months ended 30 June 2024 amounted to €19 million compared to €18 million for the six months ended 30 June 2023, driven mainly by the increase of deposits of €0.55 billion year-on-year.

The cost to income ratio excluding special levy on deposits and other levies/contributions for the six months ended 30 June 2024 was 30% compared to 32% for the six months ended 30 June 2023, benefitting from higher income.

Profit before tax and non-recurring items

Operating profit for the six months ended 30 June 2024 amounted to €363 million, compared to €331 million for the six months ended 30 June 2023, up by 9% year-on-year reflecting mainly the significant increase in net interest income.

Loan credit losses for the six months ended 30 June 2024 were €16 million compared to €24 million for the six months ended 30 June 2023, supported by the continued robust performance of the credit portfolio and improved macroeconomic assumptions. Additional information on the drivers of the loan credit losses for the six months ended 30 June 2024 is disclosed in Note 32.4 of the Consolidated Condensed Interim Financial Statements.

Income Statement Analysis (continued)

Profit before tax and non-recurring items (continued)

Cost of risk for the six months ended 30 June 2024 is equivalent to 31 basis points, compared to a cost of risk of 48 basis points for the six months ended 30 June 2023.

At 30 June 2024, the allowance for expected loan credit losses, including residual fair value adjustment on initial recognition and credit losses on off-balance sheet exposures (please refer to 'Alternative Performance Measures Disclosures' section of the Interim Financial Report for the definition) totalled €251 million (compared to €267 million at 31 December 2023) and accounted for 2.4% of gross loans (compared to 2.7% as at 31 December 2023).

Impairments of other financial and non-financial assets for the six months ended 30 June 2024 amounted to €25 million, compared to €30 million for the six months ended 30 June 2023, and relate mainly to REMU stock properties.

Provisions for pending litigations, claims, regulatory and other matters (net of reversals) for the six months ended 30 June 2024 amounted to €3 million, compared to €14 million for the six months ended 30 June 2023. The decrease related primarily to a release of a provision on a claim following the closing of the investigation by the Commission of the Protection of Competition.

Profit before tax and non-recurring items for the six months ended 30 June 2024 totalled to €319 million, compared to €263 million for the six months ended 30 June 2023.

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

The tax charge for the six months ended 30 June 2024 amounted to €48 million compared to €40 million for the six months ended 30 June 2023.  

On 22 December 2022, the European Commission approved Directive 2022/2523 which provides for a minimum effective tax rate of 15% for the global activities of large multinational groups (Pillar Two tax). The Directive that follows closely the OECD Inclusive Framework on Base Erosion and Profit Shifting should have been transposed by the Member States throughout 2023, entering into force on 1 January 2024. In Cyprus, the legislation has not been substantively enacted at the balance sheet date however it is expected to be enacted within 2024. The Group expects to be in scope of the legislation and has performed an assessment of the potential impact of Pillar Two income taxes with the current estimate being a charge of approximately 1.5% on profit before tax as at 30 June 2024. Because of the calculation complexity resulting from these rules and as the final legislation has yet to be enacted, the impact of this reform has been estimated to range up to 2% of profit before tax and will be further refined upon the enactment and implementation of relevant legislation.

Profit after tax and before non-recurring items (attributable to the owners of the Company) for the six months ended 30 June 2024 is €270 million, compared to €222 million for the six months ended 30 June 2023.

Advisory and other transformation costs - organic for the six months ended 30 June 2024 are nil, compared to €2 million for the six months ended 30 June 2023.

Profit after tax attributable to the owners of the Company for the six months ended 30 June 2024 amounts to €270 million, corresponding to a ROTE of 23.7%, compared to €220 million for the six months ended 30 June 2023 (and a ROTE of 24.0%). ROTE on 15% CET1 ratio for the six months ended 30 June 2024 increases to 29.6%, compared to 25.3% for the six months ended 30 June 2023. The adjusted recurring profitability used for the Group's distribution policy (i.e. defined as the Group's profit after tax before non-recurring items (attributable to the owners of the Company) taking into account distributions under other equity instruments such as the annual AT1 coupon which is paid semi-annually) amounted to €257 million for the six months ended 30 June 2024, compared to €201 million for the six months ended 30 June 2023.

Operating Environment

Real GDP increased by 3.4% seasonally adjusted in the first quarter of 2024. Overall growth in the quarter returned to about the long-term average and contributions from the economic sectors returned to their long-term trends. This was true mainly for trade, transport and accommodation, information and communications, professional and administrative services, and also the public related sectors of public administration, education and health. For 2024, the economy is expected to increase by approximately 2.9% according to the Ministry of Finance (based on May 2024 projections).

Short-term risks are mostly external and to the downside, including a downturn in major tourism markets, an escalation of regional conflicts, and delays in the implementation of the Recovery and Resilience Plan. In the medium-term, risks are from climate change and from possible further deterioration in the global geopolitical outlook. The digital and green transitions remain key challenges.

The unemployment rate, after rising in 2020 and the first half of 2021, has been declining and dropped to 6.0% in the fourth quarter of 2023 and to 5.7% in the first quarter of 2024, seasonally adjusted. The unemployment rate was 6.5% in the Euro area in the first quarter of 2024.

In January-June 2024, harmonised inflation was 2.3% in Cyprus and core inflation was 2.5%. In the Euro area, harmonised inflation was 2.5% and core inflation was 2.9%. The decline in the harmonised inflation was driven by the non-core components of energy and food, while core inflation, defined as total index less energy and food, was stickier.

Tourist arrivals for the period January-June 2024 were broadly at the same levels as in prior year. Likewise, receipts in January-May 2024, demonstrated a small increase of 3% compared to the same period the year before.

In public finances, there have been significant improvements in budget and debt dynamics including debt affordability indicators. The recovery in 2021 was underpinned by a significant increase in general government revenue and a decrease in government expenditure. The result was a reduction in the budget deficit to -1.8% of GDP, from a deficit of -5.7% of GDP in 2020. In 2022 the budget surplus rose to 2.7% of GDP and 3.1% of GDP in 2023. Gross debt was 114.9% of GDP in 2020 and has dropped successively to 85.6% and 77.3% of GDP in 2022 and 2023 respectively. The budget balance is forecasted to remain in surplus at 2.9% of GDP in 2024 according to the Ministry of Finance Strategic Framework of Fiscal Policy 2025-2028, and gross debt is expected to continue to decline below 60% of GDP in 2026. Debt affordability metrics are favourable and are expected to remain solid in the medium term, as gross financing needs are moderate, and the cash buffer gives the government a high degree of financing flexibility.

Cypriot banks are well capitalized and remain resilient. Despite the high interest rates, asset quality has not deteriorated. Non-performing exposures (NPEs) are by now largely outside of bank balance sheets, but their resolution is critical for private sector balance sheets. As at 31 May 2024, NPEs in the Cyprus banking system were €1.8 billion or 7.4% of gross loans, compared with 7.9% of gross loans at the end of December 2023, and 9.5% at the end of December 2022, according to the Central Bank of Cyprus. The NPE ratio for the Cyprus banking sector in the non-financial companies' segment was 6.3% at the end of May 2024 and that of households was 9.2%. About 44% of total NPEs are restructured facilities and the coverage ratio was 54% as at 31 May 2024.

Risks remain to the downside. In the short-term, a slowing of economic activity in main tourism markets and an escalation of regional conflicts could slow Cyprus's efforts to reorient its services exports.

Operating Environment (continued)

Sovereign ratings

The sovereign risk ratings of the Cypriot government have improved significantly in recent years, reflecting reduced banking sector risks, improved economic resilience and consistent fiscal outperformance. Cyprus has demonstrated policy commitment to correcting fiscal imbalances through reform and restructuring of its banking system.

In June 2024, Fitch Ratings upgraded Cyprus' long-term foreign currency issuer default rating to BBB+ from BBB whilst maintaining its outlook on Cyprus positive. The upgrade relates mainly to the reduced vulnerabilities to financial shocks, the continued strengthening of the banking sector's credit profile, the deleveraging of the private sector, the reduction of Cyprus public debt, as well as its strong GDP growth.

In addition, in June 2024, S&P Global Ratings upgraded Cyprus' long-term local and foreign currency sovereign credit ratings to BBB+ from BBB, whilst maintaining its outlook on Cyprus positive. This one-notch upgrade of Cyprus' rating reflects the progress Cyprus has made in recent years to address fiscal imbalances, amid resilient growth, as well as the strengthening financial position of Cypriot banks.

In September 2023, Moody's Investors Service upgraded the long-term issuer and senior unsecured ratings of the Government of Cyprus to Baa2 from Ba1. The outlook was revised to stable from positive. This is a two-notch upgrade of Cyprus' ratings, reflecting broad-based and sustained improvements in the country's credit profile as a result of past and ongoing economic, fiscal, and banking reforms. Economic resilience has improved, and medium-term growth prospects remain strong. Fiscal strength has also improved significantly, with a positive debt trend and sound debt affordability metrics. The stable outlook balances the positive credit trends with remaining challenges.

DBRS Ratings GmbH (DBRS Morningstar) confirmed Cyprus' Long-Term Foreign and Local Currency - Issuer Ratings at BBB (high) in March 2024. DBRS Ratings had upgraded the long-term foreign and local currency issuer ratings of Cyprus from BBB to BBB (high) in September 2023. The rating action is stable. The upgrade was driven by the recent decline in government debt and the expectation that public debt metrics will continue to improve over the next few years, while economic growth is expected to remain among the strongest in the euro area. The stable outlook balances the recent favourable fiscal dynamics with downside risks to the economic outlook.

Business Overview

Credit ratings

The Group's financial performance is highly correlated to the economic and operating conditions in Cyprus. In July 2024, Moody's Investors Service upgraded the Bank's long-term deposit rating to Baa1 from Baa3 and revised the outlook to stable. The upgrade by two notches reflects the ongoing improvements of the Bank's solvency profile, the increased protection afforded to the Bank's depositors, and its strengthened capital. This is the highest long-term deposit rating for the Bank since 2011. The stable outlook balances potential further asset quality improvements against lower normalised profitability metrics, a broadly stable operating environment, and stable funding, liquidity and capital metrics. Additionally in July 2024, Fitch Ratings upgraded long-term issuer default rating to BB+ from BB, whilst maintaining the positive outlook. The one-notch upgrade reflects a combination of Fitch's improved assessment of the Cypriot operating environment, reduced private sector indebtedness, expectation of continued economic growth, the Bank's strengthened capitalisation and reduced exposure to legacy net problem assets. In June 2024, S&P Global Ratings upgraded the long-term issuer credit rating of the Bank to BB+ and maintained a positive outlook. The upgrade by one notch was driven by the reduction of economic imbalances, strengthened capitalisation, supportive economic conditions and the solid profitability stemming from improved efficiency and contained cost of risk.

Financial performance

The Group is a leading, financial and technology hub in Cyprus. During the six months ended 30 June 2024, the Group generated a profit after tax of €270 million, corresponding to a ROTE of 23.7%, demonstrating the sustainability of its business model. This strong performance was supported by a resiliently strong net interest income, continuous management of its cost base despite inflation and a low cost of risk, and was feeding through into strong growth of the Group's tangible book value per share. Since June 2023, the Group's tangible book value per share improved by 21% to €5.27 based on share in issue (excluding treasury shares), accelerating shareholder value creation. 

Interest rate environment

The structure of the Group's balance sheet remains highly liquid. As at 30 June 2024, cash balances with ECB amounted to approximately €7.3 billion, whereas the Group's loan portfolio is mainly floating rate, with almost half of the loan portfolio being Euribor based. Net interest income for the six months ended 30 June 2024 stood at €420 million, up 17% year-on-year due to higher interest income on loans and liquid assets, underpinned by high interest rates, all of which served to more than offset the higher cost of deposits, and funding costs and the continued hedging activity to reduce NII sensitivity.

Overall, the Group intends to increase its hedging position during the year ended 31 December 2024 by €4-€5 billion compared to the year ended 31 December 2023(with average duration of 3-4 years), subject to market conditions, via receive fixed interest rate swaps, further investment in fixed rate bonds, additional reverse repos and continuing offering of fixed rate loans.

In the first half of 2024, the Group carried out hedging of approximately €3.4 billion, on track to meet its 2024 target of €4-€5 billion. The increase was mainly attributed to the hedging through receive fixed interest rate swaps, investing in fixed rate bonds, entering into reverse repos and offering fixed rate loans. Simultaneously, about a quarter of the Group's loan portfolio is linked with the Bank's base rate which provides a natural hedge against the cost of deposits. Overall, these actions have led to a reduction in the net interest income sensitivity (to a parallel shift in interest rates by 100 basis points) by approximately €27 million since 31 December 2023.

Growing revenues in a more capital efficient way

The Group remains focused on growing revenues in a more capital efficient way through growth of high-quality new lending and the growth in niche areas, such as insurance and digital products, that provide further market penetration and diversify through non-banking operations.

The Group has continued to provide high quality new lending in the six months ended 30 June 2024 via prudent underwriting standards. Growth in new lending in Cyprus has been focused on selected industries in line with the Bank's target risk profile. During the six months ended 30 June 2024, new lending remained strong at €1.2 billion, up 10% on prior year, driven mainly by business demand. Gross performing loan book increased by 3% since the beginning of the year to approximately €10.1 billion; loan growth is subdued by repayments.

Business Overview (continued)

Financial performance (continued)

Growing revenues in a more capital efficient way (continued)

Fixed income portfolio continued to grow in the six months ended 30 June 2024 to €3,828 million, and currently represents 15% of total assets. This portfolio is mostly measured at amortised cost and is highly rated with average rating at Aa3. The amortised cost fixed income portfolio as at 30 June 2024 has an unrealised fair value loss of €29 million, equivalent to approximately 30 basis points of CET1 ratio (compared to an unrealized fair value gain of €3 million as at 31 December 2023) due to increases in the bond yield.

Separately, the Group focuses to continue improving revenues through multiple less capital-intensive initiatives, with a focus on fees and commissions, insurance and non-banking opportunities, leveraging on the Group's digital capabilities. During the six month ended 30 June 2024, non-interest income amounted to €129 million, covering almost 77% of the Group's total operating expenses.

