Half-year Report -Part 1

Bank of Cyprus Holdings PLC

09 August 2023

 

Ιnterim Financial Report 2023

Bank of Cyprus Holdings

Ιnterim Financial Report

Six months ended 30 June 2023

Contents	Page
Board of Directors and Executives	1
Forward Looking Statements and Notes	2
Interim Management Report	3
Risk and Capital Management Report	34
Consolidated Condensed Interim Financial statements
Interim Consolidated Income Statement	72
Interim Consolidated Statement of Comprehensive Income	73
Interim Consolidated Balance Sheet	74
Interim Consolidated Statement of Changes in Equity	75
Interim Consolidated Statement of Cash Flows	77
Notes to the Consolidated Condensed Interim Financial Statements
1.   Corporate information	79
2.   Unaudited financial statements	79
3.   Summary of significant accounting policies	79
4.   Going concern	96
5.   Economic and geopolitical environment	96
6.   Significant and other judgements, estimates and assumptions	97
7.   Segmental analysis	104
8.   Interest income and income similar to interest income	110
9.   Interest expense and expense similar to interest expense	111
10. Net gains/(losses) on financial instruments	111
11. Staff costs and other operating expenses	112
12. Credit losses on financial assets and impairment net of reversals of non‑financial assets	114
13. Income tax	114
14. Earnings per share	116
15. Investments	117
16. Derivative financial instruments	121
17. Fair value measurement	122
18. Loans and advances to customers	128
19. Stock of property	130
20. Prepayments, accrued income and other assets	131
21. Funding from central banks	132
22. Customer deposits	133
23. Debt securities in issue and Subordinated liabilities	134
24. Accruals, deferred income, other liabilities and other provisions	135
25. Share capital	135
26. Dividends	137
27. Provisions for pending litigation, claims, regulatory and other matters	137
28. Cash and cash equivalents	143
29. Analysis of assets and liabilities by expected maturity	145
30. Risk management ‑ Credit risk	146
31. Risk management ‑ Market risk	161
32. Risk management ‑ Liquidity and funding risk	166
33. Capital management	170
34. Related party transactions	171
35. Group companies	172
36. Investments in associates and joint venture	175
37. Events after the reporting period	176
Independent Review Report to the Bank of Cyprus Holdings Public Limited Company	177
Alternative Performance Measures Disclosures	179

Board of Directors and Executives

as at 08 August 2023

Board of Directors of Bank of Cyprus Holdings Public Limited Company	Efstratios‑Georgios Arapoglou CHAIRMAN Lyn Grobler VICE‑CHAIRPERSON Panicos Nicolaou Constantine Iordanou Eliza Livadiotou Ioannis Zographakis Maria Philippou Nicolaos Sofianos Paula Hadjisotiriou
Executive Committee	Panicos Nicolaou CHIEF EXECUTIVE OFFICER Dr. Charis Pouangare DEPUTY CHIEF EXECUTIVE OFFICER & CHIEF OF BUSINESS Eliza Livadiotou EXECUTIVE DIRECTOR FINANCE Demetris Th. Demetriou CHIEF RISK OFFICER Irene Gregoriou EXECUTIVE DIRECTOR PEOPLE & CHANGE George Kousis EXECUTIVE DIRECTOR TECHNOLOGY & OPERATIONS
Company Secretary	Katia Santis
Legal Advisers as to matters of Irish Law	Arthur Cox
Legal Advisers as to matters of English and US Law	Sidley Austin LLP
Legal Advisers as to matters of Cypriot Law	Chryssafinis & Polyviou LLC
Statutory Auditors	PricewaterhouseCoopers One Spencer Dock North Wall Quay Dublin 1 D01 X9R7 Ireland
Registered Office	10 Earlsfort Terrace Dublin 2 D02 T380 Ireland

Forward Looking Statements and Notes This document contains certain forward‑looking statements which can usually be identified by terms used such as 'expect', 'should be', 'will be' and similar expressions or variations thereof or their negative variations, but their absence does not mean that a statement is not forward‑looking. Examples of forward‑looking statements include, but are not limited to, statements relating to the Bank of Cyprus Holdings Group's (the Group) near term and longer term future capital requirements and ratios, intentions, beliefs or current expectations and projections about the Group's future results of operations, financial condition, expected impairment charges, the level of the Group's assets, liquidity, performance, prospects, anticipated growth, provisions, impairments, business strategies and opportunities. By their nature, forward‑looking statements involve risk and uncertainty because they relate to events, and depend upon circumstances, that will or may occur in the future. Factors that could cause actual business, strategy and/or results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward‑looking statements made by the Group include, but are not limited to: general economic and political conditions in Cyprus and other European Union (EU) Member States, interest rate and foreign exchange rate fluctuations, legislative, fiscal and regulatory developments and information technology, litigation and other operational risks, adverse market conditions, the impact of outbreaks and epidemics or pandemics, such as the COVID‑19 pandemic. The Russian invasion of Ukraine has led to heightened volatility across global markets and to the coordinated implementation of sanctions on Russia, Russian entities and nationals. The Russian invasion of Ukraine has caused significant population displacement, and if the conflict continues, the disruption will likely increase. The scale of the conflict and the extent of sanctions, as well as the uncertainty as to how the situation will develop, may have significant adverse effects on the market and macroeconomic conditions, including in ways that cannot be anticipated. This creates significantly greater uncertainty about forward‑looking statements. Should any one or more of these or other factors materialise, or should any underlying assumptions prove to be incorrect, the actual results or events could differ materially from those currently being anticipated as reflected in such forward‑looking statements. Changes in reporting frameworks and accounting standards, including the recently announced reporting changes and the implementation of IFRS 17 'Insurance Contracts', may have a material impact on the way we prepare our financial statements and (with respect to IFRS 17) may negatively affect the profitability of the Group's insurance business. The forward‑looking statements made in this document are only applicable as at the date of publication of this document. Except as required by any applicable law or regulation, the Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward‑looking statement contained in this document to reflect any change in the Group's expectations or any change in events, conditions or circumstances on which any statement is based.

Non‑IFRS performance measures

Bank of Cyprus Holdings Public Limited Company's (the Company) management believes that the non‑IFRS performance measures included in this document provide valuable information to the readers of the Interim Financial Report as they enable the readers to identify a more consistent basis for comparing the Group's performance between financial periods and provide more detail concerning the elements of performance which management are directly able to influence or are relevant for an assessment of the Group. They also reflect an important aspect of the way in which the operating targets are defined and performance is monitored by the Group's management. However, any non‑IFRS performance measures in this document are not a substitute for IFRS measures and readers should consider the IFRS measures as the key measures of the 30 June position. Refer to 'Alternative Performance Measures Disclosures' on pages 179 to 191 of the Interim Financial Report for the six months ended 30 June 2023 for further information, reconciliations with Consolidated Condensed Interim Financial Statements and calculations of non‑IFRS performance measures included throughout this document and their reconciliation to the most directly comparable IFRS measures.

The Interim Financial Report for the six months ended 30 June 2023 is available on the Group's website www.bankofcyprus.com (Group/Investor Relations) (the Group's website).

The Interim Financial Report for the six months ended 30 June 2023 is originally issued in English. The Greek translation of the Interim Financial Report for the six months ended 30 June 2023 will be available on the Group's website by 11 August 2023. In case of a difference or inconsistency between the English document and the Greek document, the English document prevails.

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 2023.

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 35 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 2023. Information on Group companies and acquisitions and disposals during the period are detailed in Note 35 to the Consolidated Condensed Interim Financial Statements.

Group financial results on the underlying basis

The main financial highlights for the six months ended 30 June 2023 are set out below:

Consolidated Condensed Interim Income Statement on the underlying basis

€ million	Six months ended 30 June
	20231	20221,2 (restated)
Net interest income	358	145
Net fee and commission income	90	94
Net foreign exchange gains and net gains/(losses) on financial instruments	21	3
Net insurance result	25	24
Net gains from revaluation and disposal of investment properties and on disposal of stock of properties	5	7
Other income	12	9
Total income	511	282
Staff costs	(93)	(95)
Other operating expenses	(69)	(69)
Special levy on deposits and other levies/contributions	(18)	(17)
Total expenses	(180)	(181)
Operating profit	331	101
Loan credit losses	(24)	(23)
Impairments of other financial and non‑financial assets	(30)	(13)
Provisions for pending litigations, regulatory and other matters (net of reversals)	(14)	(1)
Total loan credit losses, impairments and provisions	(68)	(37)
Profit before tax and non‑recurring items	263	64
Tax	(40)	(11)
Profit attributable to non‑controlling interests	(1)	(1)
Profit after tax and before non‑recurring items (attributable to the owners of the Company)	222	52
Advisory and other transformation costs ‑ organic	(2)	(5)
Profit after tax ‑ organic (attributable to the owners of the Company)	220	47
Provisions/net loss relating to NPE sales	-	(0)
Restructuring and other costs relating to NPE sales	-	(1)
Restructuring costs ‑ Voluntary Staff Exit Plan (VEP)	-	(3)
Profit after tax (attributable to the owners of the Company)	220	43
1.     The financial information is derived from and should be read in conjunction with the accompanied Consolidated Condensed Interim Financial Statements. 2.     On 1 January 2023 the Group adopted IFRS 17 'Insurance contracts' which replaced IFRS 4 'Insurance contracts'. 2022 comparative information has been restated to reflect the impact of IFRS 17. For further details refer to Note 3.3.1 of the Consolidated Condensed Interim Financial Statements.

Group financial results on the underlying basis (continued)

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

Key Performance Ratios	Six months ended 30 June
	2023	20221 (restated)
Net interest margin (annualised)	3.17%	1.32%
Cost to income ratio	35%	64%
Cost to income ratio excluding special levy on deposits and other levies/contributions	32%	58%
Operating profit return on average assets (annualised)	2.6%	0.8%
Basic earnings per share attributable to the owners of the Company (€ cent)2	49.4	9.5
Return on tangible equity (ROTE)	24.0%	4.9%
1.     On 1 January 2023 the Group adopted IFRS 17 ' Insurance contracts', which replaced IFRS 4 'Insurance contracts'. 2022 comparative information has been restated to reflect the impact of IFRS 17. For further details refer to Note 3.3.1 of the Consolidated Condensed Interim Financial Statements. 2.     The diluted earnings per share attributable to the owners of the Company as at 30 June 2023 amounted to 49.3 cents in Euro (€).

Consolidated Condensed Interim Balance Sheet on the underlying basis

€ million	30 June 20231	31 December 20221,2 (restated)
Cash and balances with central banks	9,127	9,567
Loans and advances to banks	432	205
Debt securities, treasury bills and equity investments	3,330	2,704
Net loans and advances to customers	10,008	9,953
Stock of property	946	1,041
Investment properties	74	85
Other assets	1,790	1,734
Total assets	25,707	25,289
Deposits by banks	449	508
Funding from central banks	2,004	1,977
Customer deposits	19,166	18,998
Debt securities in issue	292	298
Subordinated liabilities	309	302
Other liabilities	1,244	1,157
Total liabilities	23,464	23,240
Shareholders' equity	1,984	1,807
Other equity instruments	236	220
Total equity excluding non‑controlling interests	2,220	2,027
Non‑controlling interests	23	22
Total equity	2,243	2,049
Total liabilities and equity	25,707	25,289
1.     The financial information is derived from and should be read in conjunction with the accompanied Consolidated Condensed Interim Financial Statements. 2.     On 1 January 2023 the Group adopted IFRS 17 'Insurance contracts' which replaced IFRS 4 'Insurance contracts'. 2022 comparative information has been restated to reflect the impact of IFRS 17. For further details refer to Note 3.3.1 of the Consolidated Condensed Interim Financial Statements.

Group financial results on the underlying basis (continued)

Consolidated Condensed Interim Balance Sheet on the underlying basis (continued)

Key Balance Sheet figures and ratios	30 June 2023	31 December 20221,2 (restated)
Gross loans (€ million)	10,277	10,217
Allowance for expected loan credit losses (€ million)	288	282
Customer deposits (€ million)	19,166	18,998
Loans to deposits ratio (net)	52%	52%
NPE ratio	3.6%	4.0%
NPE coverage ratio	78%	69%
Leverage ratio	8.5%	7.8%
Capital ratios and risk weighted assets
Common Equity Tier 1 (CET1) ratio (transitional for IFRS 9)	16.0%3	15.2%
Total capital ratio (transitional)	21.1%3	20.4%
Risk weighted assets (€ million)	10,257	10,114
1.     On 1 January 2023 the Group adopted IFRS 17 'Insurance contracts' which replaced IFRS 4 'Insurance contracts'. 2022 comparative information has been restated to reflect the impact of IFRS 17. For further details refer to Note 3.3.1 of the Consolidated Condensed Interim Financial Statements. 2.     The capital ratios have been restated to take into consideration the dividend in respect of the FY2022 earnings. More information is provided in 'Capital Base' under the 'Balance Sheet Analysis' section below. 3.     Includes reviewed profits for the six months ended 30 June 2023 and is net of dividend accrual (refer to section 'Balance Sheet Analysis - Capital Base' below).

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 2023 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 Condensed Consolidated Income Statement for the six months ended 30 June 2023 between the statutory and underlying basis' and in 'Alternative Performance Measures Disclosures' of the Interim Financial Report 2023.

Throughout the Interim Management Report, financial information in relation to the year ended 31 December 2022 financial information has been restated to reflect the transition to IFRS 17 which was adopted on 1 January 2023 and applied retrospectively. As a result, such 2022 financial information, ratios and metrics are presented on a restated basis unless otherwise stated. Further information on the impact of IFRS 17 transition is provided below and in Note 3.3.1 of the Consolidated Condensed Interim Financial Statements for the six months ended 30 June 2023.

Throughout the Interim Management Report, the capital ratios as at 31 December 2022 have been restated in order to take into consideration the 2022 dividend declaration. This refers to the proposal by the Board of Directors to the shareholders of a final dividend in respect of the earnings of the year ended 31 December 2022 following the approval by the European Central Bank ('ECB'). The proposed final dividend was declared at the Annual General Meeting ('AGM') which was held on 26 May 2023. This dividend amounted to €22.3 million in total and had a negative impact of 22 basis points on the Group's CET1 ratio and Total Capital ratio as at 31 December 2022. As a result, the 31 December 2022 capital ratios are presented as restated for the 2022 dividend unless otherwise stated. Further details are provided in section 'Capital Base' below.

Group financial results on the underlying basis (continued)

Transition to IFRS 17

On 1 January 2023 the Group adopted IFRS 17 'Insurance Contracts' ('IFRS 17') which replaced IFRS 4 'Insurance contracts'. IFRS 17 is an accounting standard that was implemented on 1 January 2023, with retrospective application and establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts issued, investment contracts with discretionary participation features issued and reinsurance contracts held. In substance, IFRS 17 impacts the phasing of profit recognition for insurance contracts as profitability is spread over the lifetime of the contract compared to being recognised substantially up-front under IFRS 4. This new accounting standard does not change the economics of the insurance contracts but decreases the volatility of the Group's insurance companies profitability.

The Group's total equity as at 31 December 2022 as restated for IFRS 17 compared to IFRS 4, was reduced by overall €52 million (predominantly relating to the life insurance business of the Group) from the below changes: 

·      The removal of the present value of in-force life insurance contracts ('PVIF') asset including the associated deferred tax liability, resulting in a reduction of €101 million in the Group's total equity.

·      The remeasurement of insurance assets and liabilities (including the impact of the contractual service margin ('CSM')) resulting in an increase in the Group's equity by €49 million.

The estimated future profit of insurance contracts is included in the measurement of the insurance contract liabilities as the contractual service margin ('CSM') and this will be gradually recognised in revenue, as services are provided over the duration of the insurance contract. A contractual service margin liability of approximately €42 million was recognised as at 31 December 2022 (reflected in the impact from the remeasurement of insurance liabilities mentioned above).

