Announcement. Group Financial Results for the quarter ended 31 March PDF

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Announcement Group Financial Results for the quarter ended 31 March 2014 Nicosia, 30 May 2014 Bank of Cyprus Group s CEO Statement: We have made significant progress in the implementation of our Restructuring
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Announcement Group Financial Results for the quarter ended 31 March 2014 Nicosia, 30 May 2014 Bank of Cyprus Group s CEO Statement: We have made significant progress in the implementation of our Restructuring Plan during the first quarter of 2014, and we continue to deliver against our strategic objectives. The first quarter of 2014 was the Group s first profitable quarter after seven consecutive loss-making quarters, with profit from continuing operations and profit after tax totalling 72 mn and 31 mn, respectively. The performance of the Cypriot operations, our core business, was significantly stronger than the Group s overall performance, supporting our efforts in shrinking to strength through the disposal of non-core operations. The balance sheet was deleveraged by 1 bn and the Common Equity Tier 1 capital (CET1) ratio increased to 10,6%. Loans in arrears for more than 90 days declined for the first time following sixteen consecutive quarterly increases. The integration of the ex-laiki business in Cyprus is on track and the IT migration is expected to be completed by early June The deleveraging process through specific, deliberate and welltimed actions is progressing ahead of plan. In the second quarter of 2014, the disposal of the Ukrainian operations, our investment in Romanian Banca Transilvania and of certain loans in Serbia have reduced the Group s risk profile, have further enhanced our liquidity by 350 mn and have had a 0,3 percentage points positive impact on the CET1 ratio. The Bank s improving liquidity position allowed us to release the 9-month decree deposits ahead of plan, with the vast majority of these deposits having been retained. Arresting asset quality deterioration, making progress on non-core disposals and maintaining capital ratios are core to building confidence in the Bank of Cyprus. The establishment of the Restructuring and Recoveries Division has ensured that we have a systematic approach to managing stressed and delinquent customer accounts. Our efforts to reduce our problem loan book should also be supported by the necessary changes to legislation that would prevent strategic defaults and would enhance our ability in engaging with clients, always within an appropriate Code of Conduct. The continuing recessionary environment continues to place pressure on the Bank s fundamentals and, while we were pleased to see an arresting in the deterioration trend of loans in arrears, we remain vigilant and cautious about the coming quarters. In terms of the macro picture in Cyprus, while current economic conditions remain challenging, there are encouraging signs. The recession has been shallower than expected, the ratings of the Republic of Cyprus have been upgraded and there has been a positive fourth review by the Troika. Through our relentless focus on asset quality, funding, capital and efficiency we aim to ensure that Bank of Cyprus restores its financial strength enabling it to support the recovery of the Cypriot economy. As the leading bank in Cyprus, Bank of Cyprus will benefit significantly from improving fundamentals and confidence in its home market. John Patrick Hourican, Group Chief Executive Officer 1 Group Profile Founded in 1899, Bank of Cyprus Group is the leading banking and financial services group in Cyprus. The Group provides a wide range of financial products and services which include retail and commercial banking, finance, factoring, investment banking, brokerage, fund management, private banking, life and general insurance. The Group operates through a total of 300 branches, of which 164 operate in Russia, 130 in Cyprus, 1 in Romania, 4 in the United Kingdom and 1 in the Channel Islands. Bank of Cyprus also has 5 representative offices in Russia, Ukraine, China and South Africa. The Bank of Cyprus Group employs staff worldwide. At 31 March 2014, the Group s Total Assets amounted to 29,4 bn and Total Equity was 2,7 bn. Notes to the Financial Results for the quarter ended 31 March 2014: Following the Eurogroup decisions to recapitalise Bank of Cyprus via a bail-in of depositors, the Bank was placed under resolution from 25 March 2013 until 30 July 2013, a period during which it was recapitalised and restructured in accordance with the following decrees issued by the Central Bank of Cyprus in its capacity as Resolution Authority: 1) Sale of the Greek banking and leasing operations as per the Sale of the Greek operations of Bank of Cyprus Public Company Ltd Decree of ) Acquisition of Laiki s operations as per the Sale of certain operations of Cyprus Popular Bank Public Co Ltd Decrees of ) Compensation for assets and liabilities acquired from Laiki as per the Bank of Cyprus Share Capital Issue for Compensation of Cyprus Popular Bank Public Co Ltd Decree of ) Recapitalisation of Bank of Cyprus as per the Bailing-in of Bank of Cyprus Public Company Limited Decrees of 2013 up to (No. 3). Unsecured deposits are also calculated pursuant to the provisions of the Decrees. 