In the first six months of 2024, net fee and commission income amounted to €86 million and was down by 4% compared to the previous year, due to lower transactional fees. Net fee and commission income is enhanced by transaction fees from the Group's subsidiary, JCC Payment Systems Ltd (JCC), a leading player in the card processing business and payment solutions, 75% owned by the Bank. JCC's net fee and commission income contributed 11% of total non-interest income and amounted to approximately €14 million for the six months ended 30 June 2024, up 3% year-on-year, backed by strong transaction volume. In the context of its wider strategic evaluation, the Group is undertaking a strategic review which may result in a potential disposal of part or all of its holding in JCC, although no decision has been taken at this stage.

The Group's insurance companies, EuroLife and GI are respectively leading players in the life and general insurance business in Cyprus, and have been providing recurring and improving income, further diversifying the Group's income streams. The net insurance result for the six months ended 30 June 2024 contributed approximately 18% of non-interest income and amounted to €23 million; insurance companies remain valuable and sustainable contributors to the Group's profitability.

Finally, the Group through the Digital Economy Platform (Jinius) ('the Platform') aims to support the national digital economy by optimising processes in a cost-efficient way, allow the Bank to strengthen its client relationships, create cross-selling opportunities, as well as to generate new revenue sources over the medium term, leveraging on the Bank's market position, knowledge and digital infrastructure. The first Business-to-Business services are already in use by clients and include invoice, remittance, tender and ecosystem management. Currently, approximately 2,200 companies are registered in the platform and over €600 million cash were exchanged via the platform since 2023 through invoicing and remittance services.

In February 2024, the Business-to-Consumer service was launched, a Product Marketplace aiming to increase the touch points with customers. Currently approximately 130 retailers were onboarded in fashion, technology, beauty, small appliances, personal care devices and toy sectors, and over 160 thousand products were embedded in the Product Marketplace.

Lean operating model

Striving for a lean operating model is a key strategic pillar for the Group in order to deliver shareholder value, without constraining funding its digital transformation and investing in the business.

In 2023, the Group completed a small-scale, targeted VEP through which 50 full-time employees were approved to leave at a total cost of approximately €7.5 million, recorded in staff costs in the year ended 31 December 2023. Since the beginning of the year, there was further branch footprint rationalization as the Group reduced the number of branches by 5 to 55, a reduction of 8%.

The Group's total operating expenses for the six months ended 30 June 2024 amounted to €167 million, up 4% on prior year, impacted mainly by inflationary pressures on staff costs. The cost to income ratio excluding special levy on deposits and other levies/contributions for the six months ended 30 June 2024 stood at 30%, down 2 percentage points compared to prior year, supported by strong income. In August 2024, a reward programme through Antamivi Reward scheme was launched in the context of the new loyalty scheme 'Pronomia' to reward the Group's performing borrowers, which is expected to impact total operating expenses by approximately €3 million in the second half of 2024.

Business Overview (continued)

Financial performance (continued)

Lean operating model (continued)

Transformation plan

The Group's focus continues on deepening the relationship with its customers as a customer centric organisation. The Group aims to enable the shift to modern banking by digitally transforming customer service, as well as internal operations. The holistic transformation aims to (i) shift to a more customer-centric operating model by defining customer segment strategies, (ii) redefine distribution model across existing and new channels, (iii) digitally transform the way the Group serves its customers and operates internally, and (iv) improve employee engagement through a robust set of organisational health initiatives.

Digital transformation

In the dynamic world of banking, the Group stands as a pioneer of digital banking innovation in Cyprus, reshaping the banking experience into something more intuitive, more responsive, and more aligned with the contemporary needs of its customers, consistently pushing the boundaries to offer unparalleled banking services. The Group aims to continue to innovate and simplify the banking journey, providing a unique and personalised experience to each of its customers.

The Group's digital channels continue to grow. As at 30 June 2024, the Group's digital community has increased to 467 thousand active subscribers, both on Internet Banking and the BoC Mobile App, improving by 7% year-on-year. Likewise, the BoC Mobile App, had 429 thousand active subscribers as at 30 June 2024 and increased by 10% year-on-year.

During the second quarter of 2024, the Group continued to enrich and improve its digital portfolio with new innovative services to its customers. The Bank's loyalty scheme 'pronomia' was launched, rewarding customers with several benefits, such as additional Antamivi points, lower interest rates and no initial bank fees on new loans and discounts on new insurance policies. Additionally, the ability to request replacement of a card that was lost or stolen has been added in both the BoC Mobile App and Internet Banking. Furthermore, the ability to provide the beneficiary details for dividend payments was given to the Bank's shareholders. In July 2024, Bank of Cyprus is the first bank in Cyprus that enabled instant payments via digital channels, providing the ability to the customer to make credit transfers in Euros making the funds available in the beneficiary customer's account within 10 seconds. Instant transfers are applicable for credit payments up to €50 thousand within Cyprus and up to €25 thousand outside Cyprus (to 36 countries in the SEPA Zone).

One of the Group's latest digital innovations, Quickloans, accessible through both the BoC Mobile App and Internet Banking, has transformed the traditional loan process, enabling customers to obtain a credit facility decision instantly, without the need to visit a branch. Since the beginning of the year 2024, over seven thousand applications were processed, granting €52 million new loans in the six months ended 30 June 2024, equivalent to an increase of 12% compared to the six months ended 30 June 2023.

In collaboration with Genikes Insurance, an insurance plan purchase was integrated into the BoC Mobile App, enabling customers to access car or home insurance plans through the BoC Mobile App at lower rates than branch prices. Digital insurance sales for the six months ended 30 June 2024 amounted to €291 thousand, compared to €159 thousand for the six months ended 30 June 2023, reflecting 925 policies in the six months ended 30 June 2024 compared to 541 policies for the six months ended 30 June 2023.

Lastly, digital account openings increased by 53% in the six months ended 30 June 2024 to 8,291 from 5,423 in the six months ended 30 June 2023 and new debit cards increased by 97% year-on-year to 8,865 in the six months ended 30 June 2024, compared to 4,492 during the same period last year.

Asset quality

Balance sheet de-risking was largely completed in 2022; as at 30 June 2024, the Group's NPE ratio stood at 2.8%, already achieving the 2024 NPE ratio target. The Group's priorities remain intact, maintaining high quality new lending with strict underwriting standards and preventing asset quality deterioration.

Business Overview (continued)

Financial performance (continued)

Capital market presence

In April 2024, the Bank successfully launched and priced an issuance of €300 million green senior preferred notes ('Green Notes'). With this issuance, the Bank finalised its MREL build-up and creates a comfortable buffer over the final requirements of 25% of RWAs (or 30.3% of RWAs taking into account the expected prevailing CBR as at 31 December 2024) and 5.91% of LRE which the Bank must meet by 31 December 2024.

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

Climate change and transition to a sustainable economy is one of the greatest challenges. As part of its vision to be the leading financial hub in Cyprus, the Group is determined to lead the transition of Cyprus to a sustainable future. The Group continuously evolves towards its ESG agenda and continues to progress towards building a forward-looking organisation embracing ESG in all aspects of business as usual. In 2024, the Bank received a rating of AA (on a scale of AAA-CCC) in the MSCI ESG Ratings assessment.

Reaffirming its strong commitment to sustainability and to the long term value creation for all its stakeholders, in November 2023, the Bank was the first Bank in Cyprus to become an official signatory of the United Nations Principles for Responsible Banking representing a single framework for a sustainable banking industry developed through a collaboration between banks worldwide and the United Nations Environment Programme Finance Initiative (UNEP FI).

In line with the Group's Beyond Banking approach and its commitment to create a stronger, safer and future-focused organisation the Bank proceeded, in 2024, with the issuance of an inaugural green bond. An amount equivalent to the net proceeds of the notes will be allocated to eligible green projects as described in the Bank's sustainable finance framework, which includes green buildings, energy efficiency, clean transport and renewable energy.

The ESG strategy formulated in 2021 is continuously expanding. The Group is maintaining its leading role in the Social and Governance pillars and focus on increasing the Group's positive impacts on the Environment by transforming not only its own operations, but also the operations of its customers.

The Group has committed to the following primary ESG targets, which reflect the pivotal role of ESG in the Group's strategy:

● Become carbon neutral by 2030

● Become Net Zero by 2050

● Steadily increase Green Asset Ratio

● Steadily increase Green Mortgage Ratio

● ≥30% women in Group's management bodies (defined as the Executive Committee (EXCO) and the Extended EXCO) by 2030

For the Group to continue its progress against its primary ESG targets and address the evolving regulatory expectations, it further enhanced in 2024 its ESG working plan which was established in 2022. Progress on the ESG working plan is closely monitored by the Sustainability Committee, the Executive Committee and the Board Committees on a quarterly basis.

Environmental Pillar

The Group has estimated the Scope 1 and Scope 2 greenhouse gas (GHG) emissions of 2021 relating to own operations in order to set the baseline for carbon neutrality target. The Bank being the main contributor of GHG emissions of the Group, designed in 2022 the strategy to meet the carbon neutrality target by 2030 and progress towards Net Zero target of 2050. For the Group to become carbon neutral by 2030, Scope 1 and Scope 2 emissions should be reduced by 42% by 2030. The Bank, following the implementation of various energy upgrade actions in 2022 and 2023, achieved a reduction of approximately 18% in Scope 1 and Scope 2 GHG emissions in 2023 compared to the baseline of 2021.

Business Overview (continued)

Financial performance (continued)

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

Environmental Pillar (continued)

The Group plans to invest in energy efficient installations and actions as well as replace fuel intensive machineries and vehicles from 2024 to 2025, which would lead to approximately 3%-4% reduction in Scope 1 and Scope 2 emissions by 2025 compared to 2021. The Group expects that the Scope 2 emissions will be reduced further when the energy market in Cyprus shifts further towards renewable energy. The Bank achieved a reduction of approximately 22% in Scope 1 - Stationary Combustion GHG emissions and approximately 5% in Scope 2 GHG emissions in the six months ended 30 June 2024 compared to the six months ended 30 June 2023 due to new solar panels connected to energy network in 2023 as well as branch rationalisation as part of the digitalization journey. The Bank achieved an increase of 16% in renewable energy production, from 128,780 Kwh to 149,031 Kwh, in the six months ended 30 June 2024 compared to the six months ended 30 June 2023.

The Group is gradually integrating climate-related and environmental (C&E) risks into its Business Strategy. The Bank was the first bank in Cyprus to join the Partnership for Carbon Accounting Financials (PCAF) in October 2022, and has estimated and published the Financed Scope 3 GHG emissions associated with its loan and investment portfolio as well as Insurance associated GHG emissions using the PCAF standards, methodology and proxies. Following the estimation of Financed Scope 3 GHG emissions of loan portfolio, the Bank established a decarbonization target on Mortgage loan portfolio. The decarbonization target on Mortgage portfolio was established by applying the International Energy Agency's Below 2 Degree Scenario. For the Bank's Mortgage loan portfolio to be aligned with the climate scenario and effectively be associated with lower transition risks, the baseline as at 31 December 2022 of 53.5 kgCO2e/m2 should be reduced by 43% by 31 December 2030. The carbon intensity of the Mortgage loan portfolio as at 30 June 2024 is estimated at 49.11 kgCO2e/m2 achieving approximately 8% reduction compared to baseline, due to increased installation of solar panels in residential properties in 2023. A Variable Green Housing product was launched at the end of 2023 to support the Bank to meet the decarbonization target on Mortgage loans and effectively limit the level of climate transition risk that is exposed to. The Bank is in the process to launch in the third quarter of 2024, a Fixed Green Housing product aligned with Green Loan Principles (GLPs) of the Loan Market Association (LMA) which is expected to contribute significantly to the environmentally friendly portfolio of the Bank by the end of 2024. In addition, the Bank has set lending and investment limits on specific carbon intensive sectors which are widely considered to be associated with high climate transition risk. Further, having introduced and implementing a Business Environment Scan process, the Bank developed green/transition new lending targets in certain sectors to support its customer's transition to a low carbon economy and effectively manage climate transition risks.

During 2023, the Bank has made considerable progress in integrating climate-related and environmental risks into its risk management approach and risk culture. The Bank revised and enhanced the Materiality assessment process on C&E risks. The Bank has carried out a comprehensive identification and assessment of C&E risks as drivers of existing financial and non-financial risks considering its business profile and loan portfolio composition. As part of this process, the Bank has identified the risk drivers, both physical and transition, which could potentially have an impact on its risk profile and operations and has assessed the severity of each risk driver for all the existing categories of risks.

In 2024, the Bank introduced the syndicated Synesgy solution (ESG Due Diligence process) across the Cypriot Banking system designed to enhance data collection, score customers on their performance against various aspects around C&E risks and provide guidance on remediation actions. This process involves the utilization of structured ESG questionnaires, through the Synesgy platform, applied at the individual company level to derive an ESG score. The Bank established a structure and detailed Business Environment Scan process to monitor the impact of C&E risks on its business environment in the short, medium and long-term. The results of the preliminary (quarterly) and final (annual) impact assessment have been incorporated in the Materiality assessment of C&E risks as well as informed the Bank's Business Strategy.

The Bank offers a range of environmentally friendly products to manage transition risk and help its customers become more sustainable. Specifically, the Bank offers loans for energy upgrades of homes, installation of solar panels, acquisition of new hybrid or electric car as well as financing of renewable energy projects. In addition, following the Energy performance certificate gathering exercise, in 2024, the Bank identified a pool of €307.3 million gross loans, as at 30 June 2024, associated (financing or collateralized) with properties with EPC Category A. The gross amount of environmentally friendly loans (including loans associated with properties with EPC Category A) as at 30 June 2024 was €339.8 million compared to €272.0 million as at 31 December 2023.

Business Overview (continued)

Financial performance (continued)

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

Environmental Pillar (continued)

During the six months ended 30 June 2024, in order to enhance the awareness and skillset on ESG matters, the Group performed relevant trainings to control functions and plans to perform trainings to the Board of Directors and Senior Management, as well as to other members of staff.

Social Pillar

At the centre of the Group's leading social role lie its contributions to the Bank of Cyprus Oncology Centre (with an overall amount of approximately €70 million since 1998, whilst 55% of diagnosed cancer cases in Cyprus are being treated at the Centre), the immediate and efficient response of Bank of Cyprus' SupportCY network consisting of companies and organisations, to various needs of the society and in cases of crises and emergencies, through the activation of programs, specialized equipment and a highly trained Volunteers Corps, the contribution of the Bank of Cyprus Cultural Foundation in promoting the cultural heritage of the island, and the work of IDEA Innovation Centre.