With regards to the Group's income statement for the year ended 31 December 2022, as restated for IFRS 17, the profit after tax (attributable to the owners of the Company) was reduced by €14 million to €57 million (compared to €71 million under IFRS 4) reflecting mainly:

·      Profit is deferred and held as CSM liability as mentioned above to be recognised in the income statement over the contract service period.

·      The impact of assumption changes relating to the future service is also deferred through CSM liability and is recognised in the income statement over the contract service period.

·      There is increased use of current market values in the measurement of insurance assets and liabilities (for unit-linked business) and market volatility on unit-linked business is deferred to the CSM, thereby reducing the volatility in the income statement. 

The transition to IFRS 17 had no impact on the Group's regulatory capital. However, as a result of the benefit arising from the remeasurement of the insurance assets and liabilities, the life insurance subsidiary distributed €50 million as dividend to BOC PCL in February 2023, which benefited Group regulatory capital by an equivalent amount on the same date, enhancing CET1 ratio by approximately 50 basis points. Going forward, meaningful dividend generation from the insurance business is expected to continue.

Group financial results on the underlying basis (continued)

Reconciliation of the Consolidated Condensed Interim Income Statement for the six months ended 30 June 2023 between the statutory and the underlying basis

€ million	Underlying basis	Other	Statutory basis
Net interest income	358	-	358
Net fee and commission income	90	-	90
Net foreign exchange gains and net gains/(losses) on financial instruments	21	-	21
Net gains on derecognition of financial assets measured at amortised cost	-	6	6
Net insurance result*	25	-	25
Net gains from revaluation and disposal of investment properties and on disposal of stock of properties	5	-	5
Other income	12	-	12
Total income	511	6	517
Total expenses	(180)	(16)	(196)
Operating profit	331	(10)	321
Loan credit losses	(24)	24	-
Impairment of other financial and non-financial assets	(30)	30	-
Provisions for pending litigations, regulatory and other matters (net of reversals)	(14)	14	-
Credit losses on financial assets and impairment net of reversals of non-financial assets	-	(60)	(60)
Profit before tax and non-recurring items	263	(2)	261
Tax	(40)	-	(40)
Profit attributable to non-controlling interests	(1)	-	(1)
Profit after tax and before non-recurring items (attributable to the owners of the Company)	222	(2)	220
Advisory and other transformation costs - organic	(2)	2	-
Profit after tax (attributable to the owners of the Company)	220	-	220

* Net insurance result per the 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 loans and advances to customers at FVPL of approximately zero million included in 'Loan credit losses' under the underlying basis are included in 'Net gains/(losses) on financial instruments' under the statutory basis. Their classification under the underlying basis is done to align their presentation with the loan credit losses on loans and advances to customers at amortised cost.

·           'Net gains on derecognition of financial assets measured at amortised cost' of €6 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, regulatory and other matters amounting to €14 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.

Group financial results on the underlying basis (continued)

Reconciliation of the Consolidated Condensed Interim Income Statement for the six months ended 30 June 2023 between the statutory and the underlying basis (continued)

·           Advisory and other transformation costs of €2 million included in 'Other operating expenses' under the statutory basis are separately presented under the underlying basis since they comprise mainly fees to external advisors in relation to the transformation programme and other strategic projects of the Group.

·           '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
€30 million, which are included in 'Loan credit losses' under the underlying basis, and ii) credit losses of other financial assets of €7 million and impairment net of reversals of non-financial assets of €23 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 €2,220 million as at 30 June 2023 compared to €2,027 million as at 31 December 2022. Shareholders' equity totalled €1,984 million as at 30 June 2023 compared to €1,807 million as at 31 December 2022.

The Common Equity Tier 1 capital (CET1) ratio on a transitional basis stood at 16.0% as at 30 June 2023, compared to 15.2% as at 31 December 2022 as restated. During the six months ended 30 June 2023, CET1 ratio was positively affected mainly by pre-provision income and the €50 million dividend distributed to BOC PLC in February 2023 by the life insurance subsidiary, and negatively affected by provisions and impairments, as well as the AT1 distributions and refinancing costs and the increase in risk weighted assets. Throughout the Interim Management Report, the capital ratios as at 30 June 2023 include reviewed profits for the six months ended 30 June 2023 and an accrual for an estimated final dividend at a payout ratio of 30% of the Group's adjusted recurring profitability for the period, which represents the low-end range of the Group's approved dividend policy. As per the latest SREP decision, any dividend distribution is subject to regulatory approval. Such dividend accrual does not constitute a binding commitment for a dividend payment nor does it constitute a warranty or representation that such a payment will be made. 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. For more details please refer to 'Resumption of dividends' further below. For Capital Requirements Regulation (CRR) purposes a payout of 50% of the Group's adjusted recurring profitability for the period, the high-end of the payout range, is prescribed corresponding to a CET1 ratio of 15.6% as at 30 June 2023.

The Group has elected to apply the EU transitional arrangements for regulatory capital purposes (EU Regulation 2017/2395) where the impact on the impairment amount from the initial application of IFRS 9 on the capital ratios was phased-in gradually, with the impact being fully phased-in (100%) by 1 January 2023. The final phasing-in of the impact of the impairment amount from the initial application of IFRS 9 was approximately 65 basis points on the CET1 ratio on 1 January 2023. In addition, a prudential charge in relation to the onsite inspection on the value of the Group's foreclosed assets is being deducted from own funds since June 2021, the impact of which is 17 basis points on Group's CET1 ratio as at 30 June 2023.

The Total Capital ratio stood at 21.1% as at 30 June 2023, compared to 20.4% as at 31 December 2022, as restated. As at 30 June 2023, Existing Capital Securities (for further details refer to 'Other equity Instruments' section below) of a nominal amount of approximately €8 million are included in Total Capital, the impact of which is approximately 8 basis points on the Total Capital ratio. For CRR purposes a payout of 50% of the Group's adjusted recurring profitability for the period, the high-end of the payout range, is prescribed corresponding to a Total Capital Ratio ratio of 20.7% as at 30 June 2023.

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

In the context of the annual SREP performed by the ECB in 2022 and based on the final SREP decision received in December 2022, effective from 1 January 2023, the Pillar II requirement has been revised to 3.08%, compared to the previous level of 3.26%. The Pillar II requirement includes a revised Pillar II requirement add-on of 0.33% relating to ECB's prudential provisioning expectations. When disregarding the Pillar II add-on relating to ECB's prudential provisioning expectations, the Pillar 2 requirement has been reduced from 3.00% to 2.75%.

Group financial results on the underlying basis (continued)

Balance Sheet Analysis(continued)

Capital Base (continued)

The Group's minimum phased-in CET1 capital ratio requirement as at 30 June 2023 is set at 10.26%, compared to the previous level of 10.10% in 2022, 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 0.02%. The Group's minimum phased-in Total Capital ratio requirement is set at 15.10%, compared to the previous level of 15.03% in 2022, 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 0.02%. The ECB has also maintained the non-public guidance for an additional Pillar II CET1 buffer (P2G) unchanged compared to the previous year.

BOC PCL 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 since November 2021 the O-SII buffer has been set to 1.50%. This buffer was phased-in gradually, having started from 1 January 2019 at 0.50%. The O-SII buffer was fully phased-in on 1 January 2023 and now stands at 1.50%.

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.

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. The new rate of 0.50% must be observed as from 30 November 2023. Further, in June 2023, the CBC announced a further increase of 0.50% in the CcyB of the total risk exposure amounts in Cyprus of each licensed credit institution incorporated in Cyprus to be observed from June 2024, increasing the CcyB to 1% from June 2024.

The Group participated in the ECB Stress Test of 2023, the results of which were published by the ECB on 28 July 2023. For further information please refer to the 'Risk and Capital Management Report' of the Interim Financial Report 2023.

Resumption of dividend payments

Following the 2022 SREP decision, the equity dividend distribution prohibition was lifted for both the Company and BOC PCL, with any dividend distribution being subject to regulatory approval.

In April 2023, the Company obtained the approval of the European Central Bank to pay a dividend. Following this approval, the Board of Directors of the Company recommended to the shareholders a final dividend of €0.05 per ordinary share in respect of the earnings of the year ended 31 December 2022 ('Dividend'). The proposed final dividend was declared at the 'AGM' which was held on 26 May 2023. This Dividend amounted to €22.3 million in total and is equivalent to a payout ratio of 14% of the year ended 31 December 2022 Group's adjusted recurring profitability or 31% based on the year ended 31 December 2022 profit after tax (as reported in the 2022 Annual Financial Report). The Dividend was paid in cash on 16 June 2023.

This Dividend resulted in a negative capital impact of 22 basis points on the Group's CET1 ratio and Total Capital ratio as at 31 December 2022. Throughout the Interim Management Report the capital ratios as at 31 December 2022 have been restated in order to take into consideration the dividend payment.

The resumption of dividend payments after 12 years, underpins the Group's position as a strong and well-diversified organisation, capable of delivering sustainable shareholder returns.

Dividend policy

In April 2023 the Board of Directors approved the Group dividend policy. The Group aims to provide a sustainable return to shareholders. Dividend payments are expected to build prudently and progressively over time, towards a payout ratio in the range of 30-50% of the Group's adjusted recurring profitability. The dividend policy takes into consideration market conditions as well as the outcome of capital and liquidity planning.

Group financial results on the underlying basis (continued)

Balance Sheet Analysis(continued)

Capital Base (continued)

Other equity instruments

At 30 June 2023, the Group's other equity instruments relate to Additional Tier 1 Capital Securities (the 'AT1 securities') and amounted to €236 million.

In June 2023, the Company successfully launched and priced an issue of €220 million Fixed Rate Reset Perpetual Additional Tier 1 Capital Securities (the 'New Capital Securities').

The New 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 the New 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.

The net proceeds of the issue of the New Capital Securities were on-lent by the Company to BOC PCL to be used for general corporate purposes. The on-loan qualifies as Additional Tier 1 capital for BOC PCL.

The issue of the New Capital Securities will maintain the Group's optimised capital structure and contributes to the Group's Total Capital Ratio by approximately 215 basis points.

At the same time, the Company invited the holders of its outstanding €220 million Fixed Rate Reset Perpetual Additional Tier 1 Capital Securities callable in December 2023 (the 'Existing Capital Securities') to tender their Existing Capital Securities at a purchase price of 103% of the principal amount. The Company received valid tenders of approximately €204 million in aggregate principal amount, or approximately 93% of the outstanding Existing Capital Securities, all of which were accepted by the Company. As a result, a cost of approximately €7 million was recorded directly in the Company's equity during the six months ended 30 June 2023, forfeiting the relevant future coupon payments. Transaction costs of €3.5 million in relation to the transactions were recorded directly in equity in June 2023. Existing Capital Securities of approximately €16 million in aggregate principal amount remain outstanding as at 30 June 2023. In July 2023, the Company purchased in the open market Existing Capital Securities of a nominal value of approximately €7 million, further reducing the outstanding nominal amount of the Existing Capital Securities to approximately €8 million.

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 BOC PCL 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 BOC PCL. With this legislation, institutions are allowed to treat such DTAs as 'not relying on profitability', according to CRR/CRD IV and as a result not deducted from CET1, hence improving a credit institution's capital position.

In response to concerns raised by the European Commission with regard to the provision of state aid arising out of the treatment of such tax losses, the Cyprus Government has proceeded with the adoption of modifications to the Law, including requirements for an additional annual fee over and above the 1.5% annual guarantee fee already provided for in the Law, to maintain the conversion of such DTAs into tax credits. In May 2022 the Cyprus Parliament voted these amendments which became effective at that time. As prescribed by the amendments in the Law, the annual 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, and also allowing for a higher amount to be charged in the year the amendments are effective (i.e. in 2022).

Group financial results on the underlying basis (continued)

Balance Sheet Analysis(continued)

Capital Base (continued)

Legislative amendments for the conversion of DTA to DTC (continued)

In anticipation of modifications to the Law, the Group has since prior years acknowledged that such increased annual fee may be required to be recorded on an annual basis until expiration of such losses in 2028. 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 IV 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 is subject to amendment in the course of the EU's legislative process; and its scope and terms may change prior to its implementation. In addition, in the case of the proposed amendments to CRD IV and the BRRD, their terms and effect will depend, in part, on how they are transposed in each member state. The European Council's proposal on CRR and CRD was published on 8 November 2022. During February 2023, the European Parliament's ECON Committee voted to adopt Parliament's proposed amendments to the Commission's proposal, and the 2021 Banking Package is currently in the final stage of the EU legislative process. It is expected that the 2021 Banking Package will enter into force on 1 January 2025; and certain measures are expected to be subject to transitional arrangements or to be phased in over time. 

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 early 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 took immediate effect.

In February 2023, the Bank received notification from the Single Resolution Board (SRB) of the final decision for the binding minimum requirement for own funds and eligible liabilities (MREL) for the Bank, determined as the preferred resolution point of entry. As per the decision, the final MREL requirement was set at 24.35% of risk weighted assets and 5.91% of Leverage Ratio Exposure (LRE) (as defined in the CRR) and must be met by 31 December 2025. Furthermore, the binding interim requirement of 1 January 2022 set at 14.94% of risk weighted assets and 5.91% of LRE must continue to be met. The own funds used by the Bank to meet the Combined Buffer Requirement (CBR) are not eligible to meet its MREL requirements expressed in terms of risk-weighted assets. The Bank must comply with the MREL requirement at the consolidated level, comprising the Bank and its subsidiaries.

The MREL ratio as at 30 June 2023, calculated according to the SRB's eligibility criteria currently in effect and based on internal estimate, stood at 21.5% of risk weighted assets (RWA) and at 10.2% of LRE. The MREL ratio as at 30 June 2023, includes an amount of approximately €8 million that remained following the tender offer and open market purchases of the Existing Capital Securities. The impact of this amount is contributing approximately 8 basis points to the MREL ratio expressed as a percentage of RWA and approximately 3 basis points to the MREL ratio expressed as a percentage of LRE. In July 2023 BOC PCL proceeded with an issue of €350 million senior preferred notes (the 'Notes'). The Notes comply with the MREL criteria and are expected to contribute towards the Bank's MREL requirements. When accounting for the Notes, the Bank's MREL ratio improves to 24.9% of RWA and 11.4% of LRE. For further details, please refer to section 'Debt securities in issue'.

Group financial results on the underlying basis (continued)

Balance Sheet Analysis (continued)

Regulations and Directives (continued)

Bank Recovery and Resolution Directive (BRRD) (continued)

Minimum Requirement for Own Funds and Eligible Liabilities (MREL) (continued)

The MREL ratio expressed as a percentage of risk weighted assets does not include capital used to meet the CBR amount, which stood at 4.02% on 30 June 2023 (compared to 3.77% as at 31 December 2022), expected to increase further on 30 November 2023 following increase in CcyB from 0.00% to 0.50% of the total risk exposure amounts in Cyprus and to 1% from June 2024 as announced by CBC.

The MREL ratios as at 30 June 2023 include profits for the six months ended 30 June 2023 and an accrual for an estimated final dividend at a payout ratio of 30% of the Group's adjusted recurring profitability for the period, which represents the low-end range of the Group's approved dividend policy. For CRR purposes, a payout ratio of 50% of the Group's adjusted recurring profitability for the period, the high-end of the payout range of the Group's approved dividend policy is prescribed, corresponding to an MREL ratio expressed as a percentage of RWA of 21.1% and an MREL ratio expressed as a percentage of LRE of 10.1% as at 30 June 2023 and pro forma for the Notes issuance, the MREL ratio expressed as a percentage of RWA stands at 24.5% and the MREL ratio expressed as a percentage of LRE stands at 11.3%.

When accounting for the Notes issued in July 2023, BOC PCL meets the final MREL requirement currently set by the SRB well ahead the compliance date of 31 December 2025. Acknowledging that the MREL requirement (amount and date) is subject to annual review by the regulator, BOC PCL continues to evaluate opportunities to optimise the build-up of its MREL.

Funding and Liquidity

Funding

Funding from Central Banks

At 30 June 2023, the Bank's funding from central banks amounted to €2,004 million, which relates to ECB funding, comprising solely of funding through the Targeted Longer-Term Refinancing Operations (TLTRO) III, compared to €1,977 million at 31 December 2022.