5) Acquisition of Laiki s branch operations in the UK as per the Sale of certain operations in the United Kingdom of Cyprus Popular Bank Public Co Ltd Decree of ) Disposal of the Bank s operations in Romania to Marfin Romania as per the Sale of certain operations in Romania of Bank of Cyprus Public Company Ltd Decree of Due to the above transactions, the figures and financial results of the Group are not comparable with past financial results, while the financial statements as at 31 March 2013 were not possible to publish since no reliable information was available for the three months ended 31 March 2013 due to the increased level of uncertainty and changes which were prevailing at the time of the Eurogroup events to March It is noted that the Bank has completed the fair valuation of the assets and liabilities acquired from Cyprus Popular Bank Public Co Ltd and has included final amounts and all the final adjustments on net assets of 7,1 mn were recognised retrospectively as if the accounting recognition of a business combination was completed on the acquisition date. In April 2014, the Group s activities in Ukraine were sold to Alfa Group. As a result, the Ukrainian operations are presented as discontinued operations. Comparatives have been re-presented to reflect the reclassification of the Ukrainian operations disposed on 18 April 2014, from continuing to discontinued operations. The Consolidated Financial Statements for the quarter ended 31 March 2014 are available at the Bank of Cyprus Public Company Ltd Registered Office (at 51 Stassinos Street, Ayia Paraskevi, Strovolos, P.O. Box 24884, 1398 Nicosia, Cyprus) and on the Group s website ( ). The Consolidated Financial Statements for the quarter ended 31 March 2014 have not been reviewed by the Bank s external auditors. The announcement and the presentation of the financial results for the quarter ended 31 March 2014 have been posted on the Group s website (Investor Relations). 2 A. Summary of Financial Results for the quarter ended 31 March 2014 Balance Sheet The Common Equity Tier 1 capital (CET1) ratio (calculated in accordance with CRD IV/CRR 1 ) was improved to 10,6% at 31 March 2014, compared to an adjusted for CRD IV/CRR CET 1 ratio of 10,5% at 31 December Taking into account the sale of the Ukrainian operations, the investment in Romanian Banca Transilvania and the loans in Serbia in the second quarter of 2014, there has been a 0,3 percentage points positive impact on the CET1 ratio. At 31 March 2014, gross loans and deposits were 26,3 bn and 14,1 bn respectively, with a net loans to deposits ratio of 151% (compared to 145% at 31 December 2013). Pro forma for the sale of the Ukrainian operations and the loans in Serbia, the net loans to deposits ratio is reduced to 148%. Emergency Liquidity Assistance (ELA) has been reduced to 9,51 bn at 31 March 2014, down from 9,56 bn at 31 December ECB funding totalled 1,4 bn at 31 March ELA was reduced by a further 270 mn in the second quarter of 2014 utilising funds from deleveraging. Loans in arrears for more than 90 days (90+ DPD) 2 declined by 1,9% during the first quarter of 2014 and totalled mn at 31 March 2014, compared to mn at 31 December 2013, and accounted for 48,6% of gross loans (90+ DPD ratio). The provision coverage ratio of 90+ DPD was improved to 39%, while taking into account tangible collateral, 90+ DPD are fully covered by provisions and tangible collateral. Although early to consider the reduction in 90+ DPD as a sustainable trend, 90+ DPD are showing signs of stabilisation going into the second quarter of 2014, while the new definition Non- Performing Loans 3 continue to rise. Income Statement Total income for the first quarter of 2014 was 340 mn, with net interest income (NII) at 267 mn and net interest margin (NIM) at 3,99%. Total income for the fourth quarter of 2013 was 310 mn, with NII at 268 mn and NIM at 3,80%. Total expenses for the first quarter of 2014 were 124 mn, 2% lower compared to the fourth quarter of 2013, and the cost to income ratio was 36% compared to 41% for the fourth quarter of Profit before impairments, restructuring costs and discontinued operations for the first quarter of 2014 was 216 mn, 17% higher compared to 184 mn for the fourth quarter of As from 1 January 2014, the new Capital Requirements Regulations (CRR) and amended Capital Requirements Directive IV (CRDIV) became effective (see section B1.1 for more details). The adoption has had a 0,3 percentage points positive impact on the Group s CET1 ratio as at 1 January Loans in arrears for more than 90 days (90+ DPD) are defined as loans with a specific provision (i.e. impaired loans) and loans past-due for more than 90 days, as per IFRS. 3 These are defined as per the new Directive issued by the Central Bank of Cyprus for the Definition of Non-performing and Restructured Credit Facilities, effective as of 1 July The Directive is available on the website of the Central Bank of Cyprus. 