The Cultural Foundation premises and museums were closed from March to June 2024 for renovation purposes so to launch the new exhibition 'Cyprus Insula'. The physical attendees of Cultural foundation events remain unchanged from the first quarter of 2024 (4,062 attendees).

The IDEA Innovation Centre, invested approximately €4 million in start-up business creation since its incorporation, supported creation of 95 new companies to date, provided support to more than 210 entrepreneurs through its Startup program since incorporation, and provided education to 7,000 entrepreneurs. Staff continued to engage in voluntary initiatives to support charities, foundations, people in need and initiatives to protect the environment.

The Group has continued to upgrade its staff's skillset by providing training and development opportunities to all staff and capitalising on modern delivery methods. In the six months ended 30 June 2024, the Bank's employees attended 23,482 hours of trainings. Moreover, the Group continued its emphasis on staff wellness during 2024 by offering webinars, team building activities and family events with sole purpose to enhance mental, physical, financial and social health, attended by approximately 750 employees through its Well at Work program.

Governance Pillar

The Group continues to operate successfully within a complex regulatory framework of a holding company which is registered in Ireland, listed on two Stock Exchanges and run in compliance with a number of rules and regulations. Its governance and management structures enable it to achieve present and future economic prosperity, environmental integrity and social equity across its value chain. The Group operates within a framework with adequate control environment, which enable risk assessment and risk management based on the relevant policies under the leadership of the Board of Directors. The Group has set up a Governance Structure to oversee its ESG agenda. Progress on the implementation and evolution of the Group's ESG strategy is monitored by the Sustainability Committee and the Board of Directors. The Sustainability Committee is a dedicated executive committee set up in early 2021 to oversee the ESG agenda of the Group, review the evolution of the Group's ESG strategy, monitor the development and implementation of the Group's ESG objectives and the embedding of ESG priorities in the Group's business targets. The Group's ESG Governance structure continues to evolve, so as to better address the Group's evolving ESG needs. The Group's regulatory compliance continues to be an undisputed priority.

The Group's aspiration to achieve a representation of at least 30% women in Group's management bodies (Defined as the EXCO and the Extended EXCO) by 2030, has been reached earlier with 33% representation of women, as at 31 December 2023, in Group's management bodies. Women representation in Group management bodies continues to be 33% as at 30 June 2024. During the transitional phase of the Board's composition in the six months ended 30 June 2024 two male members, highly experienced in the areas of ESG and technology, were appointed leading to the female representation, as at 30 June 2024, being at 37.5%. The Bank is in the process to appoint new members in the Board which will lead to female representation of 42%.

Strategy and Outlook

The vision of the Group is to create a lifelong partnership with its customers, guiding and supporting them in an evolving world.

The strategic pillars of the Group remain intact: 

· Grow revenues in a more capital efficient way; by enhancing revenue generation via growth in high quality new lending, diversification to less capital intensive banking and other financial services (such as insurance and the digital economy) as well as prudent management of the Group's liquidity

· Achieve a lean operating model; by ongoing focus on efficiency through further automations facilitated by digitisation

· Maintain robust asset quality; by maintaining high quality new lending via strict underwriting criteria, normalising cost of risk and reducing other impairments

· Enhance organisational resilience and ESG (Environmental, Social and Governance) agenda; by leading the transition of Cyprus to a sustainable future and building a forward-looking organisation embracing ESG in all aspects.

During the first half of 2024, the Group continued to deliver strong financial and operational results, demonstrating the sustainability of its business model. Capitalising on its strong performance in the first half of 2024 the Group has upgraded its 2024 and 2025 financial targets.

Components of Upgraded Financial Targets

On the back of a more favourable interest rate environment and positive deposit behaviour, the net interest income for 2024 is upgraded from over €670 million to approximately €800 million. This is mainly due to the fact that the interest rate environment turned out to be more resilient than initially anticipated, with the pace of rate cuts being prolonged. According to market projections of July 2024, the ECB deposit facility rate and 6-month Euribor are expected to average to 3.8% and 3.6% respectively for 2024, vis-à-vis 3.4% ECB deposit facility rate and 3.2% 6-month Euribor anticipated in February 2024. Other drivers of the upgrade of net interest income guidance include:

· Cost of deposits to average to approximately 35 basis points in 2024, facilitated by the highly liquid banking sector in Cyprus

· Gradual change in deposit mix towards time and notice deposits to approximately 43% by 31 December 2024;

· Low single-digit loan growth, in 2024-2025, supported by GDP growth; loan growth subdued by repayments;

· Hedging activity to continue in 2024 to meet target of €4-€5 billion; already carried out €3.4 billion as at 30 June 2024;

· Fixed income portfolio to continue to grow, subject to market conditions, so that it represents approximately 17% of total assets by the end of 2024 (compared to 16% previously guided), benefitting also from rollover to higher rates and;

· Higher wholesale funding costs, reflecting the full year impact of the 2023 senior preferred issuance and the April 2024 issuance of green senior preferred notes.

Going forward, the net interest income for 2025 is expected to be lower than 2024 but to remain strong, exceeding €700 million based on projections of the ECB deposit facility rate and 6-month Euribor to average to approximately 3.0% respectively, reflecting mainly projected lower interest rates and higher cost of deposits compared to 2024.

Separately, the Group continues to focus on improving revenues through multiple less capital-intensive initiatives, with a focus on net fee and commission income, insurance and non-banking activities, enhancing the Group's diversified business model further. Non-interest income is an important contributor to the Group's profitability and historically covered on average around 80% of its total operating expenses. The Group reiterated its expectation to continue covering around 70-80% of the Group's total operating expenses, supported by a growing net fee and commission income in line with economic growth for 2024-2025.

Maintaining cost discipline management remains an ongoing focus for the Group. The cost to income ratio excluding special levy on deposits or other levies/contributions is revised downwards to below 35% for 2024 (compared to approximately 40% previously guided) reflecting mainly the higher income on the back of the improved interest rate environment. For 2025, the cost to income ratio excluding special levy on deposits or other levies/contributions is set at below 40%, reflecting mainly lower income on gradually declining interest rates.

Strategy and Outlook (continued)

On asset quality, the Group's NPE ratio decreased to 2.8% as at 30 June 2024 indicating that is already aligned with the 2024 NPE ratio target. In this respect, the Group aims at an NPE ratio below 3% by end-2024 and below 2.5% by end-2025. Additionally, due to the continued strong credit portfolio performance, the cost of risk target is revised downwards and is currently expected to be approximately 40 basis points for 2024 and within the normalised range of 40-50 basis points for 2025.

Upgraded ROTE Targets

Overall, the Group expects to deliver a ROTE of over 19% (on a reported basis) which is translated into a ROTE of over 24% on 15% CET1 ratio for 2024. For 2025, the Group expects to deliver a reported ROTE in the range of mid-teens, corresponding to high-teens ROTE on 15% CET1 ratio. This strong performance for 2024 and 2025 will facilitate rapid capital build-up, with the CET1 generation expected to exceed 300 basis points per annum on a pre-distribution level.

Distributions

The Group aims to provide a sustainable return to shareholders. Distributions are expected to be in the range of 30%-50% payout ratio of the Group's adjusted recurring profitability, including cash dividends and buybacks, with any distribution being subject to regulatory approval. Group adjusted recurring profitability is defined as the Group's profit after tax before non-recurring items (attributable to the owners of the Company) taking into account distributions under other equity instruments, such as the annual AT1 coupon. In line with the Group's distribution policy, the Group is committed to delivering sustainably growing distributions through a combination of cash dividend and share buybacks while maintaining a robust capital base to support profitable growth and prudently prepare for upcoming potential regulatory changes. Supported by its continued progress towards its strategic targets, the Group intends to move towards the top-end of the 30%-50% range of its distribution policy (i.e. 50% payout ratio) for 2024, subject to required approvals. Any proposed distribution quantum, as well as envisaged allocation between dividend and buyback, will take into consideration market conditions as well as the outcome of its ongoing capital and liquidity planning exercises at the time. Given the strong capital generation, the Group's distribution policy is expected to be reviewed with the full year 2024 financial results in the context of prevailing market conditions.

Proposal to enhance the Group's market visibility and improve liquidity via ATHEX listing

In the context of evaluating how best to position the Group to achieve its long-term strategic targets and deliver sustainable value to shareholders, the Board has been assessing how to enhance the liquidity of the ordinary shares of the Group which are currently listed on the London Stock Exchange (LSE) and Cyprus Stock Exchange (CSE). Following extensive communication with the Group's stakeholders, the Board has reached the view that listing the ordinary shares on the Athens Stock Exchange ('ATHEX') in conjunction with a delisting from the LSE, will yield a number of long-term strategic and capital market benefits. These include enhancing the Group's profile among the relevant investor base focused on the region, enabling investors to directly compare performance with regional banking peers, attracting long-term institutional holders within the more focused market ecosystem of ATHEX and providing scope for inclusion among indices over time. Taking into account these benefits, the Board of the Group believes that listing the ordinary shares on ATHEX and delisting the ordinary shares from the LSE has the potential to enhance the liquidity of the ordinary shares and may improve the market visibility of the Group for the benefit of shareholders. The ordinary shares of the Group will continue to be listed on theCSE. An Extraordinary General Meeting will be convened to propose a resolution to shareholders to consider the proposed listing on ATHEX; further details will be announced in due course. The effectiveness of the listing on ATHEX will also be subject to and conditional upon, being approved by the ATHEX Listings Committee. Subject to shareholder approval, necessary regulatory approvals and market conditions, the Board expects the listing and delisting to take place in autumn 2024.

Going concern

The Directors have made an assessment of the ability of the Group, the Company and BOC PCL to continue as a going concern for a period of 12 months from the date of approval of the Consolidated Condensed Interim Financial Statements.

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

In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including projections of profitability, cash flows, capital requirements and capital resources, liquidity and funding position, taking also into consideration the Group's Financial Plan approved by the Board in February 2024 (the 'Plan') and the operating environment, as well as any reforecast exercises performed. The Group has sensitised its projection to cater for a downside scenario and has used reasonable economic inputs to develop its medium‑term strategy. The Group is working towards materialising its Strategy.

Capital

The Directors and Management have considered the Group's forecasted capital position, including the potential impact of a deterioration in economic conditions. The Group has developed capital projections under a base and an adverse scenario and the Directors believe that the Group has sufficient capital to meet its regulatory capital requirements throughout the period of assessment.

Funding and liquidity

The Directors and Management have considered the Group's funding and liquidity position and are satisfied that the Group has sufficient funding and liquidity throughout the period of assessment. The Group continues to hold a significant liquidity buffer at 30 June 2024 that can be easily and readily monetised in a period of stress.

Principal risks and uncertainties ‑ Risk management and mitigation

As part of its business activities, the Group faces a variety of risks. The Group identifies, monitors, manages and mitigates these risks through various control mechanisms. Credit risk, liquidity and funding risk, market risk (arising from adverse movements in foreign currency exchange rates, interest rates, security prices and property prices), insurance and re‑insurance risk and operational risk, are some of the key significant risks the Group faces. In addition, key risks facing the Group include geopolitical risk, legal risk, regulatory compliance risk, information security and cyber risk, digital transformation and technology risks, climate related and environmental risks, and business model and strategic risk.

Information relating to the principal risks the Group faces and risk management is set out in Notes 32 to 35 of the Consolidated Condensed Interim Financial Statements and in the 'Risk and Capital Management Report', both of which form part of the Interim Financial Report for the six months ended 30 June 2024. In addition, in relation to legal risk arising from litigations, investigations, claims and other matters, further information is disclosed in Note 28 of the Consolidated Condensed Interim Financial Statements.

Additionally, the Group is exposed to the risk of changes in the 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 for debt and is intended to be disposed of in line with the Group's strategy. Further information is disclosed in Note 20 of the Consolidated Condensed Interim Financial Statements.

Details of the financial instruments and hedging activities of the Group are set out in Note 17 of the Consolidated Condensed Interim Financial Statements. Further information on financial instruments is also presented in Notes 32 and 33 of the Consolidated Condensed Interim Financial Statements.

The Group's activities are mainly in Cyprus therefore the Group's performance is impacted by changes in the Cyprus operating environment, as described in the 'Operating environment' section of this Interim Management Report and changes in the macroeconomic conditions and geopolitical developments as described in the 'Risk and Capital Management Report' which forms part of the Interim Financial Report for the six months ended 30 June 2024.

In addition, details of the significant and other 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 the Consolidated Condensed Interim Financial Statements.

Principal risks and uncertainties ‑ Risk management and mitigation (continued)

As the war in Ukraine and the military conflict in the Middle east continue, considerable uncertainly is added to the outlook for the global economy and the impact will largely depend on how these conflicts are resolved. The Group has limited direct exposure to both Ukraine and Russia as well as to Israel, and is continuously monitoring the current affairs and remains vigilant to take precautionary measures as required.

The risk factors discussed above and in the reports referenced above should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties. There may be risks and uncertainties of which the Group is not aware of, or which the Group does not consider significant, but which may become significant. There are challenging conditions in global markets due to the high interest rate environment, inflationary pressures, the geopolitical developments, the growing threat from cyberattacks and other unknown risks. As a result the precise nature of all risks and uncertainties that the Group faces cannot be predicted with accuracy as many of these risks are outside of the Group's control.

Events after the reporting date

Share repurchase programme

During the period from 1 July 2024 to 6 August 2024, 464 thousand shares were further purchased under the share repurchase programme launched in April 2024, at a total cost of €1,920 thousand. As at 6 August 2024, the Company holds 44 thousand shares, all arising from the share repurchase programme.

Proposal to list to Athens Stock Exchange and delist from London Stock Exchange

The Board has been assessing how to enhance the liquidity of the ordinary shares of the Group which are currently listed on the London Stock Exchange ('LSE') and the Cyprus Stock Exchange ('CSE'). Following extensive communication with Group's stakeholders, the Board has reached the view that listing the ordinary shares on the Athens Stock Exchange ('ATHEX') in conjunction with a delisting from the LSE will yield a number of long-term strategic and capital market benefits. The ordinary shares of the Group will continue to be listed on the CSE. An Extraordinary General Meeting will be convened to propose a resolution to shareholders to consider the proposed listing on ATHEX. The effectiveness of the listing on ATHEX will also be subject to and conditional upon, being approved by the ATHEX Listings Committee.