The Bank borrowed an overall amount of €3 billion under TLTRO III by June 2021, despite its comfortable liquidity position, given the favourable borrowing terms, in combination with the relaxation of collateral requirements.

Following the changes in the terms of the TLTRO III announced by the ECB in October 2022, and given the Bank's strong liquidity position, the Bank proceeded with the repayment of €1 billion TLTRO III funding in December 2022. The maturity date of the Bank's funding of €1.7 billion under the seventh TLTRO III operation is in March 2024, whilst the €300 million under the eighth TLTRO III operation is in June 2024.

Deposits

Customer deposits totalled €19,166 million at 30 June 2023, compared to €18,998 million at 31 December 2022. Customer deposits are mainly retail-funded and almost 60% of deposits are protected under the deposit guarantee scheme as at 30 June 2023.  

The Bank's deposit market share in Cyprus reached 37.4% as at 30 June 2023, compared to 37.2% as at 31 December 2022. Customer deposits accounted for 75% of total assets and 82% of total liabilities at 30 June 2023 (flat since 31 December 2022).

The net loans to deposits (L/D) ratio stood at 52% as at 30 June 2023, compared to 52% as at 31 December 2022, remaining broadly flat.

Subordinated liabilities

At 30 June 2023, the carrying amount of the Group's subordinated liabilities (including accrued interest) amounted to €309 million, compared to €302 million at 31 December 2022, and relate to unsecured subordinated Tier 2 Capital Notes ('T2 Notes').

Group financial results on the underlying basis (continued)

Balance Sheet Analysis (continued)

Funding and Liquidity (continued)

Funding (continued)

Subordinated liabilities (continued)

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 2023, the carrying value of the Group's debt securities in issue (including accrued interest) amounted to €292 million, compared to €298 million at 31 December 2022, and relate to senior preferred notes.

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.

In July 2023, the Bank has 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 plus 409.5 basis points, payable quarterly in arrears. The issuance was met with strong demand, attracting interest from more than 90 institutional investors, with a peak orderbook of €950 million and final pricing 37.5 basis points tighter than the initial pricing indication. The Notes comply with the criteria for the Minimum Requirement for Own Funds and Eligible Liabilities and contributes towards the Bank's MREL requirements.

Liquidity

At 30 June 2023, the Group Liquidity Coverage Ratio (LCR) stood at 316%, compared to 291% at 31 December 2022, well above the minimum regulatory requirement of 100%. The LCR surplus as at 30 June 2023 amounted to €7.7 billion, compared to €7.2 billion at 31 December 2022. When disregarding the TLTRO III and including the €350 million of the senior preferred notes issued on July 2023, the Group's liquidity position remains strong with an LCR of 270% and liquidity surplus of €6.1 billion.

At 30 June 2023, the Group Net Stable Funding Ratio (NSFR) stood at 165%, compared to 168% at 31 December 2022, well above the minimum regulatory requirement of 100%.

Loans

Group gross loans totalled €10,277 million at 30 June 2023, compared to €10,217 million at 31 December 2022, remaining largely flat as ongoing repayments offset new lending.

New lending granted in Cyprus totalled €1,118 million for the six months ended 30 June 2023, compared to €1,159 million for the six months ended 30 June 2022, mainly driven by strong demand for business loans. New lending in the six months ended 30 June 2023 comprised €509 million of corporate loans, €370 million of retail loans (of which €227 million were housing loans), €125 million of SME loans and €114 million of shipping and international loans. 

At 30 June 2023, the Group net loans and advances to customers totalled €10,008 million, compared to €9,953 million at 31 December 2022, up by 1% since the beginning of the year.

The Bank is the largest credit provider in Cyprus with a market share of 42.4% at 30 June 2023, compared to 40.9% at 31 December 2022.

Group financial results on the underlying basis (continued)

Balance Sheet Analysis (continued)

Loan portfolio quality

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

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

The elevated inflation combined with the rising interest rate environment are expected to weigh on customers behaviour. Despite these persisting pressures there are no signs of asset quality deterioration to date. While defaults have been limited, the additional monitoring and provisioning for sectors and individuals vulnerable to the deteriorated 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

Non-performing exposures (NPEs) as defined by the European Banking Authority (EBA) were reduced by €40 million (net), to €371 million at 30 June 2023, compared to €411 million as at 31 December 2022.

As a result, the NPEs account for 3.6% of gross loans as at 30 June 2023, compared to 4.0% at 31 December 2022.

The NPE coverage ratio stands at 78% at 30 June 2023, compared to 69% as at 31 December 2022. 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 €14.6 billion or 98% to below €0.4 billion and the NPE ratio by 59 percentage points, from 63% to below 4%.

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 and 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.

The eligible applicants will be able to reside in their primary residence as tenants and are exempted from their mortgage loan, as the state will be covering fully the required rent on their behalf. The eligible applicants will be able to acquire the primary residence after five years at a favourable price, below the Open Market Value.

The scheme has not been launched yet; it is expected to act as another tool to address NPEs in the Retail sector.

Group financial results on the underlying basis (continued)

Balance Sheet Analysis (continued)

Fixed income portfolio

Fixed income portfolio amounts to €3,178 million as at 30 June 2023, compared to €2,500 million as at 31 December 2022. As at 30 June 2023, the portfolio represents 13% of total assets (net of TLTRO III) and comprises €2,703 million (85%) measured at amortised cost and €475 million (15%) 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 A1 or at Aa2 when Cyprus government bonds are excluded. The fair value of the amortised cost fixed income portfolio as at 30 June 2023 amounts to €2,619 million, reflecting an unrealised fair value loss of €84 million, equivalent to approximately 80 basis points of CET1 ratio. 

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 since the beginning of 2019 amount to €0.8 billion and exceed properties on-boarded in the same period of €0.5 billion.

During the six months ended 30 June 2023, the Group completed disposals of €71 million (compared to €87 million in the six months ended 30 June 2022), resulting in a profit on disposal of €5 million for the six months ended 30 June 2023 (compared to a profit of approximately €8 million for the six months ended 30 June 2022). Asset disposals are across all property classes, with almost 45% by value in the six months ended 30 June 2023 relating to land.

During the six months ended 30 June 2023, the Group executed sale-purchase agreements (SPAs) for disposals of 273 properties with contract value of €78 million, compared to SPAs for disposals of 373 properties, with contract value of approximately €99 million for the six months ended 30 June 2022.

In addition, the Group had a strong pipeline of €66 million by contract value as at 30 June 2023, of which €38 million related to SPAs signed (compared to a pipeline of €81 million as at 30 June 2022, of which €41 million related to SPAs signed).

REMU on-boarded €6 million of assets in the six months ended 30 June 2023 (compared to additions of €26 million in the six months ended 30 June 2022), via the execution of debt for asset swaps and repossessed properties.

As at 30 June 2023, assets held by REMU had a carrying value of €1,010 million, (comprising properties of €946 million classified as 'Stock of property' and €64 million as 'Investment properties'), compared to €1,116 million as at 31 December 2022 (comprising properties of €1,041 million classified as 'Stock of property' and €75 million as 'Investment properties').

In addition to assets held by REMU, properties classified as 'Investment properties' with carrying value of €10 million as at 30 June 2023, compared to €10 million as at 31 December 2022, are not managed by REMU.

Group financial results on the underlying basis (continued)

Income Statement Analysis

Total income

Net interest income (NII) for the six months ended 30 June 2023 amounted to €358 million, compared to €145 million for the six months ended 30 June 2022, up by 146% compared to the prior period, driven mainly by the repricing of loans and liquid assets to higher rates, the limited increase in funding costs and the increase of fixed income portfolio, notwithstanding the foregone NII on the NPE sale Helix 3 portfolio (of approximately €8 million in the six months ended 30 June 2022) and the end of TLTRO favourable terms (approximately €7 million in the six months ended 30 June 2022).

Quarterly average interest earning assets (AIEA) for the six months ended 30 June 2023 amounted to €22,781 million, compared to €22,235 million as at 30 June 2022. The increase was driven by the increase in liquid assets, mainly as a result of the increase in fixed income portfolio and deposits by approximately €1.3 billion and €0.7 billion respectively, partly offset by the repayment of €1.0 billion TLTRO funding in December 2022.

Net interest margin (NIM) for the six months ended 30 June 2023 amounted to 3.17% compared to 1.32% for the six months ended 30 June 2022, driven by interest rate rises and the increase in average interest earning assets.

Non-interest income for the six months ended 30 June 2023 amounted to €153 million, compared to €137 million for the six months ended 30 June 2022, comprising net fee and commission income of €90 million, net foreign exchange gains and net gains/(losses) on financial instruments of €21 million, net insurance result of €25 million, net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties of €5 million and other income of €12 million. Each of the components is further analysed below.

Net fee and commission income for the six months ended 30 June 2023 amounted to €90 million, compared to €94 million for the six months ended 30 June 2022. When disregarding the impact of the liquidity fees and NPE sale-related servicing fee, net fee and commission income was up 8% compared to the prior period, reflecting the introduction of a revised price list in February 2022, and higher net credit card commissions.

Net foreign exchange gains and net gains/(losses) on financial instruments amounted to €21 million for the six months ended 30 June 2023, compared to €3 million for the six months ended 30 June 2022. The increase was driven by higher net foreign exchange gains of €16 million (30 June 2022: €12 million) reflecting higher foreign exchange income through FX swaps, and net gains in financial instruments of €5 million (30 June 2022: losses of €9 million).

Net insurance result amounted to €25 million for the six months ended 30 June 2023, compared to €24 million for the six months ended 30 June 2022, up by 4% compared to the prior period.

Net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties for the six months ended 30 June 2023 amounted to €5 million (comprising net gains on disposal of stock of properties of €4 million, and net gains from revaluation and disposal of investment properties of €1 million), compared to €7 million for the six months ended 30 June 2022 (comprising a profit on disposal of stock of properties of €8 million and net losses from revaluation and disposal of investment properties of €1 million). REMU profit remains volatile.

Total income amounted to €511 million for the six months ended 30 June 2023, compared to €282 million for the six months ended 30 June 2022. The increase was mainly driven by strong growth in net interest income as explained above.

Total expenses

Total expenses for the six months ended 30 June 2023 were €180 million, compared to €181 million for the six months ended 30 June 2022, 52% of which related to staff costs (€93 million), 38% to other operating expenses (€69 million) and 10% to special levy on deposits and other levies/contributions (€18 million). The decrease mainly relates to the reduction in staff costs, as further explained below.

Group financial results on the underlying basis (continued)

Income Statement Analysis (continued)

Total expenses (continued)

Total operating expenses amounted to €162 million for the six months ended 30 June 2023, compared to €164 million for the six months ended 30 June 2022, as benefits from the efficiency actions in the year ended 31 December 2022 continue to partly offset wage and inflationary pressures.

Staff costs for the six months ended 30 June 2023 were €93 million, compared to €95 million for the six months ended 30 June 2022, reflecting the savings of the Voluntary Staff Exit Plan (VEP) that took place in July 2022, partially offset by inflationary pressures and the accrual of termination benefits cost of approximately €3 million. In addition staff costs for the six months ended 30 June 2023 include €3.8 million staff cost rewards (variable pay), namely the Short-Term Incentive Plan ('STIP') and the Long-Term Incentive Plan. The STIP involves variable remuneration to selected employees and will be driven by both delivery of the Group's strategy, as well as individual performance.

During December 2022 the Group granted to eligible employees share awards under a long-term incentive plan ('2022 LTIP' or the '2022 Plan'). The 2022 Plan 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. The employees eligible for the 2022 LTIP are the members of the Extended EXCO. The 2022 LTIP stipulates that performance will be measured over a 3-year period and financial and non-financial objectives to be achieved (driven by both delivery of the Group's strategy as well as individual performance). At the end of the performance period, the performance outcome will be used to assess the percentage of the awards that will vest.

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.

In July 2022 the Group completed a VEP which led to the reduction of the Group's full-time employees by 16%, at a total cost of €101 million, recorded in the consolidated income statement in the nine months ended 30 September 2022. The gross annual savings were estimated at approximately €37 million or 19% of staff costs with a payback period of 2.7 years. The estimated savings of the VEP are expected to be partially offset by the renewal of the collective agreement in 2023.

As at 30 June 2023, the Group employed 2,902 persons compared to 2,889 persons as at 31 December 2022.

Other operating expenses totaled €69 million for the six months ended 30 June 2023 and remained broadly flat compared to the six months ended 30 June 2022.

Special levy on deposits and other levies/contributions for the six months ended 30 June 2023 amounted to €18 million compared to €17 million for the six months ended 30 June 2022, up 10% compared to the prior period, driven mainly by the increase of deposits of €0.7 billion compared to the prior period.

The cost to income ratio excluding special levy on deposits and other levies/contributions for the six months ended 30 June 2023 was 32% compared to 58% for the six months ended 30 June 2022, down by 26 percentage points. The decrease is driven mainly by the higher total income.

Profit before tax and non-recurring items

Operating profit for the six months ended 30 June 2023 amounted to €331 million, compared to €101 million for the six months ended 30 June 2022, driven mainly by the significant increase in net interest income.

Loan credit losses for the six months ended 30 June 2023 were €24 million, compared to €23 million for the six months ended 30 June 2022.  

Cost of risk for the six months ended 30 June 2023 was 48 basis points, compared to a cost of risk of 43 basis points for the six months ended 30 June 2022.

At 30 June 2023, the allowance for expected loan credit losses, including residual fair value adjustment on initial recognition and credit losses on off-balance sheet exposures (refer to 'Alternative Performance Measures Disclosures' section of the Interim Financial Report 2023 for the respective definitions) totalled €288 million, compared to €282 million at 31 December 2022, and accounted for 2.8% of gross loans (31 December 2022: 2.8%).

Group financial results on the underlying basis (continued)

Income Statement Analysis (continued)

Profit before tax and non-recurring items (continued)

Impairments of other financial and non-financial assets for the six months ended 30 June 2023 amounted to €30 million, compared to €13 million for the six months ended 30 June 2022, driven mainly by higher impairments on specific, large, illiquid REMU stock properties.

Provisions for pending litigations, regulatory and other matters (net of reversals) for the six months ended 30 June 2023 amounted to €14 million, compared to €1 million for the six months ended 30 June 2022. The increase is driven by the revised approach on pending litigation fees and the progress on legal cases, as well as provisions for other matters in relation to the run-down and disposal of the Group's legacy and non-core operations.

Profit before tax and non-recurring items for the six months ended 30 June 2023 totalled €263 million, compared to €64 million for the six months ended 30 June 2022.

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

The tax charge totaled to €40 million for the six months ended 30 June 2023, compared to €11 million for the six months ended 30 June 2022.

Profit after tax and before non-recurring items (attributable to the owners of the Company) for the six months ended 30 June 2023 is €222 million, compared to €52 million for the six months ended 30 June 2022.

Advisory and other transformation costs - organic for the six months ended 30 June 2023 are €2 million, compared to €5 million for the six months ended 30 June 2022, down by 57%.

Profit after tax arising from the organic operations (attributable to the owners of the Company) for the six months ended 30 June 2023 amounted to €220 million, compared to €47 million for the six months ended 30 June 2022.

Following completion of Helix 3 project, there are no amounts recognised for provisions/net profit/(loss) relating to NPE sales for the six months ended 30 June 2023.

Restructuring and other costs relating to NPE sales for the six months ended 30 June 2023 was nil compared to €1 million for the six months ended 30 June 2022 (relating to the agreements for the sale of portfolios of NPEs).

Restructuring costs relating to the Voluntary Staff Exit Plan (VEP) of €3 million in the six months ended 30 June 2022, related to a Voluntary Staff Exit Plan (VEP), through one of the Group's subsidiaries of which a small number of its employees were approved to leave.

Profit after tax attributable to the owners of the Company for the six months ended 30 June 2023 amounts to €220 million, corresponding to a ROTE of 24.0%, compared to €43 million for the six months ended 30 June 2022, corresponding to a ROTE of 4.9%.