3 Provisions for impairment of loans for the first quarter of 2014 were 146 mn, with the provisioning charge accounting for 2,2% of gross loans on an annualised basis. Provisions for impairment of loans for the fourth quarter of 2013 were 229 mn, accounting for 3,7% of gross loans on an annualised basis. Profit from continuing operations (defined as profit after tax and before restructuring costs and discontinued operations) for the first quarter of 2014 totalled 72 mn. Loss from continuing operations for the fourth quarter of 2013 totalled 38 mn. Profit from continuing operations in the Cyprus operations for the first quarter of 2014 totalled 101 mn. The Ukrainian operations, sold in April 2014, were classified as discontinued operations in the first quarter of 2014 and recorded a loss of 36 mn. The reclassification of the Ukrainian operations into discontinued operations has been made in previous quarters for comparison purposes. Restructuring costs for the first quarter of 2014 totalled 5 mn, compared to 15 mn for the fourth quarter of Profit after tax attributable to the owners of the company for the first quarter of 2014 totalled 31 mn, compared to a loss of 103 mn for the fourth quarter of Profit after tax in the Cyprus operations for the first quarter of 2014 totalled 96 mn. B. Analysis of Financial Results for the quarter ended 31 March 2014 B.1 Balance Sheet Analysis B.1.1 Capital Base The Group s shareholders equity at 31 March 2014 amounted to mn, 1% higher compared to 31 December 2013, while the Group s provisional CET1 ratio increased to 10,6% compared to 10,5%, as adjusted in accordance with CRD IV/CRR rules, for 31 December The CET1 ratio was enhanced due to the 1Q2014 profitability (it is noted that the CET1 ratio includes unaudited profits amounting to 18 mn for the quarter) and the reduction of risk weighted assets. After taking into account the deleveraging actions completed in the second quarter of 2014 relating to Ukraine, Banca Transilvania and Serbia, there is a 0,3 percentage points positive impact on the CET1 ratio. Going forward, the Group aims to preserve and enhance its capital adequacy by retaining internally generated capital, while the restructuring and disposal of non-core assets will be driven by risk mitigation and capital considerations. As from 1 January 2014, the new Capital Requirements Regulations (CRR) and amended Capital Requirements Directive IV (CRD IV) became effective, comprising the European regulatory package designed to transpose 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 that entities need to abide by. It is immediately binding on all EU member states. CRD IV governs access to deposit taking activities, internal governance arrangements, including remuneration, board composition and transparency. Unlike the CRR, the directive needs to be transposed into national laws and national regulators can impose additional capital buffer requirements. CRR introduces significant changes in the prudential regulatory regime applicable to banks including amended minimum capital ratios, changes to the definition of capital and the calculation of risk weighted assets and the introduction of new measures relating to leverage, liquidity and funding. CRR permits a transitional period for certain of the enhanced capital requirements and certain other measures, such as leverage, which are not expected to be fully 4 implemented until The Central Bank of Cyprus (CBC) has determined the extent of phasingin of the transitional provisions relating to Common Equity Tier 1 deductions. On the basis of that assessment and taking into account the parameters of the balance sheet assessment and the EUwide stress test, the minimum capital requirements will be determined in consultation with the Troika and informing the European Stability Mechanism. In addition the CBC may also impose additional capital requirements for risks which are not covered by the above-mentioned capital requirements (Pillar II add-ons). B.1.2 Deposits and Loans The Group s total deposits were 14,1 bn at 31 March 2014, compared to 15,0 bn at 31 December Customer outflows 4 experienced by the Bank in its Cyprus operations post-march 2013 have significantly abated during the second half of 2013 and into During the first quarter of 2014, the deposits of the Cypriot operations dropped by 6% compared to a 2% drop in the fourth quarter of 2013 and 10% in the third quarter of The first quarter of 2014 drop in the deposits of the Cyprus operations was due to seasonality, payment of taxes and dividends, the release of the 6- month decree deposits and the general relaxation of restrictive measures. On 30 January 2014, the Bank released the 6-month decree deposits maturing on 31 January 2014 and totalling about 940 mn. Depositors with released funds have generally stayed with the Bank and