No other significant non-adjusting events have taken place since 30 June 2024.

Distributions

Based on the 2023 SREP decision, effective from 1 January 2024, any equity dividend distribution is subject to regulatory approval, both for the Company and BOC PCL. The requirement for approval does not apply if the distributions are made via the issuance of new ordinary shares to the shareholders which are eligible as Common Equity Tier 1 Capital nor to the payment of coupons on any AT1 capital instruments issued by the Company or BOC PCL.

In March 2024, the Company obtained the approval of the European Central Bank to pay a cash dividend and to conduct a share buyback (together the 'Distribution') in respect of earnings for the year ended 31 December 2023. The Distribution amounted to €137 million in total, comprising a cash dividend of €112 million and a share buyback of up to €25 million as described in Note 26 of the Consolidated Condensed Interim Financial Statements. The AGM, on 17 May 2024, approved a final cash dividend of €0.25 per ordinary share in respect of earnings for the year ended 31 December 2023.

In April 2023, the Company obtained the approval of the European Central Bank to pay a dividend in respect of earnings for the year ended 31 December 2022. The AGM, on 26 May 2023, declared a final cash dividend of €0.05 per ordinary share in respect of earnings for the year ended 31 December 2022. The dividend amounted to €22 million in total.

Statement of Directors' Responsibilities

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

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

· the Consolidated Condensed Interim Financial Statements, prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU, give a true and fair view of the assets, liabilities and financial position of the Group at 30 June 2024, and its profit for the period then ended; and

· the Interim Financial Report includes a fair review of:

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

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

c. details of any related party transactions that have materially affected the Group's financial position or performance in the six months ended 30 June 2024; and

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

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

Efstratios‑Georgios Arapoglou

Chairman

Panicos Nicolaou

Chief Executive Officer

07 August 2024

Risk and Capital Management Report

30 June 2024

The Group's approach to risk management

One of the Group's main priorities is to continually improve its risk management framework to be able to respond to the ever changing environment in an appropriate manner. Effective risk management is critical to the success of the Group, and as such the Group maintains a risk management framework designed to ensure the safety and soundness of the institution, protect the interests of depositors and shareholders and comply with regulatory requirements. Clearly defined lines of authority and accountability are in place as well as the necessary infrastructure and analytics to allow the Group to identify, assess, monitor and control risk.

1. Risk Management Framework (RMF)

The Board of Directors, through the Risk Committee (RC), is responsible to ensure that a coherent and comprehensive Risk Management Framework (the 'Framework' or 'RMF') for the identification, assessment, monitoring and controlling of all risks is in place. The Framework ensures that material and emerging risks are identified, including, but not limited to, risks that might threaten the Group's business model, future performance, liquidity, and solvency. Such risks are taken into consideration in defining the Group's overall business strategy ensuring alignment with the Group's risk appetite. In setting its risk appetite, the Group ensures that its risk bearing capacity is considered so that the appropriate capital levels are always maintained.

The RMF is supported by a strong governance structure and is comprised of several components that are analysed in the sections below. The RMF is reviewed, updated and approved by the Board at least annually to reflect any changes to the Group's business or to take into consideration external regulations, corporate governance requirements and industry best practices.

1.1 Risk Governance

The responsibility for the governance of risk at the Group lies with the Board of Directors (the 'Board') which is ultimately accountable for the effective management of risks and for the system of internal controls in the Group. The Board is assisted in its risk governance responsibilities by the Board Risk and Board Audit Committees (RC and AC respectively) and at executive management level by the Executive Committee (EXCO), Asset and Liability Committee (ALCO), Asset Disposal Committee (ADC), Technology Committee (TC), Sustainability Committee (SC) and the Credit Committee.

The RC supports the Board on risk oversight matters including the monitoring of the Group's risk profile and of all risk management activities whilst the AC supports the Board in relation to the effectiveness of the system of internal controls. In addition, discussion and escalation processes are in place through both the Board Committees and executive level Committees that provide for a consistent approach to risk management and decision-making.

Discussion around risk management is supported by the appropriate risk information submitted by the Risk Management Division (RMD) and Executive Management. The Chief Risk Officer (CRO) or his representatives participate in all such key committees to ensure that the information is appropriately presented, and that RMD's position is clearly articulated.

Furthermore, the roles of the CEO and the Group CRO are critical as they carry specific responsibilities with respect to risk management. These include:

1. Risk Management Framework (RMF) (continued)

1.1 Risk Governance (continued)

Chief Executive Officer (CEO)

The CEO is accountable for leading the development of the Group's strategy and business plans in a manner that is consistent with the approved risk appetite and for managing and organising Executive Management to ensure these are executed. It is the CEO's responsibility to manage the Group's financial and operational performance within the approved risk appetite.

Chief Risk Officer (CRO)

The CRO leads an independent RMD across the Group including its subsidiaries. The CRO is responsible for the execution of the Risk Management Framework and the development of risk management strategies. The CRO is expected to challenge business strategy and overall risk taking and risk governance within the Group and independently submit his findings, where necessary, to the RC. The CRO reports to the RC and for administrative purposes has a dotted line to the CEO, as presented in the figure organizational diagram below.

1.2 Organisational Model

The RMD is the business function set up to manage the risk management process of the Group on a day-to-day basis. The risk management process is integrated into BOC PCL's internal control system. The RMD is organized into several departments, each of which is specialized in one or several categories of risks. The organization of RMD reflects the types of risks inherent in the Group.

\* The Data Quality and Governance Unit of the Data Office & Risk Analytics Department directly reports through its manager to the Data Quality & Governance committee chaired by the Executive Director People & Change.

RMD organisational model

The RMD operates independently and this is achieved through:

- Organisational independence from the activities assigned to control;

- Unrestricted and direct access to Executive Management and the Board, either through the RC or directly

- Direct and unconditional access to all business lines that have the potential to generate material risk to the Group. Front Line managers are required to cooperate with the RMD managers and provide access to all records and files of the Group as well as any other information necessary;

- A separate budget submitted to the RC for approval;

- The CRO is a member of the EXCO and holds voting or veto presence in key executive committees as well as operational committees.

Furthermore, this independence is also ensured as:

- The CRO is assessed annually by the RC that is jointly responsible with Human Resources & Remuneration Committee

- The CRO maintains a close working relationship with both the RC and its Chairperson which includes regular and frequent direct communication both during official RC meetings as well as unofficial meetings and discussions

1. Risk Management Framework (RMF) (continued)

1.2 Organisational Model (continued)

The RMD organisational model is structured so as to:

- Define risk appetite and report regularly on the status of the risk profile

- Ensure that all material and emerging risks have proper ownership, management, monitoring and clear reporting

- Promote proper empowerment in key risk areas that will assist in the creation of a robust risk culture

- Provide tools and methodologies for risk management to the business units

- Report losses from risks identified to the EXCO, the RC and the Board and, where necessary, to the Regulatory Authorities

- Collect and monitor Key Risk Indicators (KRIs)

The RMD is responsible for risk identification and risk management across the Group.

1.3 Risk Identification

The risk identification process is comprised of two simultaneous but complementary approaches, namely, the top-down and the bottom-up approaches. The top-down process is led by Senior Management and focuses on identifying the Group's material risks whilst the bottom-up approach risks are identified and captured through several methods such as the Risk and Control Self-Assessment (RCSA) process, incident capture, fraud events capture, regulatory audits, direct engagement with specialized units and other. The risks captured by these processes are compiled during the annual ICAAP process and its quarterly updates and form the Groups' material risks.

To ensure a complete and comprehensive identification of risks the Group has integrated several key processes into its risk identification process, including the:

- Internal Capital Adequacy Assessment Process (ICAAP)

- Internal Liquidity Adequacy Assessment Process (ILAAP)

- Stress testing

- Group Financial Plan compilation process

- Regulatory, internal and external reviews and audits

1.4 Three Lines of Defence

The Group complies with the regulatory guidelines for corporate governance and has established the "Three Lines of Defence" model as a framework for effective risk and compliance management and control. The three lines of defence model defines the responsibilities in the risk management process ensuring adequate segregation in the oversight and assurance of risk.

First Line of Defence

The first line of defence lies with the functions that own and manage risks as part of their responsibility for achieving objectives and are responsible for implementing corrective actions to address, process and control deficiencies. It comprises of the management and staff of business lines and support functions who are directly aligned with the delivery of products and/or services.

Second Line of Defence

The second line of defence includes functions that oversee the compliance of the first line management and staff, with the regulatory framework and risk management principles. It comprises of the RMD, Information Security and Compliance functions. The second line of defence sets the corporate governance framework of the Group and establishes policies and guidelines that the business lines and support functions, Group entities and staff should operate within. The second line of defence also provides support, as well as independent oversight of the risk profile and risk framework.

1. Risk Management Framework (RMF) (continued)

1.4 Three Lines of Defence (continued)

Third Line of Defence

The third line of defence is the Internal Audit Division (IA) which provides independent assurance to the Board and the EXCO on the design adequacy and operating effectiveness of the Group's internal control framework, corporate governance and risk management processes for the management of risks according to the risk appetite set by the Board. Findings are communicated to the Board through the committees and senior management and other key stakeholders, with remediation plans monitored for progress against agreed completion dates.

1. Risk Management Framework (RMF) (continued)

1.5 Risk Appetite Framework (RAF)

The objective of the Risk Appetite Framework (RAF) is to set out the level of risk that the Group is willing to take in pursuit of its strategic objectives, outlying the key principles and rules that govern the risk appetite setting. It comprises the Risk Appetite Statement (RAS), the associated policies and limits where appropriate, as well as the roles and responsibilities for the implementation and monitoring of the RAF.

The RAF has been developed in order to be used as a key management tool to better align business strategy (financial and non-financial targets) with risk management, and it should be perceived as the focal point for all relevant stakeholders within the Group, as well as the supervisory bodies, for the assessment of whether the undertaken business activities are consistent with the set risk appetite.

The RAF is one of the main elements of the Risk Management Framework which includes, among others, a number of frameworks, policies and circulars that address the principal risks of the Group. Separate RAFs are in place for all operating subsidiaries which are subject to each subsidiary's board approval.

Risk Appetite Statement (RAS)

The RAS is the articulation, in written form, of the aggregate level and types of risk that the Group is willing to accept in the course of executing its business objectives and strategy. It includes qualitative statements as well as quantitative measures expressed relative to Financial and Non-Financial risks. As part of the overall framework for risk governance, it forms a boundary condition to strategy and guides the Group in its risk-taking and related business activities.

Risk appetite and Financial Plan interaction

The Group's Financial Plan is integral to how the Group manages its business and monitors performance. It informs the delivery of the Group's strategy and is aligned to the Risk Appetite Statement. The RAS is subject to an annual review process during the period in which the Group's Financial Plan as well as the divisional strategic plans are being formulated. The interplay between these processes provides for cycle of feedback during which certain RAS indicators (such as ones related to minimum regulatory requirements) act as a backstop to the Group's Financial Plan while for other indicators the Group Financial Plan provides input for risk tolerance setting. Furthermore, the Group Financial Plan and Reforecast exercises are tested to ensure they are within the Group's risk appetite.

Risk Appetite monitoring

To ensure that the risk profile of the Group is within the approved risk appetite, a consolidated risk report and a risk appetite profile report are regularly reviewed and discussed by the Board and the RC.

1.6 Risk Taxonomy

In order to ensure that all risks the Group may face are identified and managed, a risk taxonomy is in place which is a key component of the Internal Capital Adequacy Assessment Process (ICAAP) and the Internal Liquidity Adequacy Assessment Process (ILAAP). The taxonomy ensures that the coverage of risks is comprehensive and identifies potential linkages between risks.

The Risk taxonomy provides a categorisation of different risk types / factors enabling the institution to assess, aggregate and manage risks in a consistent way through a common risk language and mapping. It comprises of several levels of risks in increasing granularity and supports a multi-level tree categorization to enhance the overall risk classification. This risk categorization is also used to accommodate additional regulatory compliance requirements and internal risk analysis and reporting needs.

1. Risk Management Framework (RMF) (continued)

1.7 Risk measurement and reporting

The RMD uses several systems and models to support key business processes and operations, including stress testing, credit approvals, fraud risk and financial reporting. The RMD has established a model governance and validation framework to help address risks arising from model use.

Additionally, the RMD:

- Maintains a categorization and definitions of risks and terminologies which are used throughout the Group

- Collates reports of Key Risk Indicators (KRIs) and other relevant risk information. When limit violations occur, escalation and reporting procedures are in place;

- Checks that risk information provided by management is complete and accurate and management has made all reasonable endeavour to identify and assess all key risks;

- Ensures that the risk information submitted to the RC and the Board by RMD and management is appropriate and enables monitoring and control of all the risks faced by the Group;

- Discloses risk information externally and prepares reports on significant risks in line with internal and external regulatory requirements.

Stress testing

Stress testing is a key risk management tool used by the Group to provide insights on the behaviour of different elements of the Group in a crisis scenario and to assess the Group's resilience and capital and liquidity adequacy. To make this assessment, a range of scenarios is used, based on variations of market, economic and other operating environment conditions. Stress tests are performed for both internal and regulatory purposes and serve an important role in:

- Understanding the risk profile of the Group;

- Evaluating whether there is sufficient capital or adequate liquidity under stressed conditions (ICAAP and ILAAP) so as to put in place appropriate mitigants;

- Evaluating of the Group's strategy;

- Establishing or revising limits;

- Assisting the Group to understand the events that might push the Group outside its risk appetite.

The Group carries out the stress testing process through a combination of bottom-up and top-down approaches. Scenario and sensitivity analysis follows a bottom-up approach, whereas reverse stress testing follows a top-down approach.

If the stress testing scenarios reveal vulnerability to a given set of risks, management makes recommendations to the Board, through the RC, for remedial measures or actions.

The Group's stress testing programme embraces a range of forward-looking stress tests and takes all the Group's material risks into account. These key internal exercises include:

· Stress testing undertaken in support of the Internal Capital Adequacy Assessment Process (ICAAP). Quarterly ICAAP reviews are also undertaken.