Operating Environment

The Cyprus economy recovered strongly from the Covid-induced recession of 2020 and succeeded in improving its credit and macroeconomic profile significantly in the period that followed. The general government budget returned to a surplus position and the public debt dropped sharply relative to GDP in 2021-2022. In the banking sector banks restructured their balance sheets and reduced their non-performing exposures significantly, while at the same time increasing their capital buffers and raising their profitability. The growth outlook remains positive over the medium term supported by Next Generation EU funds.

First quarter growth for 2023 was 3.4% according to the Cyprus Statistical Service. The growth forecast for the year 2023 is around 2.8% according to the Ministry of Finance, and the economy is thus expected to weaken somewhat in the second half of the year. This follows strong growth of 6.6% and 5.6% respectively in 2021-2022, driven by a strong recovery in tourism toward pre pandemic levels, and also strong growth in other services sectors. 

Operating Environment (continued)

Employment growth remained strong in 2021-2022 averaging 1.2% and 2.8% respectively following a 1% drop in 2020. Productivity growth was particularly strong in the period immediately after the Covid recession and started to slow in more recent quarters. In the first quarter of 2023, the volume of employment increased by 2.1% and the unemployment rate dropped to 6.7% seasonally adjusted, from 7.1% in the fourth quarter 2022.

Inflation measured by the Harmonised Index of Consumer Prices, was 8.1% in 2022 compared to 8.4% in the Euro area. Inflation peaked in July 2022 at 10.6% and has been decelerating since, reaching 3.6% in May 2023 and 2.8% in June 2023, and is estimated to reach 2.4% in July 2023. This was driven by the non-core components of energy and food, while core inflation, defined as total index less energy and food, was stickier and was 4% in June 2023. In the first half of 2023, total harmonised inflation was 4.9% and consisted of 4.6 percentage points of core inflation.

Harmonised inflation is expected to moderate further but only gradually. Without energy prices spiking unexpectedly, headline inflation is projected at 3.2% in 2023 in Cyprus and 2.5% in 2024 according to the Ministry of Finance (Strategic Framework for Fiscal Policy 2024-2026).

Tourist activity continued to rebound in the first half of the year after a strong performance in 2022. Arrivals increased by 32% in January-June 2023, from a year earlier, and corresponded to 99% of arrivals in the same period of 2019. Likewise, receipts increased by 34% in January-May 2023, from the same period a year earlier and exceeded receipts from the same period in 2019 by 12%.

Private consumption remains strong and retail sales picked up in the first four months of 2023 up by 8% year-on-year excluding vehicles. This was driven by all retail categories particularly food and beverages, non-food products, textiles and clothing, and computers and telecommunications equipment.

Public finances continued to improve following significant advances in 2021-2022. The budget deficit narrowed to 2.0% of GDP in 2021, from a deficit of 5.8% of GDP in 2020 and turned into a surplus of 2.1% of GDP in 2022. Gross debt dropped from 101.2% of GDP in 2021 to 86.5% in 2022. In the first quarter of 2023, gross debt to GDP dropped further to 84.0%. In the first quarter of the year the budget surplus increased to €329 million from €240 million in the first quarter of 2022. This was driven by considerable increases in direct and indirect tax revenue and in social contributions which were influenced by the inflation driven increases in the respective tax bases.

Interest payments declined to 1.5% of GDP in 2022 or 3.6% of general government revenue indicating that debt affordability remains favourable. Debt affordability will remain favourable in the medium term as the government still refinances maturing debt at lower cost while the cash buffer allows the government a high degree of flexibility with regards to funding.

In the banking sector, pure new business lending which excludes renegotiated amounts, slowed in January-April 2023, compared to the same period of last year but picked up in May. In total, for the period January-May 2023, pure new loans were marginally higher than pure new loans in the same period of last year, with a difference in their composition. This year there were more new loans extended to non-financial companies, in comparison, and less mortgage lending primarily due to higher interest rates.

Banks managed to weather the pandemic crisis well, with their liquidity and capital buffers intact. Non-performing exposures (NPEs) continued their declining trend following the sale of packages by the two largest banks. Total NPEs at the end of April 2023, were €2.2 billion or 9% of gross loans. Respectively, the NPE ratio in the non-financial companies' segment was 7.7% and that of households was 11.6%. About 44.8% of total NPEs are restructured facilities and the coverage ratio was 54.2%.

Private indebtedness measured by loans to residents on bank balance sheets, excluding the government, dropped to €20.9 billion at the end of June 2023, or about 77% of GDP. In comparison, private indebtedness peaked at the end of December 2012, amounted to €53 billion or about three times GDP.

The federal reserve in the United States and the European Central Bank, in their July 2023 meetings, raised their policy rates by 25 basis points. The federal reserve started hiking in March 2022 and the ECB followed in July of the same year. The federal funds rate now stands at 5.25-5.5% target range, and the ECB's Minimum Refinance Operations rate stands at 4.25%.

Operating Environment (continued)

Cyprus' current account deficit narrowed from 10.1% of GDP in 2020 to 6.8% in 2021 before deteriorating to 8.8% of GDP in 2022. The current account deficit will narrow modestly according to the IMF, in 2023-2024, to 7.8% and 7.7% of GDP respectively. The current account deficit will remain higher than pre-pandemic levels in the medium term, partly due to strong import growth linked to higher energy prices and EU investment plans, which will weigh on the trade balance. The size of the country's deficits is partly structural, a consequence of special purpose vehicles domiciled in Cyprus.

The outlook remains positive. The government debt ratio will continue to decline while debt affordability metrics will remain strong. Growth in the recent period has been broadly based and Cyprus' economic resilience has been stronger than expected vis-à-vis the exogenous shocks of Russia's invasion of Ukraine and also the pandemic. Solid medium-term GDP growth prospects are supported by the European Union's Next Generation EU package of grants and loans.

Sovereign ratings

The sovereign risk ratings of the Cyprus Government improved considerably in recent years reflecting reduced banking sector risks, and improvements in economic resilience and consistent fiscal outperformance. Cyprus demonstrated policy commitment to correcting fiscal imbalances through reform and restructuring of its banking system. Public debt remains high in relation to GDP but large-scale asset purchases from the ECB ensure favourable funding costs for Cyprus and ample liquidity in the sovereign bond market.

Fitch Ratings has affirmed Cyprus' Long-Term Foreign-Currency Issuer Default Rating at 'BBB' with a Stable Outlook, in June 2023, following its upgrade last March. The affirmation reflects the improvement in public finances and the government indebtedness as well as strong growth in GDP, the resiliency of the Cypriot economy to external shocks and the improvement in the Banking sector in asset quality.

In March 2023, DBRS Morningstar confirmed the Republic of Cyprus' Long-Term Foreign and Local Currency - Issuer Ratings at BBB (low) and maintained the trend Stable. The affirmation is supported by a stable political environment, the government's sound fiscal and economic policies and the favourable government debt profile. The stable outlook balances recent favourable fiscal dynamics against downside risks for the economic outlook.

In September 2022, S&P Global Ratings upgraded Cyprus' investment grade rating of BBB and has changed the outlook from positive to stable. The upgrade reflects the resiliency of the Cypriot economy to recent external shock (including the COVID-19 pandemic). The stable outlook balances risks from the crisis in Ukraine and the economy's diversified structure and the expectation that the government's fiscal position will continue to improve. The credit rating was later reviewed and affirmed in March 2023.

In August 2022, Moody's Investors Service affirmed the Government of Cyprus' long-term issuer and senior unsecured ratings to Ba1 and changed the outlook from stable to positive. The ratings and positive outlook were affirmed again in credit opinion updates published in April 2023 and June 2023. The key drivers reflecting the affirmation are the strong reduction in Cyprus' public debt ratio in 2022, stronger-than expected economic resilience to Russia's invasion of Ukraine and the COVID-19 pandemic as well the ongoing strengthening of the banking sector. In a credit assessment that was published in December 2022 and updated in June 2023, Moody's investors service affirmed a new Cyprus' credit profile.

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 are:

·      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.

The Group's transformation into a strong, diversified, well-capitalised and sustainably profitable banking and financial services organisation lay the foundations to create the conditions for higher returns. Capitalising on this transformation, the Group has revised its financial targets during the Investor Update Event in June 2023  and raised its Return on Tangible Equity (ROTE) guidance for 2023 and 2024 to over 17% and over 14% respectively, from over 13% per annum (as previously announced on 20 February 2023). The key driver of the upgrade is the revised expectation for net interest income, primarily to reflect higher rates for longer.

The structure of the Group's balance sheet is very liquid with almost half of its assets held as cash balances with central banks and fixed income portfolio, demonstrating that it is well-positioned to benefit from rising interest rates. Factoring in the expectations for the evolution of interest rates at the time of the event (with the ECB deposit facility rate averaging 3% for 2023 and 3.1% for 2024), the net interest income guidance was upgraded and is expected to exceed €650 million for 2023 and to fall modestly to over €625 million for 2024. For 2025 net interest income is expected to be lower than 2024 reflecting a lower projected ECB deposit facility rate of 2.5%. These net interest income targets incorporate assumptions of:

·      gradual increase in time and notice deposit pass-through to approximately 50% by June 2024 (previously assumed by December 2023)

·      gradual change in deposit mix towards time and notice deposits to approximately 50% by December 2024 (previously assumed by December 2023) and;

·      higher wholesale funding costs.

The Group is expected to continue to gradually deploy excess liquidity to further expand the fixed income portfolio. Over the recent quarters the Group has increased its fixed income portfolio reflecting the improved market conditions, whilst maintaining a low risk, diversified, highly rated portfolio. Going forward, it is expected to prudently grow the fixed income portfolio to reach approximately 15% of the Group's total assets (net of TLTRO III) in order to be broadly in line with the average of EU peers (excluding Greek banks).

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. In 2023 net fee and commission income is negatively affected by the termination of liquidity fees in December 2022 and an NPE sale-related servicing fee in mid-February 2023. Adjusting for these items, net fee and commission income is expected to rise by approximately 3% per annum for 2022-2024, broadly in line with projected economic growth, driven by cross-selling and growth in capital-light sales.

Strategy and Outlook (continued)

The Group's insurance companies, EuroLife Ltd (Eurolife) and Genikes Insurance of Cyprus Ltd (GI) are respectively leading players in the life and general insurance business in Cyprus, and have been providing a recurring and improving income, further diversifying the Group's income streams. In the life insurance business, further growth is expected to be driven through the pursuit of new market segments, cross-selling opportunities in the occupational pensions market and other appealing products and widening the customer base by leveraging on its bancassurance model and strengthening further its agency force. In the general insurance business, further growth is expected by growing the bancassurance potential leveraging on the Bank's strong market share, promoting and enhancing the digital sales through the Bank's mobile application, exploiting synergies with the life insurance agency force and pursuing profitable segments and products. In this respect, regular income for the life insurance business is expected to rise by approximately 6% per annum for 2022-2025 whilst premium income for the non-life insurance business is expected to rise by over 8% per annum for the same period.

Finally, there is additional revenue upside coming from the Digital Economy Platform (Jinius) which aims to generate new revenue sources over the medium term, leveraging on the Bank's market position, knowledge and digital infrastructure.

The significant improvement in the Group's revenues (driven primarily from the expansion of net interest income) will effectively lead to an improvement in the Group's operating efficiency. The cost to income ratio excluding special levy on deposits or other levies/contributions is expected to remain below 40% for 2023 and then to increase modestly to approximately 40% for 2024, despite inflationary pressures. There is some upward pressure on costs from investments in transformation and digitisation as well as inflationary pressure on staff costs arising from the renewal of the collective agreement and variable remuneration to selected employees driven by the delivery of the Group's strategy and individual performance.

In terms of asset quality, the cost of risk target of 50-80 basis points for 2023 is reiterated to weather the ongoing macroeconomic and geopolitical uncertainties, and then to normalise to approximately 40-50 basis points over the medium-term. Additionally, the NPE ratio is expected to remain below 4% for 2023 and 2024 and to fall modestly to below 3% for 2025. To achieve this, the Group aims to maintain high quality of new lending with strict underwriting standards and to prevent asset quality deterioration. Currently, there are no signs of asset quality deterioration.

Since 2019, the Real Estate Management Unit (REMU) stock has been consistently reducing, with properties sold exceeding the book value of properties acquired, while inflows remain substantially reduced following balance sheet de-risking. Going forward, REMU sales are expected to continue at a similar pace, with expected inflows to remain at low levels. Therefore, REMU portfolio is expected to halve to €0.5 billion by 2025.

Overall these returns are expected to increase the Group's equity base, corresponding to strong organic capital generation of between 200 and 250 basis points (pre-distributions) per annum for 2023-2025, facilitating strong capital ratios and healthy capital buffers. In summary, the Group expects to deliver a ROTE of over 17% for 2023 and over 14% for 2024 (which corresponds to a ROTE of over 17% based on 15% CET1 ratio). For 2025, the Group expects to generate a ROTE of over 13% which is equivalent to over 16% based on a 15% CET1 ratio, reflecting lower interest rate assumptions. By 31 December 2025, the Group expects its CET1 ratio to stand at approximately 19%, after deducting projected dividends (which remain subject to regulatory approval) per its dividend distribution policy.

The Group's aim to provide sustainable shareholder returns is reiterated. Dividend payments are expected to build prudently and progressively over time, towards a payout ratio in the range of 30-50% of the Group's adjusted recurring profitability.

Business Overview

Credit ratings

The Group's financial performance is highly correlated to the economic and operating conditions in Cyprus. In May 2023, Moody's Investors Service upgraded the Bank's long-term deposit rating to Ba1 from Ba2, maintaining the positive outlook. The main drivers for this upgrade are the continued strengthening of the Bank's asset quality and its improving profitability prospects that continue to reduce risks to its capital. In April 2023, S&P Global Ratings affirmed the long-term issuer credit rating of the Bank at BB- and revised the outlook to positive from stable. The revised outlook reflects the likelihood of further progress in Cyprus' operating environment, in particular materially easing funding risks. In December 2022, Fitch Ratings upgraded the Bank's long-term issuer default rating to B+ from B-, whilst maintaining the positive outlook. The two-notch upgrade reflects improved Bank's asset quality, supported by the completion of Project Helix 3 together with the organic reduction of impaired assets. The upgrade is also underpinned by Fitch's view of the resilience of the Cypriot economy, even in light of growing economic uncertainties.

Financial performance

The Group is a leading, financial and technology hub in Cyprus. In 2022 the Group completed its transformation into a diversified and well-capitalised organisation with sustainably profitable banking and other financial services. This was marked by the resumption of dividend payments after 12 years, a significant milestone, as it represents a new chapter for the Group. 

In April 2023 the Company obtained the approval of the European Central Bank to pay a dividend out of FY2022 profitability. Following this approval, the Board of Directors of the Company recommended to the shareholders for approval at the AGM a final Dividend of €0.05 per ordinary share in respect of earnings for the year ended 31 December 2022. This proposed Dividend was declared at the AGM on 26 May 2023, amounted to €22.3 million in total and is equivalent to a payout ratio of 14% of the FY2022 adjusted recurring profitability or 31% based on FY2022 profit after tax (as reported in 2022 Annual Financial Report). The dividend was paid in cash on 16 June 2023.

Additionally, the Board of Directors approved the Group's dividend policy. The Group aims to provide a sustainable return to shareholders. Dividend payments are expected to build prudently and progressively over time, towards a payout ratio in the range of 30-50% of the Group's profitability after tax, before non-recurring items, adjusted for AT1 distributions (referred to as 'adjusted recurring profitability'). The dividend policy takes into consideration market conditions as well as the outcome of capital and liquidity planning.

During the quarter ended 30 June 2023, the Group's financial performance was strong, with well-diversified revenues and disciplined cost containment, despite inflationary pressures. Overall, the Group generated a ROTE of 26.6% compared to 21.3% in the previous quarter, underpinned mainly by the interest rate rises and simultaneously a well-managed deposit pass-through.