indeed the retention of deposits exceeded expectations. At 31 March 2014, deposits in Cyprus accounted for 85% of Group deposits, deposits in Russia for 5% and deposits in the United Kingdom for 9%. The Bank s deposit market share in Cyprus was 26,4% at 31 March 2014, compared to 27,5% at 31 December Customer deposits remain the primary source of funding and accounted for 48% of assets as at 31 March 2014, while the net loans to deposits ratio totalled 151% compared to 145% at 31 December The net loans to deposits ratio on a pro-forma basis following the disposal of the Ukrainian operations and the loans in Serbia stands at 148%. Following the absorption of Laiki Bank and its ELA of 9 bn, the Bank s ELA amounted to 11,11 bn at 30 June With the Bank becoming an ECB eligible counterparty for monetary policy operations following its exit from Resolution, the Bank has raised 1,4 bn of funding under monetary policy operations and has reduced its ELA to 9,51 bn at 31 March Overall, between April 2013 and March 2014, the Bank managed to reduce its Eurosystem funding (ECB funding + ELA) by 490 mn from 11,4 bn (comprising solely ELA) to 10,91 bn and at the same time managed to absorb a significant reduction in its deposit base. ELA was reduced by a further 270mn in the second quarter of 2014 utilising funds from deleveraging. The decisions of the Eurogroup to bail-in depositors significantly dented the trust and confidence of customers towards the Cypriot banking system. As a result, restrictive measures and capital controls with respect to banking and cash transactions were introduced by the authorities in March 2013 to prevent large deposit outflows and to preserve the solvency and liquidity of the credit institutions in Cyprus. These measures included restrictions on cash withdrawals, compulsory renewal of maturing deposits and restrictions on capital movements and are constantly being reviewed and revised. Currently the only major restriction applicable for domestic banking transactions relates to the opening of an account in another institution. 4 Customer flows are defined as the difference between changes in stock of customer deposits and changes in stock of gross customer loans. 5 In addition to the restrictive measures applicable for the Cypriot banking system as a whole, there are additional restrictive measures applicable to the Bank s deposits affected by the bail-in 5. At 31 March 2014, deposits totalling 1,9 bn remained blocked in the form of two equal fixed term deposits with terms of 9 and 12 months respectively, beginning 1 August The Bank is allowed to renew them for an additional equal term at the same interest rates, depending on market conditions. Once these deposits are unblocked, the funds will be subject to the general restrictive measures applicable at the time. On 30 April 2014 the Bank announced its decision for the release of the 9-month decree deposits amounting to approximately 930 mn and maturing on 30 April One third of the 9-month decree deposits was immediately released and available in customers current accounts, one third was converted into a 3-month time deposit maturing and automatically released on 31 July 2014 and one third was converted into a 6-month deposit maturing and automatically released on 31 October The behaviour of depositors with released funds has been very satisfactory and the retention of deposits has been at a very high level. Gross loans were 26,3 bn at 31 March 2014 (compared to 26,7 bn at 31 December 2013, 27,4 bn at 30 September 2013 and 28,3 bn at 30 June 2013), with loans in Cyprus totalling 22,8 bn and accounting for 87% of gross loans. The reduction in gross loans reflects primarily the prepayment of loans using blocked deposits, the normal repayment of loans and the Bank s deleveraging efforts. The gross loans are presented before the deduction of the fair value adjustment on initial recognition relating to Laiki s loans amounting to 1,8 bn. As at 31 March 2014 the gross loans of ex-laiki amounted to 9,6 bn. Following the deleveraging actions completed in April and May 2014, gross loans were reduced further to 25,6 bn. Following the absorption of Laiki s loan portfolio in Cyprus, the Bank is the single largest provider of credit in Cyprus with a market share of 40% of loans as at 31 March Therefore, the Bank s future financial performance is interlinked with the Cypriot economy. Loans in Russia ( 1,3 bn) and loans in the UK operations ( 1,2 bn) accounted for 5% each of total loans. In terms of type of customer exposure, corporate loans 6 accounted for 46% of gross loans at 31 March 2014, SME 7 loans accounted for 23%, whereas mortgages and consumer loans accounted for 20% and 11%, respectively. In terms of exposures by economic sector, loans in the construction sector and in real estate development accounted for 16% of gross loans each, at 31 March B.1.3 Loan portfolio quality Although the quality of the Group s loan portfolio continues to be challenged by the on-going recessio
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