· Stress testing applied to the funding and liquidity plan in support of the Internal Liquidity Adequacy Assessment Process (ILAAP) to formally assess the Group's liquidity risks. Quarterly ILAAP reviews are also undertaken.

· Annual recovery stress tests which use scenarios to assess the adequacy of recovery indicators of both capital and liquidity in identifying the recovery plan options used to exit that stress;

· Ad hoc stress testing as and if required, including in response to regulatory requests.

1. Risk Management Framework (RMF) (continued)

1.7 Risk measurement and reporting (continued)

Other business and specific risk type stress tests

The Market and Liquidity Risk Department performs additional stress tests, which include the following:

- Monthly stress testing for interest rate risk (2% shock on Economic Value (EV));

- Quarterly stress testing for interest rate risk (2% shock on Net Interest Income (NII));

- Quarterly stress testing for interest rate risk (based on the six predefined Basel interest rate scenarios which involve flattening, steepening, short up, short down, parallel up, parallel down shocks);

- Quarterly stress testing on items that are marked to market: impact on profit/loss and reserves is indicated from changes in interest rates and prices of bonds and equities.

ICAAP

The ICAAP is a process whose main objective is to assess the Group's capital adequacy in relation to the level of underlying material risks that may arise from pursuing the Group's strategy or from changes in its operating environment. More specifically, the ICAAP analyses, assesses and quantifies the Group's risks, establishes the current and future capital needs for the material risks identified and assesses the Group's absorption capacity under both the baseline scenario and stress testing conditions, aiming to assess whether the Group has sufficient capital, under both the base and stress case scenarios, to support its business and achieve its strategic objectives as per its Board approved Risk Appetite and Strategy.

The Group undertakes quarterly reviews of its ICAAP results as well as on an ad-hoc basis if needed, which are submitted to the ALCO and the RC, considering the latest actual and forecasted information. During the quarterly review, the Group's risk profile is reviewed and any material changes/developments since the annual ICAAP exercise are assessed in terms of capital adequacy.

The 2023 ICAAP was submitted to the ECB on 28 March 2024. It indicated that the Group has sufficient capital and available mitigants to support its risk profile and its business and to enable it to meet its regulatory requirements, both under baseline and stressed conditions.

ILAAP

The ILAAP is a process whose main objective is to assess whether the volume and capacity of liquidity resources available to the Group are adequate to support its business model, to achieve its strategic objectives under both the base and severe stress scenarios, and to meet regulatory requirements, including the LCR and the NSFR.

The Group undertakes quarterly reviews of its ILAAP results through quarterly liquidity stress tests which are submitted to the ALCO and the RC, where actual and forecasted information is considered. Any material changes since the year-end are assessed in terms of liquidity and funding.

The 2023 annual ILAAP package was submitted to the ECB on 28 March 2024. It indicated that the Group maintains liquidity resources which are adequate to ensure its ability to meet obligations as they fall due under ordinary and stressed conditions.

1. Risk Management Framework (RMF) (continued)

1.8 The Group is participated in the Fit-for-55 exercise.

The Group participated in the European Banking Authority ("EBA") "Fit-for-55" climate risk scenario analysis exercise. The exercise was part of the new mandates received by the EBA in the scope of the European Commission's Renewed Sustainable Finance Strategy. Under the European Green Deal, all 27 EU Member States committed to turning the EU into the first climate-neutral continent by 2050 and pledged to reduce emissions by at least 55% by 2030, compared to 1990 levels. The One-off Fit-for-55 climate risk scenario analysis aimed at assessing the resilience of the financial sector in line with the Fit-for-55 package and to gain insights into the capacity of the financial system to support the transition to a lower carbon economy under conditions of stress.

1.9 The Group participated in the ECB Cyber Resilience Stress Test

The Group participated in the cyber resilience stress test exercise conducted by the ECB in the first half of 2024. The aim is to assess the cyber-resilience framework for all SSM Significant Institutions. The exercise aim to assess how banks respond to and recover from a cyberattack, rather than their ability to prevent it. The insights gained will be used for the wider supervisory assessment in 2024. The findings and lessons learned are discussed with each bank as part of the 2024 Supervisory Review and Evaluation Process.

2. Recovery and resolution planning

The Group's recovery plan sets out the arrangements and measures that the Group could adopt in the event of severe financial stress to restore the Group to long term viability. A suite of indicators and options are included in the Group's recovery plan, which together present the identification of stress events and the tangible mitigating actions available to the Group to restore viability. The Group's recovery plan is approved by the Board on the recommendation of the RC and ALCO.

The Group resolution plan is prepared by the Single Resolution Board in cooperation with the National Resolution Authority (Central Bank of Cyprus). The resolution plan describes the Preferred Resolution Strategy (PRS), in addition to ensuring the continuity of the Group's critical functions and the identification and addressing of any impediments to the Group's resolvability. The PRS for the Group is a single point of entry bail-in via BOC PCL. The resolution authorities also determine the Minimum Requirements for own funds and Eligible Liabilities (MREL) corresponding to the loss absorbing capacity necessary to execute the resolution.

3. Risk Culture

A robust risk culture is a substantial determinant of whether the Group will be able to successfully execute its strategy within its defined risk appetite. An action plan towards the implementation of a firm-wide risk culture is in place across the Group and RMD has a leading role in it. The action plan includes, among other, the measurement of risk culture, both at bank wide and divisional level, through a specific Risk Culture Dashboard, the communication of a series of topics aiming at re-enforcing risk culture and the provision of specific training for areas such as credit underwriting and other risk management related topics.

4. Principal Risks

As part of its business activities, the Group faces a variety of risks. The principal and other risks faced by the Group are described below as well as the way these are identified, assessed, managed and monitored by the Group, including the available mitigants. The risks described below, should not be regarded as a complete and comprehensive statement of all potential risks, uncertainties or mitigants as other factors either not yet identified or not currently material, may also adversely affect the Group.

4. Principal Risks (continued)

4.1 Credit Risk

Credit risk is defined as the current or prospective risk to earnings and capital arising from an obligor's failure to meet the terms of any contract with the Group (actual, contingent or potential claims both on and off balance sheet) or failure to perform as agreed. Within the general definition of credit risk, the Group identifies and manages the following types of risk:

· Counterparty credit risk (CCR): the Group's credit exposure with other counterparties. The risk of losses arising as a result of the counterparty not meeting their contractual obligations in full and on time.

· Settlement risk: the risk that a counterparty fails to deliver the terms of a contract with the Group.

· Issuer risk: the risk of losses arising from a credit deterioration of an issuer of instruments in which the Group has invested.

· Concentration risk: the risk that arises from the uneven distribution of exposures (i.e. credit concentration) to individual borrowers or by industry, collateral, product, currency, economic sector or geographical region.

· Country risk: the Group's credit exposure arising from lending and/or investments or the presence of the Group to a specific country.

In order to manage these risks, the Group has a Credit Risk Management function within RMD that:

- Develops prudent policies, guidelines and approval limits necessary to manage and control or mitigate the credit and concentration risk in the Group. These documents are reviewed and updated at least annually, or earlier if deemed necessary, to reflect any changes in the Group's risk appetite and strategy and consider the market environment or any other major changes from external or internal factors that come into effect;

- Assesses credit applications, before their submission for approval to Credit Committee 3 / the RC / the Board, from an independent credit risk perspective ensuring abidance to the Group's risk appetite, policies and guidelines, in order to support the role of Observer, who holds a veto right;

- Participates as an observer in the Credit Committee 3 and in specific cases that fall under the approving authority of Corporate Sanctioning as delegated by the CRO;

- Sets KRIs for monitoring the loan portfolio quality and adopts a proactive monitoring approach for such risks;

- Measures the expected credit losses in a prudent way in order to have a fair representation of the loan book in the financial statements of the Group

The Group sets and monitors risk appetite limits relating to credit risk. Furthermore, a limits framework is in place in relation to the credit granting process and also the general rules are documented in the Group's Lending Policy. Relevant circulars and guidelines are in place that provide parameters for the approval of credit applications and related credit limits. The Group has established credit approving authorities, which are authorised to approve the granting, review and restructuring of credit facilities in the Bank, including the Credit Sanctioning Department and the Credit Committee 3. Credit Committee 3 is comprised of members from various Group divisions outside RMD to ensure independence of opinion. Applications falling outside the approval limits of Credit Committee 3 are submitted to the RC or the Board, depending on the total exposure of the customer group.

The Group has adopted methodologies and techniques for credit risk identification. These methodologies are revised and modified whenever deemed necessary to reflect changes in the financial environment and adjusted to be in line with the Group's overall strategy and its short-term and long-term objectives.

4. Principal Risks (continued)

4.1 Credit Risk (continued)

The Group dedicates considerable resources to assess credit risk and to correctly reflect the value of its on-balance and off-balance sheet exposures in accordance with regulatory and accounting guidelines. This process can be summarised in the following stages:

· Analysing performance and asset quality

· Measuring exposures and concentrations

· Raising allowances for impairment

Furthermore, post-approval monitoring is in place to ensure adherence to both terms and conditions set in the approval process and credit risk policies and procedures. A key aspect of credit risk is credit risk concentration which is defined as the risk that arises from the uneven distribution of exposures to individual borrowers, specific industry or economic sectors, geographical regions, product types or currencies. The monitoring and control of concentration risk is achieved by limit setting (e.g. sector and name limits) and reporting them to senior management.

Approved policies and procedures are in place for the approval of Credit and Settlement Limits per counterparty based on the business needs, current exposures and investment plans. Counterparty credit and settlement limits for Treasury transactions are monitored real-time through the Treasury front to back system.

With the aim of identifying credit risk at an early stage, a number of key reports are prepared for the EXCOand / or the Board. Indicatively, these include a credit quality dashboard which analyses, among others, the overall loan book performance, forborne facilities, the performance of new lending, specific products or portfolios, new forbearances and modifications and other portfolio quality KPIs.

Country Risk

Country Risk refers to the possibility that borrowers of a particular country may be unable or unwilling to fulfil their foreign obligations for reasons beyond the usual risks which arise in relation to all lenders. Country risk affects the Group via its operation in other countries and also via investments in other countries (Money Market (MM) placements, bonds, shares, derivatives, etc.). In addition, the Group is indirectly affected by credit facilities provided to customers for their international operations or due to collateral in other countries. In this respect, country risk is considered in the risk assessment of all exposures, both on-balance sheet and off-balance sheet. Country risk exposures are the aggregation of the various on-balance sheet and off-balance sheet exposures including investments in bonds, money market placements, loans by or guarantees to residents of a country, letters of credit, properties etc.

The Group monitors country risk on a quarterly basis by reporting to ALCO country exposures compared to country limits. The Board, through the RC is also informed on a regular basis and at least annually, on any limit breaches. The country limits are allocated based on the CET1 capital of the Group, the country's credit rating and internal scoring.

Credit Risk Mitigation

The fundamental lending principle of the Group is to approve applications and provide credit facilities only when the applicant has the ability to pay and where the terms of these facilities are consistent with the customers' income and financial position, independent of any collateral that may be assigned as security and in full compliance with all external laws, regulations, guidelines, internal codes of conduct and other internal policies and procedures. The value of collateral is not a decisive factor in the Group's assessment and approval of any credit facility since collaterals may only serve as a secondary source of repayment in case of default.

Collaterals are used for risk mitigation. Collaterals are considered as an alternative means of debt recovery in case of default. Collateral by itself is not a predominant criterion for approving a loan, with the exception of when the loan agreement envisages that the repayment of the loan is based on the sale of the property pledged as collateral or liquid collateral provided (e.g. cash). The Group's requirements around completion, valuation and management of collateral are set out in appropriate Group policies.

4. Principal Risks (continued)

4.1 Credit Risk (continued)

Credit risk mitigation is also implemented through a number of policies, procedures, guidelines circulars and limits. Policies are approved by the RC and include the:

· Lending Policy

· Write-off policy

· Concentration Risk Policy

· Valuation Policy

· Credit Risk Monitoring Policy

· Environmental & Social Policy

· Asset Acquisition and Disposal Policy

· Loan Syndication Policy

· Green Lending Policy

· Shipping Finance Policy

· Early Warning Policy

Systems

The effective management of the Group's credit risk is achieved through a combination of training and specialisation as well as appropriate credit risk assessment (risk rating) systems. The Group aims to continuously upgrade the systems and models used in assessing the creditworthiness of Group customers. Additionally, the Group continuously upgrades the systems and models for the assessment of credit risk aiming to correctly reflect the value of its on-balance and off-balance sheet exposures in accordance with regulatory and accounting guidelines.

The analysis of loans and advances to customers in accordance with the EBA standards is presented below.

4. Principal Risks (continued)

4.1 Credit Risk (continued)

The tables below present the analysis of loans and advances to customers in accordance with the EBA standards.

1Excluding loans and advances to central banks and credit institutions.

2The residual fair value adjustment on initial recognition (which relates mainly to loans acquired from Laiki Bank and is calculated as the difference between the outstanding contractual amount and the fair value of loans acquired and bears a negative balance) is considered as part of the gross loans, therefore decreases the gross balance of loans and advances to customers.

3The analysis shown in lines 'non-financial corporations' and 'households' is non-additive across all categories as certain customers could be in both categories.

4. Principal Risks (continued)

4.1 Credit Risk (continued)

1Excluding loans and advances to central banks and credit institutions.

2The residual fair value adjustment on initial recognition (which relates mainly to loans acquired from Laiki Bank and is calculated as the difference between the outstanding contractual amount and the fair value of loans acquired and bears a negative balance) is considered as part of the gross loans, therefore decreases the gross balance of loans and advances to customers.

3The analysis shown in lines 'non-financial corporations' and 'households' is non-additive across all categories as certain customers could be in both categories.

4. Principal Risks (continued)

4.2 Market Risk

Market Risk is defined as the current or prospective risk to earnings and capital arising from adverse movements in interest rates, currency / foreign exchange rates and from any other changes in market prices. The main types of market risk to which the Group is exposed to are listed below:

a. Interest Rate Risk in the Banking Book (IRRBB);

b. Currency / foreign exchange rates risk;

c. Securities price risk (bonds, equities);

d. Properties risk;

Each of the risks above is defined and further analysed in the subsections below. Furthermore, additional information relating to Market risk is set out in Note 33 of the Consolidated Condensed Interim Financial Statements.