On 8 June 2023, the Company presented and discussed an update of the Group's outlook at the Investor Update event in London. During the Investor Update event, the Company presented its updated 2023 and 2024 financial targets and raised its ROTE guidance to over 17% and over 14% respectively, from over 13% per annum (as previously announced on 20 February 2023). The key driver of the upgrade is the revised expectation for net interest income, primarily to reflect higher rates for longer. In a normalised interest rate environment, the Company expects to generate ROTE of over 13% by 2025. These returns expect to increase the Group's equity base, corresponding to a strong organic capital generation of approximately 200-250 basis points (pre-distributions) per annum for 2023-2025. By 31 December 2025, the Group expects its CET1 ratio to stand at approximately 19%, after deducting projected dividend distributions, per its dividend distribution policy. Finally, the Group's dividend policy has been reiterated. Therefore, dividend payments are expected to build prudently and progressively over time, towards a payout ratio in the range of 30-50% of the Group's adjusted recurring profitability.

Favourable interest rate environment

The structure of the Group's balance sheet is geared towards higher interest rates. As at 30 June 2023, cash balances with ECB (excluding TLTRO III of approximately €2.0 billion) amounted to approximately €7.1 billion, reflecting immediate benefit from interest rate rises. The repricing of the reference rates gradually benefits the interest income on loans, as over 95% of the Group's loan portfolio is variable rate as at 30 June 2023. The net interest income for the six months ended 30 June 2023 stood at €358 million, more than double compared to the six months ended 30 June 2022. This increase is underpinned by faster and steeper than expected interest rate rises as well as a resilient low deposit pass-through.

Business Overview (continued)

Favourable interest rate environment (continued)

In July 2023, ECB set the remuneration of minimum reserves (MRR) at 0%. The impact on forgone net interest income from the recent reduction of MRR is expected to be approximately €7 million per annum at an annual depo rate of 3.75%.

Growing revenues in a more capital efficient way

The Group remains focused on growing revenues in a more capital efficient way. The Group aims to continue to grow its high-quality new lending, drive growth in niche areas for further market penetration and diversify through non-banking services, such as insurance and digital products.

The Group has continued to provide high quality new lending in the six months ended 30 June 2023 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 2023, new lending remained strong at €1,118 million, mainly driven by strong demand for business loans. Gross performing loan book remained broadly flat as ongoing repayments offset new lending. Performing loan book is expected to remain broadly flat in 2023.

Fixed income portfolio amounts to €3,178 million as at 30 June 2023, compared to €2,500 million as at 31 December 2022. The increase reflects incremental new investments in the six months ended 30 June 2023 ahead of expected maturities in the second half of 2023. The portfolio represents 13% of total assets (excluding TLTRO III) and comprises €2,703 million (85%) measured at amortised cost and €475 million (15%) 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 A1 or at Aa2 when Cyprus government bonds are excluded. The fair value of the amortised cost fixed income portfolio as at 30 June 2023 amounts to €2,619 million, reflecting an unrealised fair value loss of €84 million, equivalent to approximately 80 basis points of CET1 ratio. 

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 months ended 30 June 2023, non-interest income amounted to €148 million (excluding an one-off insurance receivable in other income), remaining an important contributor to the Group's profitability, and contributing to approximately 90% of the Group's total operating expenses. Going forward, non-interest income is expected to continue covering approximately 80% of the Group's total operating expenses.

In 2023, net fee and commission income is negatively affected by the termination of liquidity fees in December 2022 and an NPE sale-related servicing fee in mid-February 2023. As a result, net fee and commission income was reduced by 4% in the first half 2023 to €90 million.

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 9% of total non-interest income and amounted to €14 million in the six months ended 30 June 2023, up 11% compared to the prior period, backed by strong transaction volume.

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 a recurring and improving income, further diversifying the Group's income streams. The net insurance result for the six months ended 30 June 2023 contributed 16% of non-interest income and amounted to €25 million, up 4% compared to the prior period; insurance companies remain valuable and sustainable contributors to the Group's profitability. On 1 January 2023, the Group adopted IFRS 17, retrospectively, which impacts the profit recognition for insurance contracts by phasing of profit over their lifetime compared to recognising profit substantially up-front under IFRS 4. The new accounting standard does not change the economics of the insurance business and decreases the volatility of the Group's insurance companies profitability. For further details please refer to Note 3.3.1 of the Consolidated Condensed Interim Financial Statements within the Interim Financial Report 2023.

Business Overview (continued)

Growing revenues in a more capital efficient way (continued)

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 electronic invoicing, remittance management, tenders management and ecosystem management. The next key milestone is the launch of the first Business-to-Consumer service, a product marketplace, driving opportunities in lifestyle banking and beyond. Currently, over 1,600 companies are registered in the platform. 

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.

The efficiency actions of the Group in 2022 to maintain operating expenses under control in an inflationary environment included further branch footprint optimisation and substantial streamline of workforce. In July 2022, the Group successfully completed a Voluntary Staff Exit Plan (VEP) through which 16% of the Group's full-time employees were approved to leave at a total cost of €101 million. Following the completion of the VEP, the gross annual savings were estimated at approximately €37 million or 19% of staff costs with a payback period of 2.7 years. Additionally in January 2022 one of the Bank's subsidiaries completed a small-scale targeted VEP, through which a small number of full-time employees were approved to leave at a total cost of €3 million. In relation to branch restructuring, during 2022 the Group reduced the number of branches by 20 to 60, a reduction of 25%. As a result, the Group's total operating expenses for the six months ended 30 June 2023 were reduced by 2% on prior year, reflecting the benefits from the efficiency actions in an inflationary environment. The cost to income ratio excluding special levy on deposits and other levies/contributions for the six months ended 30 June 2023 was reduced further to 32%, 26 percentage points down compared to the six months ended 30 June 2022, driven mainly by the higher total income. In the second half of 2023, some upward pressure on total operating expenses is expected reflecting the increased cost of living adjustment (COLA) in staff costs and the launch of a reward programme through 'Antamivi Reward scheme' to the Group's performing borrowers, with an expected impact of approximately €4 million in other operating expenses.

During December 2022 the Group has granted to eligible employees share awards under a long-term incentive plan ('2022 LTIP' or the '2022 Plan'). The 2022 Plan 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. The employees eligible for the 2022 LTIP are the members of the Extended EXCO. The 2022 LTIP stipulates that performance will be measured over a 3 year period and financial and non-financial objectives to be achieved (driven by both delivery of the Group's strategy as well as individual performance). At the end of the performance period, the performance outcome will be used to assess the percentage of the awards that will vest.

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.

In addition, staff costs for the six months ended 30 June 2023 include approximately €3.5 million staff cost rewards, in relation to the Short-term Incentive Plan. 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.

Transformation plan

The Group's focus continues on deepening the relationship with its customers as a customer centric organisation. A transformation plan is already in progress and 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.

Business Overview (continued)

Lean operating model (continued)

Digital transformation

The Bank's digital transformation continues to focus  on developing digital services and products that improve the customer experience, streamlining internal processes, and introducing new ways for improving the workplace environment.

During the second quarter of 2023, the Bank continued to enrich and improve its digital portfolio with new innovative services to its customers. QuickHub, the Bank's new, digital branch has been introduced at the beginning of May 2023, offering all products and services that are digitally available to customers at the tap of a button. Additionally, customers are now able to manage their Fixed Deposit accounts through digital channels by providing instructions for maturity. These include options such as changing the duration of their fixed deposit, increasing or decreasing capital and closing the account. Moreover, the customer experience during digital onboarding has been improved by providing the NFC technology during the ID verification process through passport.

The adoption of digital products and services continued to grow and gained momentum in the second quarter of 2023. As at the end of June 2023, 95.0% of the number of transactions involving deposits, cash withdrawals and internal/external transfers were performed through digital channels (up by 11.2 percentage points from 83.8% in June 2020). In addition, 83.2% of individual customers were digitally engaged (up by 10.8 percentage points from 72.4% in June 2020), choosing digital channels over branches to perform their transactions. As at the end of June 2023, active mobile banking users and active QuickPay users have grown by 15.0% and 25.1% respectively over the last 12 months. The highest number of QuickPay users to date was recorded in June 2023 with 186 thousand active users. Likewise, the highest number of QuickPay payments (in 2023) was recorded in June 2023 with 602 thousand transactions (up 32% compared to the prior year period).

Digital offerings via digital channels continued to enhance Group's sales further in the second quarter of 2023. During the second quarter of 2023, new lending via Quickloans reached €26 million (compared to new lending of €18 million for the first quarter of 2023) and totalled €44 million for the six months ended 30 June 2023. Digital deposits have also shown an increase of 33% compared to the prior year period, reaching €221 million at 30 June 2023. For the six months ended 30 June 2023, digital insurance sales, with two new products in mobile app (Motor & Home Insurance), amounted to €159 thousand (31 December 2022: €68 thousand).

Asset quality

Balance sheet de-risking was largely completed in 2022, marked by the completion of Project Helix 3 in November 2022 which refers to the sale of non-performing exposures with gross book value of approximately €550 million as at the date of completion. Project Helix 3 represented a further milestone in the delivery of one of the Group's strategic priorities of improving asset quality through the reduction of NPEs and delivering NPE ratio below 5%. As at 30 June 2023, the Group's NPE ratio stood at 3.6%.

The Group's priorities remain intact, maintaining high quality new lending with strict underwriting standards and preventing asset quality deterioration in this uncertain outlook.

Capital market presence

In June 2023, the Company successfully launched and priced an issue of €220 million Fixed Rate Reset Perpetual Additional Tier 1 Capital Securities (the 'New Capital Securities').

The issue was met with exceptional demand, attracting interest from approximately 240 institutional investors, with the final order book over 12 times over-subscribed and final pricing 62.5 basis points tighter than the initial pricing indication. This also reflects significant improvement in the credit spread to approximately 910 basis points compared to approximately 1,260 basis points for the previous AT1 issue in 2018 ('Existing Capital Securities').

Business Overview (continued)

Capital market presence (continued)

In July 2023, the Bank has 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 issuance was met with strong demand, attracting interest from more than 90 institutional investors, with a peak orderbook of €950 million and final pricing 37.5 basis points tighter than the initial pricing indication.

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 2022, the Company received a rating of AA (on a scale of AAA-CCC) in the MSCI ESG Ratings assessment.

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 articulate the delivery of its primary ESG targets and address regulatory expectations, a comprehensive ESG working plan has been established in 2022. The ESG working plan is closely monitored by the Sustainability Committee, the Executive Committee and the Board of Directors at frequent intervals.

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 plans to invest in energy efficient installations and actions as well as replace fuel intensive machineries and vehicles from 2023 to 2025, which would lead to approximately 5-10% reduction in Scope 1 and Scope 2 emissions by 2025 compared to 2021. The Bank 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 5% in Scope 1 - Mobile Combustion GHG emissions and 16% in Scope 2 - Purchased electricity GHG emissions in the six months ended 30 June 2023, compared to the six months ended 30 June 2022 due to new solar panels connected to energy network in 2022 and early 2023 as well as buildings abandonment as part of the digitalization journey. The Bank achieved an increase by 50% in renewable energy production, from 79,424 Kwh to 119,499 Kwh in the six months ended 30 June 2023 compared to the six months ended 30 June 2022 respectively.

The Bank is the first bank in Cyprus to join the Partnership for Carbon Accounting Financials (PCAF) in October 2022 and is following the recommended methodology for the estimation of the Financed Scope 3 emissions. The Group has estimated Financed Scope 3 GHG emissions relating to the loan portfolio based on PCAF standard and proxies. Following the estimation of Financed Scope 3 GHG emissions derived from its loan portfolio and in conjunction with the materiality assessment's results on climate and environmental risks the Bank will be able to identify the carbon-concentrated areas so as to take the necessary actions to minimise the environmental and climate impact associated with its loan portfolio by offering targeted climate friendly products and engaging with its customers. In 2023, following the identification of carbon-concentrated sectors and asset classes, the Group is in the process to set decarbonisation targets aligned with 1.5C climate scenario (Science based targets) which will assist in the formulation of the Group's strategy going forward.

Business Overview (continued)

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

Environmental Pillar (continued)

The Bank in 2022 launched a low emission vehicle loan product (either hybrid or electric) and is working to expand its range of environmentally friendly products further in 2023. The gross amount of environmentally friendly loans as at 30 June 2023 was €21.2 million compared to €20.9 million as at 31 December 2022.

Moreover, the Bank is making substantial progress in further integrating climate risk considerations into its risk management approach, as it tries to integrate climate related risk into its risk culture. The Bank, within the context of underwriting processes, is currently in the process of incorporating the assessment of ESG and climate matters and amending its Policies and Procedures in such a way that potential impact from ESG and climate is reflected in the fundamental elements of the creditworthiness assessment. The Bank designed ESG questionnaires for key selected sectors which will then be leveraged for deriving an ESG classification. In addition, the Bank is in the process to enhance its risk quantification methodology to assess how the portfolio is affected by Climate and Environmental (C&E) risks and will be incorporating the above elements into the stress testing infrastructure.

During 2023 in order to enhance the awareness and skillset towards the ESG, the Group performed trainings to the Board of Directors and Senior Management. In addition, the internal communication channels are enhanced by establishing an ESG internal portal and launching Green@work which provides tips on energy efficiency actions at work. Early in 2023 the Bank launched a campaign on new Visa Debit cards produced from recyclable plastic extracted from the ocean. The campaign aims to inform the public on the level of water contamination from plastic and the impact on life below water.

Social Pillar

At the centre of the Group's leading social role lie its investments in the Bank of Cyprus Oncology Centre (with an overall investment of approximately €70 million since 1998, whilst 60% of diagnosed cancer cases in Cyprus are being treated at the Centre), the work of SupportCY Network, which was developed in 2020, the contribution of the Bank of Cyprus Cultural Centre in promoting the cultural heritage of the island, and the Work of IDEA Innovation Centre. The Cultural Centre undertook a number of innovative projects such as 'AISTHISEIS' - Multi sensory museum experience for people with disabilities as well as the ReInHerit program facilitating innovation and research cooperation between European museums and heritage continuing also into 2023, with 16,542 people participating in events at the Cultural Foundation between January to June 2023. The IDEA Innovation Centre, invested approximately €4 million in start-up business creation since its incorporation, supported creation of 89 new companies to date, and provided support to 210+ entrepreneurs through its Startup program since incorporation. Staff have 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 2023, the Bank's employees attended 31,012 hours of trainings. In addition, in 2023 the Group launched the BoC Academy to offer up-skilling short courses for employees. Moreover, the Group continues its emphasis on staff wellness into 2023 by offering webinars, team building activities and family events with sole purpose to enhance mental, physical, financial and social health.

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 of prudent and effective controls, 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 robust 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.

Business Overview (continued)

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

Governance Pillar (continued)

The Board composition of the Company and the Bank is diverse, with 44% of the Board members being female as at 30 June 2023. The Board displays a strong skillset stemming from broad international experience. Moreover, the Group aspires to achieve a representation of at least 30% women in Group's management bodies (Defined as the EXCO and the Extended EXCO) by 2030. As at 30 June 2023, there is a 27% representation of women in Group's management bodies and a 40% representation of women at key positions below the Extended EXCO level (defined as positions between Assistant Manager and Manager).

Ukrainian crisis

The economic environment has evolved rapidly since February 2022 following Russia's invasion in Ukraine. In response to the war in Ukraine, the EU, the UK and the US, in a coordinated effort joined by several other countries imposed a variety of financial sanctions and export controls on Russia, Belarus and certain regions of Ukraine as well as various related entities and individuals. As the war is prolonged, geopolitical tension persists and inflation remains elevated, impacted by soaring energy prices and disruptions in supply chains. This high inflation weighs on business confidence and consumers' behaviour. In this context, the Group is closely monitoring the developments, utilising dedicated governance structures including a Crisis Management Committee as required and has assessed the impact the crisis has on the Group's operations and financial performance.

Direct impact

The Group does not have any banking operations in Russia or Ukraine, following the sale of its operations in Ukraine in 2014 and Russia in 2015. The Group has run down its legacy net exposure to less than €1 million as at 30 June 2023 in Russia through write-offs and provisions.