The management of market risk in the Group is governed by the Group's Risk Appetite Statement approved by the Board and by the Market Risk Policy, approved by the RC. These are supplemented by a range of approved limits and controls as per Market Risk Limits document approved by the Board. The Group has an established governance structure for market risk. Market risk is measured using portfolio sensitivity analysis, Value at Risk ('VaR') and stress testing measures. Measurement and reporting to management body and committees are performed on a frequent basis.

Interest Rate Risk in the Banking Book

Interest rate risk in the banking book ("IRRBB") is the current or prospective risk to both the earnings and capital of the Group as a result of adverse movements in interest rates. The four components of interest rate risk are: repricing risk, yield curve risk, basis risk and option risk. Repricing risk is the risk of loss of net interest income or economic value as a result of timing mismatch in the repricing of assets, liabilities and off balance sheet items. Yield curve risk arises from changes in the slope and the shape of the yield curve. Basis risk is the risk of loss of net interest income or economic value as a result of imperfect correlation between different reference rates. Option risk arises from options, including embedded options, e.g. consumers redeeming fixed rate products when market rates change.

The Group does not operate any trading book and thus all interest rate exposure arises from the banking book.

In order to manage interest rate risk, the Group sets a one-year limit on the maximum reduction of the net interest income. Limits are set as a percentage of Group Tier 1 capital and as a percentage of Group annual net interest income (when positive). Whilst limit breaches must be avoided at all times, any such occurrence is reported to the relevant authorities (ALCO and / or RC) and mitigating actions are put in place. Monthly update is provided to the ALCO/ EXCO/ RC.

Treasury Division is responsible for managing the interest rate exposure of the Group. Corrective actions are taken by Treasury Division with a view of minimizing the risk exposure and in any event to restrict exposure within limits.

Currency/foreign exchange rates risk

Currency/foreign exchange rates risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

4. Principal Risks (continued)

4.2 Market Risk (continued)

Currency/foreign exchange risk (continued)

In order to limit the risk of loss from adverse fluctuations in foreign exchange rates, overall Intraday and Overnight open currency position limits have been set. These internal limits are small compared to the maximum permissible by the regulator. Internal limits serve as a trigger to management for avoiding regulatory limit breaches. Due to the fact that there is no Foreign Exchange Trading Book, VaR (Value at Risk) is calculated on a monthly basis on the position reported to the CBC. Intraday and overnight FX position limits are monitored daily and the open foreign currency position or any breaches are reported to ALCO and to the RC on a monthly basis.

Treasury Division is responsible for managing the foreign currency open position of the Group emanating from its balance sheet. The foreign currency position emanating from customer transactions is managed by the Treasury Sales Unit of Global Markets & Treasury Sales Department. Treasury Division is also responsible for hedging the foreign currency open positions of the foreign non-banking units of the Group.

Equities Price Risk

The risk of loss from changes in the price of equity securities arises when there is an unfavorable change in the prices of equity securities held by the Group as investments. 

The Group holds equity and fund investments on its balance sheet. The equity portfolio mainly relates to certain legacy positions acquired through loan restructuring activity and specifically through debt for equity swaps, whereas the fund portfolio mainly relates to investments held by the insurance operations of the Group. The policy is to manage the current equity portfolio with the intention to run it down by selling all positions for which there is a market. No new purchases of equities are allowed without ALCO approval. Nevertheless, new equities may be obtained from repossessions of collateral for loans. Analysis of equity and fund holdings are reported to ALCO on a quarterly basis. Analysis of the positions the Group maintains as at 30 June 2024 is presented in Note 16 of the Consolidated Condensed Interim Financial Statements.

Debt Securities Price Risk

Debt securities price risk is the risk of loss as a result of adverse changes in the prices of debt securities held by the Group. Debt security prices change as the credit risk of the issuers changes and/or as the interest rates of fixed rate securities change.

The Group invests a significant part of its liquid assets in debt securities. Changes in the prices of debt securities classified as investments at FVPL, affect the profit or loss of the Group, whereas changes in the value of debt securities classified as FVOCI affect directly the equity of the Group. Debt securities classified as HTC are held at amortised cost.

Debt security investment limits exist at RAS level governing the level of riskiness of the overall portfolio. Credit limits per issuer are also in place. Limit monitoring is performed on a daily basis by the Market & Liquidity Risk Unit. Any breaches are reported following the escalation process depending on the limit breach.

The debt security portfolio is managed by the Treasury Division and governed by the Bond Investment Policy. The annual bond investment strategy is proposed by Treasury and approved by ALCO. Treasury proceeds with bond investment amounts as approved through the Financial Plan which are within the Bond Investment Policy and within limits and parameters set in the various policies and frameworks.  Analysis of the positions the Group maintains as at 30 June 2024 is presented in Note 16 of the Consolidated Condensed Interim Financial Statements.

4. Principal Risks (continued)

4.2 Market Risk (continued)

Property Price Risk

Property price risk is the risk that the value of property will decrease, either as a result of:

˗ Changes in the demand for, and prices of, Cypriot real estate; or

˗ Regulatory requests which may increase the capital requirements for stock of property

The Group is exposed to the risk of negative changes in the fair value of property which is held either for own use, as stock of property or as investment property. Stock of property has been predominately acquired in exchange of debt with a clear plan and intention to be disposed of in line with the Group's strategy. 

The Group has in place a number of actions to manage and monitor the exposure to property risk as indicated below:

˗ It has an established Real Estate Management Unit (REMU), a specialised division to manage, promote and monetise the repossessed portfolio, including other non-core assets, through appropriate real estate disposal initiatives;

˗ It has placed great emphasis on the efficient and quick disposal of on-boarded properties and in their close monitoring and regular reporting. RAS indicators and other KPIs are in place monitoring REMU properties in terms of value, aging, and sales levels;

˗ It assesses and quantifies property risk as one of the material risks for ICAAP purposes under both the normative and economic perspective;

˗ It monitors the changes in the market value of the collateral and, where necessary, requests the pledging of additional collateral in accordance with the relevant agreement;

˗ As part of the valuation process, assumptions are made about the future changes in property values, as well as the timing for the realisation of collateral, taxes and expenses on the repossession and subsequent sale of the collateral as well as any other applicable haircuts;

˗ For the valuation of properties owned by the Group, judgement is exercised which takes into account available reference points, such as comparable market data, expert valuation reports, current market conditions and application of appropriate illiquidity haircuts where relevant.

4.3 Liquidity and Funding Risk

Liquidity risk is the risk that the Group does not have sufficient financial resources to meet its commitments as they fall due. This risk includes the possibility that the Group may have to raise funding at high cost or sell assets at a discount to fully and promptly satisfy its obligations.

Funding risk is the risk that the Group does not have sufficiently stable sources of funding or access to sources of funding may not always be available at a reasonable cost and thus the Group may fail to meet its obligations, including regulatory requirements (e.g. MREL).

Further information relating to Group risk management in relation to liquidity and funding risk is set out in Note 34 of the Consolidated Condensed Interim Financial Statements. Additionally, information on encumbrance and liquidity reserves is provided below.

4.3.1 Encumbered and unencumbered assets

Asset encumbrance arises from collateral pledged against secured funding and other collateralised obligations. 

An asset is classified as encumbered if it has been pledged as collateral against secured funding and other collateralised obligations and, as a result, is no longer available to the Group for further collateral or liquidity requirements. The total encumbered assets of the Group amounted to €3,499,227 thousand as at 30 June 2024 (31 December 2023: €3,681,929 thousand). 

4. Principal Risks (continued)

4.3 Liquidity and Funding Risk (continued)

4.3.1 Encumbered and unencumbered assets (continued)

An asset is classified as unencumbered if it has not been pledged as collateral against secured funding and other collateralised obligations. Unencumbered assets are further analysed into those that are available and can potentially be pledged and those that are not readily available to be pledged. As at 30 June 2024, the Group held €19,583,371 thousand (31 December 2023: €20,640,651 thousand) of unencumbered assets that can potentially be pledged and can be used to support potential liquidity funding needs and €702,645 thousand (31 December 2023: €717,575 thousand) of unencumbered assets that are not readily available to be pledged for funding requirements in their current form.

The table below presents an analysis of the Group's encumbered and unencumbered assets and the extent to which these assets are currently pledged for funding or other purposes. The carrying amount of such assets is disclosed below:

Encumbered assets primarily consist of loans and advances to customers and investments in debt securities. These are mainly pledged for the funding facilities of the European Central Bank (ECB) and for the covered bond (Notes 22 and 34 of the Consolidated Condensed Interim Financial Statements for the six ended 30 June 2024 respectively). Encumbered assets include cash and other liquid assets placed with banks as collateral under ISDA agreements which are not immediately available for use by the Group but are released once the transactions are terminated. Cash is mainly used to cover collateral required for (i) derivatives and (ii) trade finance transactions and guarantees issued. It may also be used as part of the supplementary assets for the covered bond.

4. Principal Risks (continued)

4.3 Liquidity and Funding Risk (continued)

4.3.1 Encumbered and unencumbered assets (continued)

BOC PCL maintains a Covered Bond Programme set up under the Cyprus Covered Bonds legislation and the Covered Bonds Directive of the Central Bank of Cyprus (CBC). Under the Covered Bond Programme, BOC PCL has in issue covered bonds of €650 million secured by residential mortgages originated in Cyprus. The covered bonds have a maturity date on 12 December 2026 and interest rate of 3-months Euribor plus 1.25% payable on a quarterly basis. On 9 August 2022, BOC PCL proceeded with an amendment to the terms and conditions of the covered bonds following the implementation of Directive (EU) 2019/2162 in Cyprus. The covered bonds are listed on the Luxemburg Bourse and have a conditional Pass-Through structure. All the bonds are held by

BOC PCL. The covered bonds are eligible collateral for the Eurosystem credit operations and are placed as collateral for accessing funding from the ECB.

Unencumbered assets which can potentially be pledged include debt securities and Cyprus loans and advances which are less than 90 days past due. Balances with central banks are reported as unencumbered and can be pledged, to the extent that there is excess available over the minimum reserve requirement. The minimum reserve requirement is reported as unencumbered not readily available to be pledged.

Unencumbered assets that are not readily available to be pledged primarily consist of loans and advances which are prohibited by contract or law to be encumbered or which are more than 90 days past due or for which there are pending litigations or other legal actions against the customer, a proportion of which would be suitable for use in secured funding structures but are conservatively classified as not readily available for collateral. Properties whose legal title has not been transferred to the Company or a subsidiary are not considered to be readily available as collateral.

Insurance assets held by Group insurance subsidiaries are not included in the table above or below as they are primarily due to the insurance policyholders.

The carrying and fair value of the encumbered and unencumbered investments of the Group as at 30 June 2024 and 31 December 2023 are as follows:

4. Principal Risks (continued)

4.3 Liquidity and Funding Risk (continued)

4.3.2 Liquidity regulation

The Group is required to comply with provisions on the Liquidity Coverage Ratio (LCR) under CRD IV/CRR (as supplemented by Delegated Regulations (EU) 2015/61), with the limit set at 100%. The Group must also comply with the Net Stable Funding Ratio (NSFR) calculated as per the Capital Requirements Regulation II (CRR II), with the limit set at 100%.

The LCR is designed to promote the short-term resilience of a Group's liquidity risk profile by ensuring that it has sufficient high-quality liquid resources to survive an acute stress scenario lasting for 30 days. The NSFR has been developed to promote a sustainable maturity structure of assets and liabilities.

As at 30 June 2024, the Group was in compliance with all regulatory liquidity requirements. As at 30 June 2024, the Group's LCR stood at 304% (compared to 359% at 31 December 2023) and the Group's NSFR stood at 156% (compared to 158% at 31 December 2023).

4.3.3 Liquidity reserves

The below table sets out the Group's liquidity reserves:

Internal Liquidity Reserves present the total liquid assets as defined in BOC PCL's Liquidity Policy. Liquidity reserves as per LCR Delegated Regulation (EU) 2015/61 present the liquid assets as per the definition of the aforementioned regulation i.e., High-Quality Liquid Assets (HQLA).

Balances in Nostro accounts and placements with banks are not included in Liquidity reserves as per LCR, as they are not considered HQLA (they are part of the LCR Inflows). 

Liquid investments under the Liquidity reserves as per LCR are shown at market values reduced by standard weights as prescribed by the LCR regulation. Liquid investments under Internal Liquidity Reserves include additional unencumbered liquid bonds which are shown at market values net of haircuts based on the ECB methodology and haircuts for the ECB eligible bonds, while for the non-ECB eligible bonds, a more conservative internally developed haircut methodology is used.  

Currently available ECB buffer is not part of the Liquidity reserves as per LCR.

4. Principal Risks (continued)

4.4 Operational Risk

Operational risk is defined as the risk of direct or indirect impact/loss resulting from inadequate or failed internal processes, people, and systems or from external events. The Group includes in this definition compliance, legal and reputational risk.

The Group recognises that the control of operational risk is directly related to effective and efficient management practices and high standards of corporate governance. To that effect, the management of operational risk is geared towards maintaining a strong internal control governance framework and managing operational risk exposures through a consistent set of management processes that drive risk identification, assessment, control and monitoring.

The Group also maintains adequate insurance policies to cover for unexpected material operational losses.

Operational Risk Management (ORM) Framework

The Group has established an Operational Risk Management Framework which addresses the following objectives:

- Raising operational risk awareness and building the appropriate risk culture,

- Providing effective risk monitoring and reporting to the Group's management at all levels in relation to the operational risk profile, so as to facilitate decision making for risk control activities,

- Mitigating operational risk to ensure that operational losses do not cause material damage to the Group's franchise and that the impact on the Group's profitability and corporate objectives is contained, and

- Maintaining a strong system of internal controls to ensure that operational incidents do not cause material damage to the Group's franchise and have a minimal impact on the Group's profitability and reputation.

Operational risks can arise from all business lines and from all activities carried out by the Group and are thus diverse in nature.

To enable effective management of all material operational risks, the operational risk management framework adopted by the Group is based on the three lines of defence model, through which risk ownership is dispersed throughout the organisation.

The key components of the Operational Risk Management Framework include the following:

Operational Risk Appetite

A defined Operational RAS is in place, which forms part of the Group RAS. Thresholds are applied for conduct and other operational risk related losses.

Risk Control Self-Assessment (RCSA)

An RCSA methodology is established across the Group. According to the RCSA methodology, business owners are requested to identify risks that arise primarily from the risk areas under the Group's Risk Taxonomy. Updating/enriching the risk register in terms of existing and potential new risks identified and their mitigation is an on-going process, sourced from RCSAs, but also from other risk and control assessments (RCAs) performed.

4. Principal Risks (continued)

4.4 Operational Risk (continued)

Operational Risk Management (ORM) Framework (continued)

Incident recording and analysis

An operational risk event is defined as any incident where through the failure or lack of a control, the Group has incurred an actual or potential loss/gain, or could have had a negative reputational or regulatory impact.

Operational risk loss events are classified and recorded in the Group's Risk and Compliance Management System (RCMS), which serves as an enterprise tool integrating all risk-control data (e.g. risks, loss incidents, KRIs) to provide a holistic view with regards to risk identification, corrective action and statistical analysis. During the six months ended 30 June 2024, 335 loss events with gross loss equal to or greater than €1,000 each were recorded including incidents of prior years (mostly legal cases) for which losses materialised in 2024 (30 June 2023: 406 loss events).

Key Risk Indicators (KRIs)

These are operational or financial variables, which track the likelihood and/or impact of a particular operational risk. KRIs serve as a metric, which may be used to monitor the level of particular operational risks.

Operational Risk Capital Requirements and ICAAP

Regulatory and economic capital requirements for operational risk are calculated using the Standardised Approach. Additional Pillar II Regulatory capital is calculated for operational risk on a scenario-based approach. Scenarios are built after taking into consideration the Key Risk Drivers, which are identified using a combination of methods and sources, through top-down and bottom-up approaches.

Training and awareness

The Group strives to continuously enhance its risk control culture and increase the awareness of its employees on operational risk issues through ongoing staff training (both through physical workshops and through e-learning).

Reporting

Important operational risks identified and assessed through the various tools/methodologies of the Operational Risk Management Framework, are regularly reported to top management, as part of overall risk reporting. More specifically, the CRO reports on risk to the EXCO and the RC on a monthly basis, while annual risk reports are submitted to the Regulators. Ad-hoc reports are also submitted to management, as needed.

4.4.1 Fraud Risk Management

The Group has a dedicated unit under the ORM Function, the Fraud Risk Management (FRM) unit, which is responsible for the oversight of internal and external fraud by:

˗ Developing and maintaining a framework and supporting policies for the management of internal and external fraud risks;

˗ Undertaking Specialised Fraud Risk Assessments and ensuring that divisions and business departments have a sound process for identifying new and emerging fraud risks;

˗ Promoting and adopting automated / alert-based systems and controls for the prevention and early detection of external and internal fraud;

˗ Establishing structured Fraud Incident response management processes and plans;

˗ Analysing data and emerging fraud trends for the proactive management of emerged fraud;

˗ Providing direction through policy, education, tools and training;

˗ Ensuring compliance with relevant regulations and assessing new regulations or amendments to existing ones with regards to fraud related issues, by performing regulatory gap analysis in cooperation with other related stakeholders. 

4. Principal Risks (continued)

4.4 Operational Risk (continued)

4.4.1 Fraud Risk Management (continued)

Ongoing activities/initiatives towards further enhancements of FRM involved inter alia, the provision of fraud risks and emerged frauds awareness seminar to Group's staff and top-management, and the further strengthening of external fraud prevention controls and framework, as a result of the customers' accelerated shift towards digital channels and digital banking.

4.4.2 Third-Party Risk Management

The Group has a dedicated unit under the ORM Function, the Third-Party Risk Management unit, which is responsible to perform risk assessments on all outsourcing, strategic and intragroup arrangements of the Group. As part of the risk assessment, the team identifies and monitors the effective handling of any potential gaps/weaknesses. The risk assessment occurs prior to signing an outsourcing, strategic or intragroup arrangement as well as prior to their renewal, triennially and upon any change of scope of service.

Third-Party and Outsourcing risk can arise from a third party's failure to provide the service as expected due to reasons such as inadequate capacity, technological failure, human error, unsatisfactory quality of service, unsatisfactory continuity of service and/or financial failure.

4.4.3 Business Continuity Risk Management (BCRM)

The Group has a dedicated unit under the ORM Function, the Business Continuity Risk Management unit, which provides direction and sets the overall framework to individual Business Units (BUs) to mitigate business continuity risks and minimize the impact of severe disruptive incidents such as natural disasters, loss of Information Technology Center, loss of electricity, pandemic etc.

5. Other principal risks and uncertainties

In addition to the risks described in section 4 above, further risks are also faced by the Group. These risks are described below as well as the way these are identified, assessed, managed and monitored by the Group, including the available mitigants.

Emerging risks are defined as new risks or existing risks that may escalate in a different way, with the potential to threaten the execution of the Group's strategy or operations over a medium-term horizon. The Group is forward-looking in its risk identification processes to ensure emerging risks are identified. The internal and external risk environment of the Group as well as macro-themes are assessed to identify such emerging risks that may require escalation and implementation of suitable mitigation actions. Half-year reporting of emerging risks to the RC and the EXCO is performed to ensure all significant risks are escalated effectively for discussion and action. The main emerging risks currently considered by the Group are Geopolitical Risk, Digital Transformation and Climate and Environment Risks all of which are also principal risks and are further described below.

The risks described, should not be regarded as a complete and comprehensive statement of all potential risks, uncertainties or mitigants, as other factors either not yet identified or not currently material, may also adversely affect the Group.

5. Other principal risks and uncertainties (continued)

5.1 Business Model and Strategic Risks

Business model and strategic risks refer to the uncertainty in implementing the Group's strategy and achieving its business targets. Such risks can arise from changes in the external environment, including economic trends, competition, geopolitics, and regulatory changes, or due to operational factors, such as inadequate planning or implementation. The Group faces competition from banks, financial institutions, insurance and financial technology companies operating locally or abroad. Also, deterioration of the macroeconomic environment can lead to poor financial performance impacting the Group's profitability, asset quality or capital resources.

Furthermore, the Group's business environment and operational performance are heavily dependent on current and future economic conditions and prospects in Cyprus where the Group's operations are based and earnings are predominantly generated. The Group is also dependent on the economic conditions and prospects in the countries of the main counterparties it conducts business with.

The Group has a clear strategy with key objectives to enable delivery and operates within defined risk appetite limits which are calibrated considering the Group's risk bearing capacity. The strategy is closely monitored on a regular basis. Furthermore, the Group remains ready to explore opportunities that complement its strategy including diversification of income.

The Group monitors and manages business model risk within its Risk Appetite Framework, by setting limits in respect of measures such as financial performance, portfolio performance, concentration and capital levels. At a more operational level, the risk is mitigated by monitoring deviations from the Group's Financial Plan, while during the year, periodic reforecast updates of the financial plan are prepared. The frequency of reforecast updates during each year is determined by the prevailing business and economic conditions. Performance against the plan is monitored on a monthly basis, both at Group and Business Line levels, and reported to the EXCO and the Board.

The Group also closely monitors the risks and impact of changing macroeconomic conditions on its lending portfolio, strategy and objectives, considering mitigating actions where necessary. An internal stress testing framework as part of the Group's ICAAP is in place to provide insights and to assess capital resilience to shocks.

5.2 Geopolitical Risk

Cyprus is a small, open, services-based economy, with a large external sector and high reliance on tourism and international business services. As a result, external factors such as economic and geopolitical events that are beyond the control of the Group, can have a significant impact on domestic economic activity. A number of macro and market related risks, including weaker economic activity, a higher interest rate environment for longer, and higher competition in the financial services industry, could negatively affect the Group's business environment, results and operations. 

Geopolitical tensions remain high as a result of the continuing war in Ukraine and the military conflict in the Middle East. The continuation of these conflicts add considerable uncertainty to the outlook for the global economy with the impact largely dependent on how these conflicts are resolved.

Up until now, the Cyprus economy has proved robust and flexible to withstand external shocks and has displayed the ability to sufficiently diversify income in order to maintain GDP growth and suppress unemployment.

These factors, as well as the current political context in the United States and Europe, increase the uncertainty about the evolution of the global economy and the risk of having a higher inflation and interest rates than expected as of the date of this report. The Group closely monitors these events and their impact on the economy and the business and remains vigilant to take any precautionary measures as required.

5. Other principal risks and uncertainties (continued)

5.2 Geopolitical Risk (continued)

Although, there have been distinct improvements in Cyprus' risk profile after the banking crisis, risks do remain given the open structure of the Cypriot economy.

The Group continuously monitors current affairs, the impact of forecasted macroeconomic conditions and geopolitical developments on the Group's strategy to proactively manage emerging risks. Where necessary, bespoke solutions are offered to affected exposures and close monitoring on those is maintained. Furthermore, the Group includes related events in its stress testing scenarios in order to gain a better understanding of the potential impact.

5.3 Legal Risk

The Group may, from time to time, become involved in legal or arbitration proceedings which may affect its operations and results. Litigation risk arises from pending or potential legal proceedings and regulatory investigations against the Group (Information on pending litigation, claims, regulatory and other matters is disclosed in Note 28 of the Consolidated Condensed Interim Financial Statements). In the event that legal issues are not properly dealt with by the Group, this may result in financial and/or reputational loss to the Group.

The Group has procedures in place to ensure effective and prompt management of Legal risk including, among others, the risk arising from regulatory developments, new products and internal policies.

The Legal Services department (LSD) monitors the pending litigation against the Group and assesses the probability of loss for each legal action against the Group based on International Accounting Standards. It also estimates the amount of potential loss where it is deemed as probable. Additionally, it reports pending litigation and latest developments to the Board.

5.4 Technology Risk

Technology risk arises from system downtimes impacting business operations and/or customer service. Downtimes may be caused by hardware or software failures due to malfunctions, failed processes, human error, or cyber incidents. Use of outdated, obsolete and unsupported systems increase this risk.

The Group has in place a Technology strategy designed to support Business strategy and customer centric view. The strategy includes investments in skills and technology to minimize system downtimes and security risks, modernization of legacy applications, a risk-based approach to leverage the benefits of Cloud technologies, and investments in new and innovative applications to support business requirements. The Group implements a collaborative operating model to implement the technology initiatives that support Business strategy and its digital agenda. The Operating Model involves setting up cross-functional teams that combine Technical, Business and Risk skills for accelerated results. Where necessary, the Group engages with appropriate external experts to augment capacity and meet peak demand for technical initiatives while always maintaining good levels of internal skills and capacity. 

The Group's policies, standards, governance and controls undergo ongoing review to ensure continued alignment with the Group's Technology strategy, compliance with regulation and effective management of the associated risks.

5. Other principal risks and uncertainties (continued)

5.5 Digital Transformation Risk

Digital transformation risk continues to be a principal and emerging risk, as banking models are rapidly evolving both locally and globally and available technologies have resulted in the customers' accelerated shift towards digital channels. Money transmission, data driven integrated services and Digital Product Sales are rapidly evolving. How the Group adapts to these emerging developments could impact the realisation of its market strategies and financial plans.

In the context of the overall business strategy, the Group assesses and develops its Digital Strategy and maintains a clear roadmap that provides for migration of transactions to the Digital Channels, full Digital and Digital Assisted Product Sales, and Self-service banking support services. The Group's emphasis on the Digital Strategy is reflected in the Operating Model with a designated Chief Digital Officer supported by staff with the appropriate skills that work closely with Technology and Control functions to execute the strategy. 

The Group's policies, standards, governance and controls undergo ongoing review to ensure continued alignment with the Group's strategy for digital transformation and effective management of the associated risk.

5.6 Information security and cyber risk

Information security and cyber-risk is a significant inherent risk, which could cause a material disruption to the operations of the Group. The Group's information systems have been and will continue to be exposed to an increasing threat of continually evolving cybercrime and data security attacks. Customers and other third parties to which the Group is significantly exposed, including the Group's service providers (such as data processing companies to which the Group has outsourced certain services), face similar threats.

Current geopolitical tensions have also led to increased risk of cyber-attack from foreign state actors.

The Group has an internal specialized Information Security team which constantly monitors current and future cyber security threats (either internal or external, malicious or accidental) and invests in enhanced cyber security measures and controls to protect, prevent, and appropriately respond against such threats to Group systems and information. The Group maintains an approved Group Information Security Policy that provides a set of standards, guidelines, controls, measures designed to achieve a desired level of information.

The Group also collaborates with industry bodies, the National Computer Security Incident Response Team (CSIRT) and intelligence-sharing working groups to be better equipped with the growing threat from cyber criminals. In addition, the Group maintains insurance coverage which covers certain aspects of cyber risks, and it is subject to exclusion of certain terms and conditions.

5.7 Regulatory Compliance Risk

The Group conducts its business subject to on-going regulation and the associated regulatory risk, including the effects of changes in the laws, regulations, policies, voluntary codes of practice and interpretations. Regulatory compliance risk is the risk of impairment to the organization's business model, reputation and financial condition from failure to meet laws and regulations, internal standards and policies, and expectations of key stakeholders such as shareholders, customers, employees and society. Failure to comply with regulatory framework requirements or identify and plan for emerging requirements could lead to, amongst other things, increased costs for the Group, limitation on BOC PCL's capacity to lend and could have a material adverse effect on the business, financial condition and results, operations and prospects of the Group.

5. Other Principal Risks and uncertainties (continued)

5.7 Regulatory Compliance Risk (continued)

There is strong commitment by the management of the Group for an on-going and transparent dialogue with the Regulators of the Group (including the ECB, the CBC and others, such as CySec and CSE). The Regulatory Steering Group, chaired by the CEO and consisting of executive management, is regularly updated on Regulatory Compliance Risk matters, through the Regulatory Affairs Department, which obtains relevant information from Group Compliance, to ensure that all regulatory matters are brought to the attention of management in a timely manner.