The Group has no exposure to Russian bonds or banks which are subject to sanctions.

The Group has limited direct exposure with loans related to Russia and Belarus, representing 0.3% of total assets or less than 1% of net loans as at 30 June 2023. The net book value of these loans stood at €81 million as at 30 June 2023, of which €74 million are performing, whilst the remaining were classified as NPEs well before the current crisis. The portfolio is granular and secured mainly by real estate properties in Cyprus.

Customer deposits related to Russian and Belarusian customers account for only 4% of total customer deposits as at 30 June 2023. This exposure is not material, given the Group's strong liquidity position. The Group operates with a significant surplus liquidity of €7.7 billion (LCR ratio of 316%) as at 30 June 2023.

Since 2014 the Bank, has engaged in a very demanding and rigorous anti-financial crime remediation programme. It fully adheres to all relevant UN, EU, USA and UK sanction frameworks and has implemented additional measures to monitor a complicated sanctions environment including systemic enhancements, specialised training and revision of risk appetite. As a result, the Bank has effectively terminated the relationship with professional intermediaries introducing customers to the Bank. Additionally, approximately 25,900 customer relationships were terminated and approximately 12,000 potential new customer relationships were suspended solely on compliance reasons (eg: KYC, or AML) in the years 2015-2022.

Indirect impact

Although the Group's direct exposure to Russia or Belarus is limited, the crisis in Ukraine had a negative impact on the Cypriot economy, mainly arising from the tourism and professional services sectors, increasing energy prices fuelling inflation and disruptions to global supply chains. During the first six months of 2023 the performance of the tourism sector was strong and represented 99% of 2019 respective levels, despite the sizeable loss of tourist arrivals from Russia and Ukraine. To date, tourist activity is recovering to pre-pandemic levels. The Group continues to monitor exposures in sectors likely impacted by the prolonged geopolitical uncertainty and persistent inflationary pressures and remains in close contact with customers to offer solutions as necessary. 

Cyprus has no energy dependence on Russia as it imports oil from Greece, Italy and the Netherlands; however it is indirectly affected by pricing pressures in the international energy markets. The focus on renewables increases, and a steady increase in contribution from renewables is noted.

Business Overview (continued)

Ukrainian crisis (continued)

Indirect impact (continued)

Overall, the Group has limited impact from its direct exposure, while any indirect impact depends on the duration and severity of the crisis and its impact on the Cypriot economy.

The Group continues to closely monitor the situation, taking all necessary and appropriate measures to minimise the impact on its operations and financial performance, as well as to manage all related risks and comply with the applicable sanctions.

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 these Consolidated Financial Statements.

The Directors have concluded that there are no material uncertainties which would cast 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, taking also into consideration, the Group's Financial Plan approved by the Board in February 2023 (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 2023 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 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) and insurance and re‑insurance risk, are some of the key significant risks the Group faces.  In addition, key risks facing the Group include operational risk which includes also compliance, legal and reputational risk, regulatory risk, information security and cyber risk, digital transformation risk, technology risk, climate risk as well as business model and strategic risk. 

Information relating to the principal risks the Group faces and risk management is set out in Notes 30 to 32 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 2023. In addition, in relation to legal risk arising from litigations, investigations, claims and other matters, further information is disclosed in Note 27 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 19 to the Consolidated Condensed Interim Financial Statements.

Details of the financial instruments and hedging activities of the Group are set out in Note 16 of the Consolidated Condensed Interim Financial Statements. Further information on financial instruments is also presented in Notes 30-31 of the Consolidated Condensed Interim Financial Statements.

Going concern (continued)

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

The Group 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 the 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 2023.

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 to the Consolidated Condensed Interim Financial Statements.

The invasion of Russia in Ukraine and the sanctions imposed on Russia raised new challenges for the Group and the developments are closely monitored. The Group's direct exposure is limited, however any indirect impact will depend on the duration and severity of the crisis in Ukraine and its impact on the Cypriot economy, mainly due to a negative impact on the tourism sector, the increasing energy prices resulting in inflationary pressures and disruptions to global supply chains. Further disclosures are provided in 'Business Overview' and 'Operating Environment' sections of the Interim Management Report.

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 or which the Group does not consider significant, but which may become significant. The challenging conditions in global markets arise due to factors including the Ukraine-Russian war, high interest rate environment, inflationary pressures, 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 as many of these risks are outside of the Group's control.

Events after the reporting date

In July 2023, BOC PCL issued a €350 million senior preferred note (the 'Notes') under the EMTN Programme. 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, BOC PCL 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 of the Notes. If the Notes are not redeemed by BOC PCL, 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 409.5 basis points, payable quarterly in arrears. The Notes are listed on the Luxembourg Stock Exchange's Euro MTF market. The Notes comply with the criteria for the minimum requirement for own funds and eligible liabilities (MREL) and contribute towards BOC PCL's MREL requirements.

No other significant non adjusting events have taken place since 30 June 2023.

Dividends

Based on the 2022 SREP decision, effective from 1 January 2023, 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 April 2023, the Company obtained the approval of the European Central Bank to pay a dividend. Following this approval, the Board of Directors of the Company recommended to the shareholders for approval at the Annual General Meeting ('AGM') on 26 May 2023, a final dividend of €0.05 per ordinary share in respect of the earnings of the year ended 31 December 2022 ('Dividend'). The AGM on 26 May 2023 declared a final dividend of €0.05 per share. The Dividend amounted to €22,310 thousand in total and is equivalent to a payout ratio of 14% of the financial year 2022 recurring profitability adjusted for the AT1 coupon or 31% based on the financial year 2022 profit after tax (as reported in the 2022 Annual Financial Report).

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 2023, 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 2023; 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

08 August 2023

 

 Risk and Capital Management Report 30 June 2023

One of the Group's main priorities is to continually improve its risk management framework so as 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 so as to allow the Group to identify, assess, monitor and control risk.

1.                Risk Management Framework (RMF)

The Board of Directors, through the Risk Committee, 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 by 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 level by the Executive Committee (EXCO), Asset and Liability Committee (ALCO), Asset Disposal Committee (ADC), Technology Committee (TC), Sustainability Committee (SC) and the Credit Committees.

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 Board and Executive 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, certain roles within the Group 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.

Accountability and Authority

The RMD operates independently and this is achieved through:

-        Organisational independence from the activities assigned to be controlled

-        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 communication both during official RC meetings as well as unofficial meetings and discussions

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 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)

RMD is responsible for the risk management across the Group companies.

1.                Risk Management Framework (continued)

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 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.

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 (continued)

1.4              Three Lines of Defence (continued)

1.                Risk Management Framework (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 capital, liquidity, earnings, funding and other risks.

The RAS considers both principal and other risks (financial and non-financial), which indicatively include the following:

Financial Risks	Non-Financial Risks
Capital	Transaction Processing & Execution Risk
Earnings	Compliance Risk
Credit Risk	Reputational Risk
Market Risk	Legal Risk
Interest Rate Risk in the Banking Book (IRRBB)	Information Security and Cyber Risk
Concentration Risk	Technology Risk
Funding & Liquidity Risk	Outsourcing/3rd Party Risk
Climate & Environmental (C&E) risks

Risk appetite and Financial Plan interaction

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 devised. The interplay between these processes provides for an iterative cycle of feedback during which RAS indicators, with minimum regulatory requirements, act as a backstop to the Financial Plan while for other indicators the Financial Plan provides input for risk tolerance setting. Furthermore, every revision of the Group Financial Plan (as well as different scenarios run under the Group Financial Plan) and/or Reforecast exercises run, are tested to ensure they are within the Group's risk appetite.

Risk Appetite Dashboard monitoring

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

Where a breach occurs, the Risk Appetite Framework provides the necessary escalation process to analyse the materiality and nature of the breach, notify the appropriate authorities, and decide the necessary remediation actions.

1.                Risk Management Framework (continued)

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.

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 assess Group's resilience and capital and liquidity adequacy, through the use of a range of scenarios, 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 the 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 through a top-down approach.

If the stress testing scenarios reveal vulnerability to a given set of risks, management makes recommendations to the Board, through 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:

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

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

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

1.                Risk Management Framework (continued)

1.7              Risk measurement and reporting (continued)

Other business and risk type specific stress tests

The Market Risk 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 demonstrate that 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 2022 ICAAP was submitted to the ECB on 31 March 2023. The 2022 ICAAP 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 a baseline and stressed conditions scenarios.

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 quarterly review assessment identifies whether the Group has an adequate liquidity buffer to cover the stress outflows.

The 2022 ILAAP was submitted to the ECB on 31 March 2023. The 2022 ILAAP 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 scenarios.

The Group participated in the ECB's inaugural climate risk stress test in 2022 

The exercise served as a learning exercise for banks to introduce climate risk into risk management as a qualitative part of the Supervisory Review and Evaluation Process (SREP).

1.8.                                                                     2023 ECB SREP Stress Test

The Group participated in the ECB SREP Stress Test of 2023. The stress test measures how banks would fare in a hypothetical adverse economic scenario, which assumes a prolonged period of low growth, elevated interest rates and high inflation. It is not a 'pass-or-fail' exercise, and no threshold is set to define the failure or success of banks. Instead, the findings of the stress test will feed into the ongoing supervisory dialogue, in which supervisors explain their assessment to banks and discuss potential measures to address any shortcomings.

The ECB published on 28 July 2023 the results of the stress test. As per the relevant ECB press release 'Capital depletion at the end of the three-year horizon was lower than in previous stress tests. This was mainly due to banks overall being in better shape going into the exercise, with higher-quality assets and stronger profitability. 

1.8.             2023 ECB SREP Stress Test (continued)

By its standard procedures, the ECB considers the quantitative performance in the adverse scenario as an input when reconsidering the level of the Pillar II Guidance in its 2023 SREP assessment and the qualitative performance as one aspect when holistically reviewing the Pillar II Requirement. The stress test was based on a Static balance sheet approach, thus using the Group's financial and capital position as at 31 December 2022 as a starting point. The results for the Group, as published by the ECB, are presented below:

		High-level individual results by range			Scenario sensitivities: 2023-2025 projections
		adverse scenario, FL			(delta over total REA FL 2022)
Institution	Sample	Maximum CET1 ratio (FL) depletion by ranges	Minimum CET1 ratio (FL) by ranges	Minimum Tier 1 leverage ratio (FL) by ranges	Delta projected NII adverse vs. baseline scenario (in %)	Delta projected LLPs adverse vs. baseline scenario (in %)	Delta projected profit/ loss adverse vs. base-line scenario (in %)
Bank of Cyprus Holdings Public Limited Company	SSM	300 to 599 bps	8%<CET1R < 11%	5%<LR < 6%	-3.7%	4.4%	-9.0%

In terms of the Group's results, the capital depletion of the CET1 FL ratio over the 3-year horizon in the adverse scenario is in the range of 300 to 599 basis points as indicated above, compared to 600 to 899 basis points in the 2021 stress test, and compares well with the average 480 basis points for the 98 ECB stress-tested banks.

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.

The Group enhances its risk control culture and increases the awareness of its employees on risk issues through ongoing staff training (both through physical workshops and through e-learning).

4.                Principal Risks

As part of its business activities, the Group faces a variety of risks, the most significant of which include Credit risk, Market risk, Liquidity and Funding risk, and Operational risk. Additionally, further risks are also faced by the Group. 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.

4.1              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.

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

·           Issuer risk: the risk to earnings 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 investment or the presence of the Group to a specific country.

4.                Principal Risks (continued)

4.1              Credit Risk (continued)

Further information and analysis relating to credit risk is set out in Note 30 of the Consolidated Condensed Interim Financial Statements for the six months ended 30 June 2023 (the Consolidated Financial Statements) included within the Interim Financial Report for 2023. Furthermore, the Group's significant judgements, estimates and assumptions regarding the determination of the level of provisions for impairment/expected credit losses (ECLs) are set out in Note 6 'Significant and other judgements, estimates and assumptions' of the Consolidated Financial Statements.

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

-           Develops 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 Committees / the RC / the Board from an independent credit risk perspective and prepares recommendations with suggestions to improve credit proposals and mitigate credit risk

-        Participates in the Credit Committees of BOC PCL

-        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 around credit risk. Furthermore, a Limits framework is in place in relation to the credit granting process and its structure and also the general rules are documented in the Group's Lending Policy. Relevant circulars and guidelines are in place that provide limits and parameters for the approval of credit applications and related credit limits. The Group currently has Credit Committees which are comprised of members from various Group divisions outside RMD to ensure independence of opinion. Applications falling outside the approval limits of these Credit Committees 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.

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.

4.                Principal Risks (continued)

4.1              Credit Risk (continued)

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. In the case of a breach, an automatic e-mail is sent to the dealers and Market & Liquidity Risk officers.

With the aim of identifying credit risk at an early stage, a number of key reports are prepared for the EXCO and / 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 fulfill 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.

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

4.                Principal Risks (continued)

4.1              Credit Risk (continued)

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.

	Gross loans and advances to customers				Accumulated impairment, accumulated negative changes in fair value due to credit risk and provisions
30 June 2023	Group gross customer  loans and advances1,2	Of which: NPEs	Of which exposures with forbearance measures		Accumulated impairment, accumulated negative changes in fair value due to credit risk and provisions	Of which: NPEs	Of which exposures with forbearance measures
			Total exposures with forbearance measures	Of which: NPEs			Total exposures with forbearance measures	Of which: NPEs
	€000	€000	€000	€000	€000	€000	€000	€000
Loans and advances to customers
General governments	42,617	-	-	-	34	-	-	-
Other financial corporations	240,481	2,526	23,323	2,182	5,736	1,958	2,011	1,890
Non-financial corporations	5,131,534	131,992	473,886	84,842	101,605	71,610	55,060	49,547
Of which: Small and Medium sized Enterprises3 (SMEs)	3,265,501	72,343	217,817	25,610	50,836	30,680	12,894	9,054
Of which: Commercial real estate3	3,895,018	109,623	436,537	76,672	79,255	60,639	50,963	46,452
Non-financial corporations by sector
Construction	526,409	8,380			10,285
Wholesale and retail trade	901,834	18,565			16,851
Accommodation and food service activities	1,207,745	20,699			10,881
Real estate activities	1,073,133	16,507			17,030
Manufacturing	379,347	7,316			4,966
Other sectors	1,043,066	60,525			41,592
Households	4,791,088	234,687	233,781	119,784	90,526	64,478	40,943	32,950
Of which: Residential mortgage loans3	3,776,027	193,706	205,936	104,043	58,323	44,227	33,356	26,487
Of which: Credit for consumption3	571,712	33,935	26,402	17,407	23,584	14,604	7,138	6,242
Total on-balance sheet	10,205,720	369,205	730,990	206,808	197,901	138,046	98,014	84,387

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

  ² The 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.

  ³ The 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)

	Gross loans and advances to customers				Accumulated impairment, accumulated negative changes in fair value due to credit risk and provisions
31 December 2022	Group gross customer  loans and advances4,5	Of which: NPEs	Of which exposures with forbearance measures		Accumulated impairment, accumulated negative changes in fair value due to credit risk and provisions	Of which: NPEs	Of which exposures with forbearance measures
			Total exposures with forbearance measures	Of which: NPEs			Total exposures with forbearance measures	Of which: NPEs
	€000	€000	€000	€000	€000	€000	€000	€000
Loans and advances to customers
General governments	39,766	-	-	-	25	-	-	-
Other financial corporations	186,281	3,202	11,665	2,825	6,008	2,332	2,453	2,250
Non-financial corporations	5,134,784	144,522	950,499	91,100	100,265	69,212	53,940	44,957
Of which: Small and Medium sized Enterprises6 (SMEs)	3,492,414	84,493	449,891	33,140	53,939	33,882	17,643	11,683
Of which: Commercial real estate6	3,975,290	120,445	895,971	80,980	76,385	58,414	47,047	41,152
Non-financial corporations by sector
Construction	549,921	11,949			13,319
Wholesale and retail trade	909,438	20,783			15,907
Accommodation and food service activities	1,164,979	20,824			9,543
Real estate activities	1,108,581	20,281			19,738
Manufacturing	392,843	9,429			4,033
Other sectors	1,009,022	61,256			37,725
Households	4,770,863	260,629	290,556	143,140	72,144	54,643	37,362	32,087
Of which: Residential mortgage loans6	3,785,834	220,354	253,794	125,994	45,805	37,616	29,759	25,751
Of which: Credit for consumption6	547,490	37,622	42,719	21,235	20,355	14,628	8,543	7,486
Total on-balance sheet	10,131,694	408,353	1,252,720	237,065	178,442	126,187	93,755	79,294

  ⁴ Excluding loans and advances to central banks and credit institutions.