Regulatory compliance risks are identified and assessed using a combination of methods and sources as these are incorporated in the Group Compliance Policy which sets out the compliance framework that applies within BOC PCL and its subsidiaries in Cyprus and abroad. It sets out the business and legal environment applicable to the Group as well as the objectives, principles, and responsibilities for compliance and how these responsibilities are allocated and carried out at Group and Entity level. Furthermore, this Policy ensures that there are proper procedures in place for BOC PCL to comply with the requirements of the CBC Internal Governance Directive and the EBA Guidelines on Internal Governance.

The Compliance Risk Assessment Methodology sets out the principles to assess compliance risks. The Compliance function identifies and communicates new and/or amended regulations, within the regulatory compliance universe to the relevant business areas for impact assessment and/or a regulatory gap analysis with the Compliance function as second line of defence to review and challenge.

Appropriate tools and mechanisms are in place for identifying, assessing, monitoring, escalating and reporting compliance risks which, inter alia, include:

˗ The assessment of periodic reports submitted by the network of its compliance liaisons;

˗ The use of aggregated risk measurements such as compliance risk indicators;

˗ Oversighting and challenging the regulatory risks identified by compliance liaisons and subsidiary compliance officers through the gap analysis of new or amended regulations, assessments of new or amended processes and procedures, project assessments, new or amended product/services assessments and any other ad-hoc assessments with regulatory impact such as new operating models, reorganisations etc., to ensure that compliance risks within the Group are managed effectively and recommending additional controls and corrective actions, where needed;

˗ Oversighting the compliance risk assessment process followed by the compliance liaisons and subsidiary compliance officers and the monitoring of the implementation of mitigating actions for the management of identified risks;

˗ Overseeing the complaints process and utilising customer complaints as a source of relevant information in the context of its general monitoring responsibilities;

˗ Cooperating and exchanging information with other internal control and risk management functions on compliance matters, assessing any regulatory incidents, monitoring any mitigating actions to avoid reoccurrence and manage the risk and reporting to competent authorities incidents of non-compliance as per the relevant regulations;

˗ Conducting periodic onsite/offsite reviews with applicable laws, rules, regulations and standards and providing recommendations / advise to management on measures to be taken to ensure compliance,

˗ Investigating possible breaches of the compliance policy and regulatory framework and/or conducting investigations thereof, as requested by competent authorities with the assistance, if deemed necessary; of experts from within the institution such as experts from the Internal Audit function, Legal Services Department, Information Security Department or Fraud Risk Management unit.

Regulatory compliance risks are reported promptly to senior management and the management body in accordance with the guidelines of the CBC Internal Governance Directive.

5. Other Principal Risks and uncertainties (continued)

5.8 Insurance risk and re-insurance risk

The Group, through its subsidiaries, EuroLife Ltd ('EuroLife') and General Insurance of Cyprus Ltd ('Genikes Insurance'), provides life insurance and non-life insurance services, respectively, and is exposed to certain risks specific to these businesses. Insurance events are unpredictable and the actual number and amount of claims and benefits will vary from year to year from the estimate established using actuarial and statistical techniques. Insurance risk therefore is the risk that an insured event under an insurance contract occurs and uncertainty over the amount and the timing of the resulting claim exists.

The above risk exposure is mitigated by the Group through the diversification across a large portfolio of insurance contracts. The variability of risks is also reduced by careful selection and implementation of underwriting strategy guidelines, as well as the use of reinsurance arrangements. Although the Group has reinsurance coverage, it is not relieved of its direct obligations to policyholders and is thus exposed to credit risk with respect to ceded insurance, to the extent that any reinsurer is unable to meet the obligations assumed under such reinsurance arrangements.

For that reason, the creditworthiness of reinsurers is evaluated by considering their solvency and credit rating and reinsurance arrangements are monitored and reviewed to ensure their adequacy as per the reinsurance policy. In addition, counterparty risk assessment is performed on a frequent basis.

Both EuroLife and Genikes Insurance perform their annual stress tests (ORSA) which aim to ensure, among others, the appropriate identification and measurement of risks, an appropriate level of internal capital in relation to each company's risk profile, and the application and further development of suitable risk management and internal control systems.

5.9 Climate Related & Environmental Risks 

Climate & Environmental matters is a growing agenda for financial institutions given the increasing effects of climate change globally and the sharp regulatory focus on addressing the resultant risks. The Group's businesses, operations and assets could be affected by climate-related and environmental (C&E) risks over the short, medium and long term. The Group is committed to integrate C&E risk considerations into all relevant aspects of the decision-making, governance, strategy and risk management and has taken the necessary steps to achieve this.

The Group applies the definition used in the Task Force on Climate-related Financial Disclosures (TCFD) for C&E risks whereby climate-related risks are divided into two major categories: (1) risks related to the transition to a lower-carbon economy (transition risks) and (2) risks related to the physical impacts of climate change (physical risks).

˗ Physical risk refers to the financial impact of a changing climate, including more frequent extreme weather events and gradual changes in climate, as well as of environmental degradation, such as air, water and land pollution, water stress, biodiversity loss and deforestation. Physical risk is categorised as "acute" when it arises from extreme events, such as droughts, floods and storms, and "chronic" when it arises from progressive shifts, such as increasing temperatures, sea-level rises, water stress, biodiversity loss, land use change, habitat destruction and resource scarcity. This can directly result in, for example, damage to property or reduced productivity, or indirectly lead to subsequent events, such as the disruption of supply chains.

˗ Transition risk refers to an institution's financial loss that can result, directly or indirectly, from the process of adjustment towards a lower-carbon and more environmentally sustainable economy. This could be triggered, for example, by a relatively abrupt adoption of climate and environmental policies, technological progress or changes in market sentiment and preferences.

5. Other Principal Risks and uncertainties (continued)

5.9 Climate Related & Environmental Risks (continued)

Accelerating climate change could lead to sooner than anticipated physical risk impacts to the Group and the wider economy and there is uncertainty in the scale and timing of technology, commercial and regulatory changes associated with the transition to a low carbon economy. 

The Group has put in place targets which set transparent ambitions on its climate strategy and decarbonization of its operations and portfolio aiming to achieve the transition to a net zero economy by 2050. An overall ESG strategy and working plan is thus in place to facilitate these ambitions and address ECB expectations.

The Group also acknowledges the growing importance of environmental / nature-related risks which, as per the Task Force for Nature-related Financial Disclosures (TNFD), are defined as those potential threats posed to an organization arising from its own and the wider society's dependencies and impacts on nature. These risks can be physical or transition risks, as defined below:

˗ Physical risks arise when natural systems are compromised, due to the impact of climate.

˗ Transition risks result from a misalignment between a company or investor's strategy and management and its changing regulatory and policy landscape.

Dedicated teams both within Risk Management and Investor Relations & ESG Department, as well as other resources, have been mobilised across the Group and are engaged in various streams of work such as the measuring of own and financed emissions, the integration of C&E risk in the risk management framework and the enhancement of green products offering.

Further information on C&E risks and its risk management is provided in the ESG Disclosures 2023 that form part of the Group's Annual Financial Report for 2023, within part A 'Task Force on Climate-related Financial Disclosures (TCFD)'.

6. Capital management

The primary objective of the Group's capital management is to ensure compliance with the relevant regulatory capital requirements and to maintain healthy capital adequacy ratios to cover the risks of its business, support its strategy and maximise shareholders' value.

The capital adequacy framework, as in force, was incorporated through the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD) which came into effect on 1 January 2014 with certain specified provisions implemented gradually. The CRR and CRD transposed the new capital, liquidity and leverage standards of Basel III into the European Union's legal framework. CRR establishes the prudential requirements for capital, liquidity and leverage for credit institutions. It is directly applicable in all EU member states. CRD governs access to deposit-taking activities and internal governance arrangements including remuneration, board composition and transparency. Unlike the CRR, member states were required to transpose the CRD into national law and national regulators were allowed to impose additional capital buffer requirements.

On 27 June 2019, the revised rules on capital and liquidity (Regulation (EU) 2019/876 (CRR II) and Directive (EU) 2019/878 (CRD V)) came into force. As an amending regulation, the existing provisions of CRR apply, unless they are amended by CRR II. Certain provisions took immediate effect (primarily relating to Minimum Requirement for Own Funds and Eligible Liabilities (MREL)), but most changes became effective as of June 2021. The key changes introduced consist of, among others, changes to qualifying criteria for Common Equity Tier 1 (CET1), Additional Tier 1 (AT1) and Tier 2 (T2) instruments, introduction of requirements for MREL and a binding Leverage Ratio requirement (as defined in the CRR) and a Net Stable Funding Ratio (NSFR).

6. Capital management (continued)

The amendments that came into effect on 28 June 2021 are in addition to those introduced in June 2020 through Regulation (EU) 2020/873, which among others, brought forward certain CRR II changes in light of the COVID-19 pandemic. The main adjustments of Regulation (EU) 2020/873 that had an impact on the Group's capital ratio relate to the acceleration of the implementation of the new SME discount factor (lower RWAs), extending the IFRS 9 transitional arrangements and introducing further relief measures to CET1 allowing to fully add back to CET1 any increase in ECL recognised in 2020 and 2021 for non-credit impaired financial assets and phasing-in this starting from 2022 (phasing-in at 25% in 2022, 50% in 2023 and 75% in 2024) and advancing the application of prudential treatment of software assets as amended by CRR II (which came into force in December 2020).

In October 2021, the European Commission adopted legislative proposals for further amendments to the CRR, CRD and the BRRD (the '2021 Banking Package'). Amongst other things, the 2021 Banking Package would implement certain elements of Basel III that have not yet been transposed into EU law. The 2021 Banking Package includes:

· a proposal for a Regulation (sometimes known as 'CRR III') to make amendments to CRR with regard to (amongst other things) requirements on credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor;

· a proposal for a Directive (sometimes known as 'CRD VI') to make amendments to CRD with regard to (amongst other things) requirements on supervisory powers, sanctions, third-country branches and ESG risks; and

· a proposal for a Regulation to make amendments to CRR and the BRRD with regard to (amongst other things) requirements on the prudential treatment of G-SII groups with a multiple point of entry resolution strategy and a methodology for the indirect subscription of instruments eligible for meeting the MREL requirements.

In the case of the proposed amendments to CRD and the BRRD, their terms and effect will depend, in part, on how they are transposed in each member state.

In December 2023 the preparatory bodies of the Council and European Parliament endorsed the amendments to the CRR and the CRD and the legal texts were published on the Council and the Parliament websites. In April 2024, the European Parliament voted to adopt the amendments to the CRR and the CRD; Regulation (EU) 2024/1623 (known as CRR III) and Directive (EU) 2024/1619 (known as CRD VI) were published in the EU's official journal in June 2024, with entry into force 20 days from the date of the publication. Most provisions of the CRR III will become effective on 1 January 2025 with certain measures subject to transitional arrangements or to be phased-in over time. Member states shall adopt and publish, by 10 January 2026, the laws, regulations and administrative provisions necessary to comply with CRD VI and shall apply most of those measures by 11 January 2026. 

The Regulatory CET1 ratio of the Group as at 30 June 2024 stands at 18.3% and the Total Capital ratio at 23.3%. The ratios as at 30 June 2024 include reviewed profits for the six months ended 30 June 2024 in line with the ECB Decision (EU) (2015/656) on the recognition of interim or year-end profits in CET1 capital in accordance with Article 26(2) of the CRR and an accrual for a distribution at a payout ratio of 50% of the Group's adjusted recurring profitability for the period, which represents the top-end range of the Group's approved distribution policy in line with the principles of Commission Delegated Regulation (EU) (241/2014) for foreseeable dividends and charges, as further described in Section 'Distributions' under 'Balance Sheet Analysis' of the Interim Management Report.

6. Capital management (continued)

* Fully phased in as of 1 January 2019

** Increasing by 0.0625%. every year thereafter, until being fully implemented on 1 January 2026 at 2.00%.

* Fully phased in as of 1 January 2019

** Increasing by 0.0625%. every year thereafter, until being fully implemented on 1 January 2026 at 2.00%.

The minimum Pillar I total capital requirement ratio of 8.00% may be met, in addition to the 4.50% CET1 requirement, with up to 1.50% by AT1 capital and with up to 2.00% by T2 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). Applicable Regulation allows a part of the said Pillar II Requirements (P2R) to be met also with AT1 and T2 capital and does not require solely the use of CET1.

The capital position of the Group and BOC PCL as at 30 June 2024 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.

The CBC, in accordance with the Macroprudential Oversight of Institutions Law of 2015, sets, on a quarterly basis, the CcyB rates in accordance with the methodology described in this law.

On 30 November 2022, the CBC, following the revised methodology described in its macroprudential policy, decided to increase the CcyB rate from 0.00% to 0.50% of the total risk exposure amount in Cyprus of each licensed credit institution incorporated in Cyprus effective from 30 November 2023. Moreover, on 2 June 2023, the CBC, announced its decision to raise the CcyB rate to 1.00% of the total risk exposure amount in Cyprus, effective from 2 June 2024. The CcyB for the Group as at 30 June 2024 has been calculated at approximately 0.94% (31 December 2023: 0.48%).

6. Capital management (continued)

In accordance with the provisions of this law, 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. BOC PCL has been designated as an O-SII. The O-SII Buffer as at 31 December 2023 stood at 1.50% and increased by 37.5 bps to 1.875% on 1 January 2024, following a revision of the O-SII buffer by the CBC in October 2023. In April 2024, following a revision by the CBC of its policy for the designation of credit institutions that meet the definition of O-SII institutions and the setting of an O-SII buffer to be observed, the Group's O-SII buffer has been set to 2.00% from 1 January 2026 (from the previous assessment carried out in October 2023 of 2.25% from 1 January 2025) to be phased-in by 6.25 bps annually to 1.9375% on 1 January 2025 and 2.00% as of 1 January 2026 from the current level of 1.875%.

The ECB also provides non-public guidance for an additional Pillar II CET1 buffer (P2G) to be maintained.

The Group is subject to a 3% Pillar I Leverage Ratio requirement.

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

The EBA final guidelines on SREP and supervisory stress testing and the Single Supervisory Mechanism's (SSM) 2018 SREP methodology provide that the own funds held for the purposes of Pillar II Guidance (P2G) cannot be used to meet any other capital requirements (Pillar I requirement, P2R or the Combined Buffer Requirement (CBR)), and therefore cannot be used twice.

The regulatory capital position of the Group and BOC PCL as at the reporting date (after applying the transitional arrangements) is presented below:

6. Capital management (continued)