  ⁵ The 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.

  ⁶ The 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 (IRR);

b.   Currency / foreign exchange 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 31 of the Consolidated Financial Statements.

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 two different variable 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 capital and as a percentage of Group net interest income (when positive). There are different limits for Euro and USD. 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 monitoring is provided to the Group ALCO.

Group Treasury is responsible for managing the interest rate exposure of the Group. Corrective actions are taken by Treasury with a view of minimizing the risk exposure and in any event to restrict exposure within limits (unless an ALCO/RC approval is obtained).

Currency/foreign exchange risk

Currency/foreign exchange 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.

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 CBC. 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.

4.                Principal Risks (continued)

4.2              Market Risk (continued)

Currency/foreign exchange risk (continued)

Group Treasury 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 is also responsible for the hedging for 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 has an outstanding equity and fund portfolio in its books. 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 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. The RC is also updated on a quarterly basis. Analysis of the positions the Group maintains as at 30 June 2023 is presented in Note 15 of the Consolidated 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. Market and Liquidity Risk Department is responsible for setting and calibrating bond related limits.  Limit monitoring is performed on a daily basis. Any breaches are reported following the escalation process depending on the limit breach.

The debt security portfolio is management by Group Treasury 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 approved through the Financial Plan, 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 2023 is presented in Note 15 of the Consolidated Financial Statements.

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 changes in the fair value of property which is held either for own use or as stock of property or as investment property.  Stock of property is predominately acquired in exchange of debt and is intended to be disposed off in line with the Group's strategy. 

4.                Principal Risks (continued)

4.2              Market Risk (continued)

Property Price Risk (continued)

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 the repossessed portfolio including employing appropriate disposal strategies.

˗       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 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 all available reference points, such as 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 ones (e.g. MREL).

Further information relating to Group risk management in relation to liquidity and funding risk is set out in Note 32 of the Consolidated 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 €3,661,160 thousand as at 30 June 2023 (31 December 2022: €3,631,269 thousand). 

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 2023, the Group held €19,630,696 thousand (31 December 2022: €19,468,233 thousand) of unencumbered assets that can potentially be pledged and can be used to support potential liquidity funding needs and €846,459 thousand (31 December 2022: €659,311 thousand) of unencumbered assets that are not readily available to be pledged for funding requirements in their current form.

4.                Principal Risks (continued)

4.3              Liquidity and Funding Risk (continued)

4.3.1          Encumbered and unencumbered assets (continued)

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:

30 June 2023	Encumbered	Unencumbered		Total
	Pledged as collateral	Which can potentially be pledged	Which are not readily available to be pledged
	€000	€000	€000	€000
Cash and other liquid assets	69,345	8,932,649	557,247	9,559,241
Investments	257,147	3,056,286	16,274	3,329,707
Loans and advances to customers	3,334,668	6,442,025	231,126	10,007,819
Property	-	1,199,736	41,812	1,241,548
Total on-balance sheet	3,661,160	19,630,696	846,459	24,138,315

31 December 2022
Cash and other liquid assets	73,557	9,391,365	307,147	9,772,069
Investments	284,343	2,393,796	25,564	2,703,703
Loans and advances to customers	3,273,369	6,397,745	282,138	9,953,252
Property	-	1,285,327	44,462	1,329,789
Total on-balance sheet	3,631,269	19,468,233	659,311	23,758,813

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 21 and 32 of the Consolidated Financial Statements for the six months ended 30 June 2023 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.

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.

4.                Principal Risks (continued)

4.3              Liquidity and Funding Risk (continued)

4.3.1          Encumbered and unencumbered assets (continued)

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. Non-current assets held for sale are also reported as not readily available to be pledged.

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 2023 and 31 December 2022 are as follows:

30 June 2023	Carrying value of encumbered investments	Fair value of encumbered investments	Carrying value of unencumbered investments	Fair value of unencumbered investments
	€000	€000	€000	€000
Equity securities	-	-	148,216	148,216
Debt securities	257,147	239,317	2,924,344	2,858,123
Total investments	257,147	239,317	3,072,560	3,006,339

31 December 2022
Equity securities	-	-	194,841	194,841
Debt securities	284,343	265,696	2,224,519	2,150,383
Total investments	284,343	265,696	2,419,360	2,345,224

4.3.2          Liquidity regulation

The Group has 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 has to 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 2023, the Group was in compliance with all regulatory liquidity requirements. As at 30 June 2023, the Group's LCR stood at 316% (compared to 291% at 31 December 2022) and the Group's NSFR stood at 165% (compared to 168% at 31 December 2022).

4.                Principal Risks (continued)

4.3              Liquidity and Funding Risk (continued)

4.3.3          Liquidity reserves

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

Composition of the liquidity reserves	30 June 2023			31 December 2022
	Internal Liquidity Reserves	Liquidity reserves as per LCR Delegated Regulation (EU) 2015/61 LCR eligible		Internal Liquidity Reserves	Liquidity reserves as per LCR Delegated Regulation (EU) 2015/61 LCR eligible
		Level 1	Level 2A & 2B		Level 1	Level 2A & 2B
	€000	€000	€000	€000	€000	€000
Cash and balances with central banks	8,943,425	8,943,425		9,379,888	9,379,888	-
Placements with banks	263,698			55,825	-	-
Liquid investments	2,476,326	2,021,659	331,111	1,827,698	1,344,032	214,800
Available ECB Buffer	57,509			147,844	-	-
Total	11,740,958	10,965,084	331,111	11,411,255	10,723,920	214,800

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 and are shown at market values net of haircuts based on ECB methodology and haircuts.

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

In March 2022, the ECB announced the steps for the gradual phasing out of the temporary pandemic collateral easing measures implemented during COVID-19 breakout. The gradual phasing out is scheduled to be concluded in three steps having started from July 2022 and will be completed by March 2024 and gives banks time to adapt to the adjustments to the collateral framework. In the first step in July 2022, the ECB halved the temporary reduction in collateral valuation haircuts across all assets from the previous 20% adjustment to 10%. In the second step, in June 2023, the ECB expects to implement a new valuation haircut schedule based on its pre-pandemic risk tolerance level for credit operations, phasing out the temporary reduction in collateral valuation haircuts completely. In the third and final step, in March 2024, the ECB will, in principle, phase out the remaining pandemic collateral easing measures.

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:

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)

A 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 a full 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 could actually or potentially have incurred a loss including circumstances whereby the Group could have incurred a loss, but in fact made a gain, as well as, incidents resulting in potential 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 2023, 406 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 the first six months of 2023.

Key Risk Indicators (KPIs)

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

Ongoing activities/initiatives towards further enhancements of Operational Risk Management (ORM), involved inter alia the following: (i) provision of a fraud risk awareness seminar to staff and top-management, (ii) establishment of the specialised Fraud Risk Assessment Framework, going beyond the current Risk Control Self-Assessment (RCSA) process, and (iii) ongoing reviews and enhancements of the internal ORM policies and procedures as well as the ORM database. As a result of the customers' accelerated shift towards digital channels, the Fraud Risk Management unit further strengthened the Group's current external fraud prevention controls and framework.

4.                Principal Risks (continued)

4.4              Operational Risk (continued)

4.4.2          Third-Party Risk Management

Third-Party and Outsourcing risk can arise from a third party's failure to perform 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.

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 or annually.

5.                Other principal risks and uncertainties

In addition to the most significant 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 main emerging risks currently considered by the Group are also stated below.

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.

5.1              Business Model and Strategic Risk

Business model and strategic risk arises from changes in the external environment including economic trends and competition. The Group faces competition from domestic banks, international banks and financial technology companies operating in Cyprus and in other parts of Europe and insurance companies offering savings, insurance and investment products. Also, a continuing deterioration of the macroeconomic environment stemming from the impact of high inflation and the resultant interest hikes or other factors could lead to adverse financial performance which could deplete capital resources.

Furthermore, the Group's business and performance are materially dependent on the economic conditions in, and future economic prospects of, Cyprus where the Group's operations and earnings are predominantly based and 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 to be within the Group's Risk bearing capacity. The strategy is monitored closely on a regular basis. Furthermore, the Group remains ready to explore opportunities that complement its strategy including diversification of income. As the Group's business model is pivotal to strategic risk, it has to be viable and sustainable and produce results that are consistent with its annual targets.

5.                Other principal risks and uncertainties (continued)

5.1              Business Model and Strategic Risk (continued)

The Group manages business model risk within its Risk Appetite Framework, by setting limits in respect of measures such as financial performance, portfolio performance and concentration and capital levels. At a more operational level, the risk is mitigated through periodic monitoring of variances to the Financial Plan. During the year, periodic forecast updates for the full year financial outcome are produced. The frequency of forecast updates during each year will be determined based on prevailing business and economic conditions.  Performance against plan is monitored at a Group and business line level on a monthly basis 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 and takes mitigating actions were necessary. An internal stress testing framework (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 which are beyond the control of the Group, including developments in the European Union and in the global economy, or in specific countries with which Cyprus maintains close economic and investment links can have a significant impact on domestic economic activity. A number of macro and market related risks, including weaker economic activity, the higher interest rate environment and higher competition in the financial services industry, could negatively affect the Group's business environment, results and operations. 

In the continuing war in Ukraine the preannounced Ukrainian counter offensive has started and is expected to lead to an escalation of the fighting, but it is unlikely to result in any significant recapture of territory or alter the strategic balance on the ground. The war is seen to be settling to a stalemate and holding the threat of renewed supply disruptions and heightened shortages. Ukraine's bid to join NATO is unlikely to receive material support from other member states and as the counter offensive is shown to have limited potential, voices for a ceasefire and peace negotiations will increase.

In Cyprus, financial sector exposure to foreign markets has been reduced since the 2013 banking crisis. Although, there have been distinct improvements in Cyprus' risk profile after the banking crisis, substantial risks remain. Cyprus' overall country risk is a combination of sovereign, currency, banking, political and economic structure risk, influenced by external developments with substantial potential impact on the domestic economy. Given the above, the Group recognises that unforeseen political events can have negative effects on the Group's activities, operating results, and market position.

Economic growth will continue to slow in the third and subsequent quarters, but there will not be a recession this year at least.

Interest rates in the US and the eurozone will peak in the third quarter as headline inflation continues to decline while core inflation proves stickier. Amidst a high interest rate environment, financial stability risks will remain elevated.

The BRICS summit in August will likely make progress on the incorporation of additional members and the establishment of a bloc-backed reserve currency. Both of which seek to reduce the dominance of the dollar and Western institutions in the long run. The August summit could be the most consequential for the bloc in years as China, Russia and others aim to boost membership and coordination on key issues. While the summit itself may not result in the immediate entry of new members or an agreement on a reserve currency, there will probably be precursor deals that could accelerate those two important long-term trends.

5.                Other principal risks and uncertainties (continued)

5.2              Geopolitical Risk (continued)

The Group is continuously monitoring the current affairs and the impact of the forecasted macroeconomic conditions on the Group's strategy to proactively manage emerging risks. Where necessary, bespoke solutions are offered to the 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 (Note 27 of the Consolidated Financial Statements for the six months ended 30 June 2023). 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 EXCO and the Board.

5.4              Technology Risk

Technology risk arises from system downtimes impacting customer service which may be due to inadequate, failed, or unavailable systems, use of outdated, obsolete and unsupported systems, or systems which do not fully support the requirements of business.

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 Digital Transformation.  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.

5.5              Digital Transformation Risk

Digital transformation risk arises 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. 

5.                                                                        Other principal risks and uncertainties (continued)

5.5              Digital Transformation Risk (continued)

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 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.

There is strong commitment by the management of the Group for an on-going and transparent dialogue with the Regulators (jointly supervised by the ECB and the CBC and others, such as CySec and CSE). The Regulatory Steering Group, chaired by the CEO and consisting of executive management, monitors the regulatory agenda, through the Regulatory Affairs Department, 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.

5.                Other Principal Risks and uncertainties (continued)

5.7              Regulatory Compliance Risk (continued)

Appropriate tools and mechanisms are in place for monitoring, escalating and reporting compliance activities 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 risk indicators,

˗           The use of reports warranting management attention, documenting material deviations between actual occurrences and expectations (an exceptions report) or situations requiring resolution (an issues log),

˗           Targeted trade surveillance, observation of procedures, desk reviews and/or interviewing relevant staff,

˗           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.

˗           Investigating and reporting to competent authorities' incidents of non-compliance with the CBC Directive within one month of identification and mitigating actions to prevent a recurrence of similar incidents within two months of identification of the incident.

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

5.8              Insurance risk and re-insurance risk

The Group, through its subsidiaries EuroLife Ltd ('EuroLife') and General Insurance of Cyprus Ltd ('GIC'), 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 GIC 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.                Other Principal Risks and uncertainties (continued)

5.9              Climate Risk 

Climate risk is a growing consideration 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.

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.

A dedicated ESG team, RMD as well as other resources have been mobilised across the Group and are engaged in various streams of work such as the measuring of the 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 2022 that form part of the Group's Annual Financial Report for 2022, 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 and 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).

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 and 50% in 2023) and advancing the application of prudential treatment of software assets as amended by CRR II (which came into force in December 2020). In addition, Regulation (EU) 2020/873 introduced a temporary treatment of unrealized gains and losses on exposures to central governments, to regional governments or to local authorities measured at fair value through other comprehensive income which the Group elected to apply and implemented from the third quarter of 2020. This temporary treatment was in effect until 31 December 2022.

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.

The 2021 Banking Package is subject to amendment in the course of the EU's legislative process; and its scope and terms may change prior to its implementation. In addition, 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.

6.                Capital management (continued)

The European Council's proposal on CRR and CRD was published on 8 November 2022. During February 2023, the European Parliament's ECON Committee voted to adopt Parliament's proposed amendments to the Commission's proposal, and the 2021 Banking Package is currently in the final stage of the EU legislative process. It is expected that the 2021 Banking Package will come in force on 1 January 2025; and certain measures are expected to be subject to transitional arrangements or to be phased in over time.

The CET1 ratio of the Group as at 30 June 2023 stands at 16.0% and the Total Capital ratio at 21.1% on a transitional basis. The ratios as at 30 June 2023 include reviewed profits for the six months ended 30 June 2023 and an accrual for an estimated final dividend at a payout ratio of 30% of the Group Adjusted Profit after tax for the period, which represents the low-end range of the Group's approved dividend policy. As per the latest SREP decision, any dividend distribution is subject to regulatory approval. Such dividend accrual does not constitute a binding commitment for a dividend payment nor does it constitute a warranty or representation that such a payment will be made. Group Adjusted Profit after tax 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. For Capital Requirements Regulation (CRR) purposes a payout of 50% of the Group's adjusted recurring profitability for the period, the high-end of the payout range, is prescribed, corresponding to a CET1 ratio of 15.6% and a Total Capital Ratio of 20.7% as at 30 June 2023.

Minimum CET1 Regulatory Capital Requirements	30 June 2023	2022
Pillar I - CET1 Requirement	4.50%	4.50%
Pillar II - CET1 Requirement	1.73%	1.83%
Capital Conservation Buffer (CCB)*	2.50%	2.50%
Other Systematically Important Institutions (O-SII) Buffer**	1.50%	1.25%
Countercyclical Buffer (CcyB)	0.02%	0.02%
Minimum CET1 Regulatory Requirements	10.26%	10.10%

* Fully phased in as of 1 January 2019

** Fully phased in as of 1 January 2023

Minimum Total Capital Regulatory Requirements	30 June 2023	2022
Pillar I - Total Capital Requirement	8.00%	8.00%
Pillar II - Total Capital Requirement	3.08%	3.26%
Capital Conservation Buffer (CCB)*	2.50%	2.50%
Other Systematically Important Institutions (O-SII) Buffer**	1.50%	1.25%
Countercyclical Buffer (CcyB)	0.02%	0.02%
Minimum Total Capital Regulatory Requirements	15.10%	15.03%

* Fully phased in as of 1 January 2019

** Fully phased in as of 1 January 2023

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.

6.     Capital management (continued)

In the context of the annual SREP conducted by the ECB in 2022 and based on the final SREP decision received in December 2022 effective from 1 January 2023, the P2R has been revised to 3.08%, compared to the previous level of 3.26%. The revised P2R includes a revised P2R add-on of 0.33%, compared to the previous level of 0.26%, relating to ECB's prudential provisioning expectations. The P2R add-on is dynamic and can vary on the basis of in-scope NPEs and level of provisioning. When disregarding the P2R add-on relating to ECB's prudential provisioning expectations, the P2R is reduced from 3.00% to 2.75%. As a result, the Group's minimum phased in CET1 capital ratio and Total Capital ratio requirements were reduced when disregarding the phasing in of the O-SII Buffer. The Group's minimum phased in CET1 capital ratio requirement was set at 10.26%, comprising a 4.50% Pillar I requirement, a P2R of 1.73%, the CCB of 2.50%, the O-SII Buffer of 1.50% (fully phased in on 1 January 2023) and the CcyB of 0.02%. The Group's minimum phased in Total Capital requirement was set at 15.10%, 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 P2R of 3.08%, the CCB of 2.50%, the O-SII Buffer of 1.50% and the CcyB of 0.02%. The ECB has also maintained the P2G unchanged.

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 capital position of the Group and BOC PCL as at 30 June 2023 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. The CcyB for the Group as at 30 June 2023 has been calculated at approximately 0.02%.

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. The new rate of 0.50% must be observed as 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 of each authorised credit institution incorporated in Cyprus. The said increase of the CcyB is effective as from 2 June 2024. Based on the above, the CcyB for the Group is expected to increase further.

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 and since November 2021 the O-SII Buffer has been set to 1.50%. This buffer was phased in gradually, having started from 1 January 2019 at 0.50%. The O-SII Buffer as at 31 December 2022 stood at 1.25% and was fully phased in on 1 January 2023.

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.

6.                Capital management (continued)

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

Regulatory capital	Group		BOC PCL
	30 June 20231	31 December 20223 (restated)	30 June 20232	31 December 20223 (restated)
	€000	€000	€000	€000
Transitional Common Equity Tier 1 (CET1)4	1,638,707	1,540,292	1,601,417	1,509,056
Transitional Additional Tier 1 capital (AT1)	228,250	220,000	228,250	220,000
Tier 2 capital (T2)	300,000	300,000	300,000	300,000
Transitional total regulatory capital	2,166,957	2,060,292	2,129,667	2,029,056
Risk weighted assets - credit risk5	9,245,884	9,103,330	9,229,649	9,150,831
Risk weighted assets - market risk	-	-	-	-
Risk weighted assets - operational risk	1,010,885	1,010,885	997,720	997,720
Total risk weighted assets	10,256,769	10,114,215	10,227,369	10,148,551
Transitional	%	%	%	%
Common Equity Tier 1 ratio	16.0	15.2	15.7	14.9
Total capital ratio	21.1	20.4	20.8	20.0
Leverage ratio	7.3	7.0	7.2	6.9
1. Includes reviewed profits for the six months ended 30 June 2023 and an accrual for dividend at a payout ratio of 30% of the Group Adjusted Profit after tax for the period, which represents the low-end range of the Group's approved dividend policy. As per the latest SREP decision, any dividend distribution is subject to regulatory approval. Such dividend accrual does not constitute a binding commitment for a dividend payment nor does it constitute a warranty or representation that such a payment will be made.  For Capital Requirements Regulation (CRR) purposes a payout of 50% of the Group's adjusted recurring profitability for the period, the high-end of the payout range, is prescribed, corresponding to a CET1 ratio of 15.6%, a Total Capital ratio of 20.7% and a Leverage ratio of 7.1% as at 30 June 2023. 2. Includes unaudited/un-reviewed profits for the six months ended 30 June 2023 and an accrual for dividend at a payout ratio of 30% of the Group Adjusted Profit after tax for the period, which represents the low-end range of the Group's approved dividend policy. As per the latest SREP decision, any dividend distribution is subject to regulatory approval. Such dividend accrual does not constitute a binding commitment for a dividend payment nor does it constitute a warranty or representation that such a payment will be made. For Capital Requirements Regulation (CRR) purposes a payout of 50% of the Group's adjusted recurring profitability for the period, the high-end of the payout range, is prescribed corresponding to a CET1 ratio of 15.3%, a Total Capital ratio of 20.4% and a Leverage ratio of 7% as at 30 June 2023. 3. The 2022 capital ratios as previously reported in the 2022 Annual Financial Report and 2022 Pillar III Disclosures have been restated following the approval by the ECB for the payment of a dividend in April 2023 and recommendation by the Board of Directors to the shareholders for approval at the Annual General Meeting on 26 May 2023, of a final dividend in respect of earnings for the year ended 31 December 2022 which amounts to an aggregate distribution of €22,310 thousand. 4. CET1 includes regulatory deductions, comprising, amongst others, intangible assets amounting to €27,227 thousand for the Group and €18,310, thousand for BOC PCL as at 30 June 2023 (31 December 2022: €30,421 thousand for the Group and €25,445 thousand for BOC PCL). As at 30 June 2023 an amount of €11,475 thousand, relating to intangible assets, is considered prudently valued for CRR purposes and is not deducted from CET1 (31 December 2022: €12,934 thousand). 5. Includes Credit Valuation Adjustments (CVA).

6.                Capital management (continued)

The capital ratios of the Group and BOC PCL as at the reporting date on a fully loaded basis are presented below:

Fully loaded	Group		BOC PCL
	30 June 20231,3	31 December 20224,5 (restated)	30 June 20232,3	31 December 20224,5 (restated)
	%	%	%	%
Common Equity Tier 1 ratio	15.9	14.5	15.6	14.1
Total capital ratio	21.1	19.6	20.8	19.3
Leverage ratio	7.3	6.7	7.1	6.5
1. Includes reviewed profits for the six months ended 30 June 2023 and an accrual for dividend at a payout ratio of 30% of the Group Adjusted Profit after tax for the period, which represents the low end range of the Group's approved dividend policy. As per the latest SREP decision, any dividend distribution is subject to regulatory approval. Such dividend accrual does not constitute a binding commitment for a dividend payment nor does it constitute a warranty or representation that such a payment will be made. For Capital Requirements Regulation (CRR) purposes a payout of 50% of the Group's adjusted recurring profitability for the period, the high end of the payout range, is prescribed corresponding to a fully loaded CET1 ratio of 15.5%, a fully loaded Total Capital ratio of 20.7% and a fully loaded Leverage ratio of 7.1% as at 30 June 2023. 2 Includes unaudited/un-reviewed profits for the six months ended 30 June 2023 and an accrual for dividend at a payout ratio of 30% of the Group Adjusted Profit after tax for the period, which represents the low end range of the Group's approved dividend policy. As per the latest SREP decision, any dividend distribution is subject to regulatory approval. Such dividend accrual does not constitute a binding commitment for a dividend payment nor does it constitute a warranty or representation that such a payment will be made. For Capital Requirements Regulation (CRR) purposes a payout of 50% of the Group's adjusted recurring profitability for the period, the high end of the payout range, is prescribed corresponding to a fully loaded CET1 ratio of 15.2%, a fully loaded Total Capital ratio of 20.4% and a fully loaded Leverage ratio of 7% as at 30 June 2023. 3 IFRS 9 fully loaded as applicable. 4 IFRS 9 and application of the temporary treatment of certain FVOCI instruments in accordance with Article 468 of CRR fully loaded as applicable. 5 The 2022 capital ratios as previously reported in the 2022 Annual Financial Report and 2022 Pillar III Disclosures have been restated following the approval by the ECB for the payment of a dividend in April 2023 and recommendation by the Board of Directors to the shareholders for approval at the Annual General Meeting on 26 May 2023, of a final dividend in respect of earnings for the year ended 31 December 2022 which amounts to an aggregate distribution of €22,310 thousand.

During the six months ended 30 June 2023, CET1 ratio was negatively affected mainly by the phasing in of IFRS 9 and other transitional adjustments on 1 January 2023, provisions and impairments, the payment of AT1 coupon, AT1 refinancing costs, other movements and the increase in risk-weighted assets and was positively affected by pre-provision income as well as the €50 million dividend distributed to BOC PCL in February 2023 by the life insurance subsidiary. As a result, the CET1 ratio (on a transitional basis) has increased by c.75 bps  during the six months ended 30 June 2023, whereas on a fully loaded basis the ratio has increased by c.150  bps.

In addition, a prudential charge in relation to the onsite inspection on the value of the Group's foreclosed assets is being deducted from own funds since June 2021, the impact of which is 17 bps on the Group's CET1 ratio as at 30 June 2023, decreased from 26bps on 31 December 2022 mainly due to impairment recognised during the period.

In June 2023, the Company successfully launched and priced an issue of €220 million Fixed Rate Reset Perpetual Additional Tier 1 Capital Securities (the 'New Capital Securities').

The proceeds of the issue of the New Capital Securities were on-lent by the Company to BOC PCL to be used for general corporate purposes. The on-loan qualifies as Additional Tier 1 capital for BOC PCL.

At the same time, the Company invited the holders of its outstanding €220 million Fixed Rate Reset Perpetual Additional Tier 1 Capital Securities callable in December 2023 to tender the previous AT1 issue in 2018 ('Existing Capital Securities') at a purchase price of 103% of the principal amount. As at 30 June 2023 Existing Capital Securities of a nominal amount of approximately €8 million remaining outstanding, are included in Tier 1 and Total Capital, the impact of which is c.8 bps on the Group's Total Capital Ratio as at 30 June 2023.

6.                Capital management (continued)

Transitional arrangements

The Group has elected in prior years to apply the 'static-dynamic' approach in relation to the transitional arrangements for the initial application of IFRS 9 for regulatory capital purposes, where the impact on the impairment amount from the initial application of IFRS 9 on the capital ratios is phased in gradually. The 'static-dynamic' approach allows for recalculation of the transitional adjustment periodically on Stage 1 and Stage 2 loans, to reflect the change of the ECL provisions within the transition period. The Stage 3 ECL remained static over the transition period as per the impact upon initial recognition.

The amount added each year for the 'static component' was decreasing based on a weighting factor until the impact of IFRS 9 was fully absorbed back to CET1 at the end of the five years, with the impact being fully phased-in (100%) on 1 January 2023. The cumulative impact on the capital position as at 31 December 2022 was 75%, with the impact being fully phased in (100%) on 1 January 2023.

Following the June 2020 amendments to the CRR in relation to the dynamic component a 100% add back of IFRS 9 provisions was allowed for the years 2020 and 2021, reducing to 75% in 2022, to 50% in 2023 and to 25% in 2024. This will be fully phased in (100%) by 1 January 2025. The calculation at each reporting period is against Stage 1 and Stage 2 provisions as at 1 January 2020, instead of 1 January 2018.

In relation to the temporary treatment of unrealized gains and losses for certain exposures measured at fair value through other comprehensive income, Regulation EU 2020/873 allows institutions to remove from their CET1 the amount of unrealized gains and losses accumulated since 31 December 2019, excluding those of financial assets that are credit impaired. The relevant amount was removed at a scaling factor of 100% from January to December 2020, reduced to 70% from January to December 2021 and to 40% from January to December 2022. The Group applied the temporary treatment from the third quarter of 2020.

Capital requirements of subsidiaries

The insurance subsidiaries of the Group, the General Insurance of Cyprus Ltd and Eurolife Ltd, comply with the requirements of the Superintendent of Insurance including the minimum solvency ratio. The regulated investment firm (CIF) of the Group, The Cyprus Investment and Securities Corporation Ltd (CISCO), complies with the minimum capital adequacy ratio requirements. From 2021 the new prudential regime for Investment Firms ('IFs') as per the Investment Firm Regulation (EU) 2019/2033 ('IFR') on the prudential requirements of IFs and the Investment Firm Directive (EU) 2019/2034 ('IFD') on the prudential supervision of IFs came into effect. Under the new regime CISCO has been classified as Non-Systemic 'Class 2' company and is subject to the new IFR/IFD regime in full. In February 2023, the activities of the regulated UCITS management company of the Group, BOC Asset Management Ltd, were absorbed by CISCO and BOC Asset Management Ltd was dissolved without liquidation. The payment services subsidiary of the Group, JCC Payment Services Ltd, complies with the regulatory capital requirements.

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 took immediate effect.

6.                Capital management (continued)

Minimum Requirement for Own Funds and Eligible Liabilities (MREL) (continued)

In February 2023, BOC PCL received notification from the Single Resolution Board (SRB) of the final decision for the binding MREL for BOC PCL, determined as the preferred resolution point of entry. As per the decision, the final MREL requirement was set at 24.35% of risk weighted assets and 5.91% of Leverage Ratio Exposure (LRE) (as defined in the CRR) and must be met by 31 December 2025. Furthermore, the binding interim  requirement of 1 January 2022 set at 14.94% of risk weighted assets and 5.91% of LRE must continue to be met. The own funds used by BOC PCL to meet the CBR are not eligible to meet its MREL requirements expressed in terms of risk-weighted assets. BOC PCL must comply with the MREL requirement at the consolidated level, comprising BOC PCL and its subsidiaries.

The MREL ratio⁷ as at 30 June 2023, calculated according to the SRB's eligibility criteria currently in effect and based on internal estimate, stood at 21.5% of RWAs and at 10.2% of LRE. In July 2023 BOC PCL proceeded with an issue of €350 million senior preferred notes (the 'Notes'). The Notes comply with the MREL criteria and expected to contribute towards BOC PCL's MREL requirements. When accounting for the Notes, BOC PCL's MREL ratio improves to 24.9% of RWA and 11.4% of LRE. The MREL ratio expressed as a percentage of risk weighted assets does not include capital used to meet the CBR requirement, which stood at 4.02% on 30 June 2023 (compared to 3.77% as at 31 December 2022), expected to increase further on 30 November 2023 following increase in CcyB from 0.00% to 0.50% of the total risk exposure amounts in Cyprus and to 1% from June 2024 as announced by Central Bank of Cyprus.

The MREL ratios as at 30 June 2023 include profits for the six months ended 30 June 2023 and an accrual for an estimated final dividend at a payout ratio of 30% of the Group Adjusted Profit after tax for the period, which represents the low-end range of the Group's approved dividend policy. For CRR purposes, a payout ratio of 50% of the Group's adjusted recurring profitability for the period, the high-end of the payout range of the Group's approved dividend policy is prescribed, corresponding to an MREL ratio expressed as a percentage of RWA of 21.1% and MREL ratio expressed as a percentage of LRE of 10.1% as at 30 June 2023; pro forma for the Notes issuance MREL ratio expressed as a percentage of RWA stands at 24.5% and MREL ratio expressed as a percentage of LRE stands at 11.3%.

When accounting for the Notes issued in July 2023, BOC PCL meets the final MREL requirement currently set by the SRB well ahead the compliance date of 31 December 2025. Acknowledging that the MREL requirement (amount and date) is subject to annual review by the regulator, BOC PCL continues to evaluate opportunities to optimise the build-up of its MREL.

  ⁷The MREL ratio as at 30 June 2023 includes an amount of approximately €8 million representing the nominal amount of securities remaining outstanding following the tender offer and open market purchases of the Existing Capital Securities. This amount contributes approximately 8 basis points to the MREL ratio expressed as a percentage of RWA and approximately 3 basis points to the MREL ratio expressed as a percentage of LRE.

 

END