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Bank of Cyprus:Steadily within targets
“The Bank of Cyprus Group, with a history of 110 years, is supported by solid foundations, following a prudent credit policy, carefully planned strategic expansion, systematic and effective risk management, and thereby has achieved its strong liquidity and has shielded itself against any negative consequences of the international crisis. In a particularly challenging and negative environment, the level of profitability of the first quarter of the current year is deemed satisfactory and together with its strong liquidity, healthy loan portfolio and the satisfactory return on equity allow us to view the future with certainty and optimism, aiming as always to create added value for our shareholders, our customers, our employees and society.”
Theodoros Aristodemou, Chairman of Board of Directors
“In a period where international financial market faces the biggest crisis in its recent history, Bank of Cyprus operated and continues to operate with caution and prudence following a rational and balanced policy with particular emphasis on effective risk management. At the same time it continues its expansion achieving satisfactory profitability for the first quarter of 2009. The bank’s strong liquidity and healthy capital adequacy is able to support its customers in these difficult times faced by the economy. The Bank of Cyprus Group has proved that continues its course standing on solid foundations, and is justifiably characterised as an organisation of trust.”
Andreas Eliades, Group Chief Executive Officer
A. Summary of Results
The Group maintained a satisfactory level of profitability despite the negative economic environment. The Group’s focus on traditional banking business, its prudent credit policy and the risk management applied by the Group, ensure that the Group is effectively shielded from the current global financial crisis and enable it to generate satisfactory profitability. At the same time, the maintenance of its strong liquidity, the strengthening of its capital adequacy and the disciplined growth of its operations, provide support to the Group during this global financial crisis.
Profit after tax for the first quarter of 2009 amounted to ?63 mn whereas the return on equity for the same period amounted to 12,4%. During the first quarter 2009, the Group maintained its efficiency by containing its cost to income ratio at a satisfactory 57,7% despite the dynamic expansion of its network in Greece, Russia, Romania and Ukraine during 2008. Specifically, the Group increased its branch network significantly, from 305 branches at 31 March 2008 to 589 at 31 March 2009. Despite the unprecedented global financial crisis and the continuing instability of the money markets, the Group maintained its strong liquidity position (loans to deposits ratio 90%) and its low reliance on wholesale funding (wholesale funding to total assets was 14%). In addition, the high quality of the loan portfolio was maintained despite the negative economic environment, with the ratio of non-performing loans to total loans standing at 4,3% at 31 March 2009.
The main financial highlights of the Group for the first quarter of 2009 are set out in the table below:
• The profit before provisions for the first quarter 2009 reached ?114 mn compared to ?153 mn for the first quarter 2008.
• The profit after tax for the first quarter 2009 reached ?63 mn compared to ?116 mn for the first quarter 2008.
• Group return on equity remained at a satisfactory level (12,4%) in a particularly demanding and negative environment.
• The Group maintained its efficiency, with the cost to income ratio contained at 57,7% despite the dynamic expansion of its network in Greece, Russia, Romania and Ukraine, during 2008. Specifically, the Group increased its branch network significantly, from 305 branches at 31 March 2008 to 589 at 31 March 2009. The increase is primarily due to the acquisition of Uniastrum Bank in October 2008.
• The Group maintained its strong liquidity with a loans to deposits ratio of 90%. The Group enjoys strong liquidity in the two main geographic markets in which it operates, with a loans to deposits ratio in Cyprus and Greece, at 31 March 2009, of 81% and 90% respectively. The Group’s conscious liquidity strengthening policy was also followed in Russia, resulting in a decrease of the loans to deposits ratio of Uniastrum Bank to 93% at 31 March 2009 (31 December 2008: 98%).
• In maintaining strong liquidity and focusing on maintaining solid financial footings and position, the Group, in light of the overall unfavourable conditions in the markets in which it operates, recorded a limited increase in its loans and deposits in the first quarter of 2009 compared to the end of 2008.
• Despite the expected deterioration of the quality of the Group’s loan portfolio arising from the negative economic environment, the Group’s non performing loans ratio was contained at a satisfactory 4,3% at 31 March 2009. The Group increased its provision charge for the impairment of loans for the first quarter 2009 to 0,6% of total loans (on an annual basis).
• Cyprus and Greece, the two main markets in which the Group operates, contributed positively to its profitability. For the first quarter of 2009, profit after tax in Cyprus reached ?55 mn, whereas profit after tax in Greece reached ?7 mn.
• Romania and Ukraine have also contributed to the Group’s profitability, with profit after tax for the first quarter 2009 amounting to ?2 mn and ?1 mn, respectively.
• In Russia, after taking into consideration the current market conditions, the Group followed a policy of containing lending and placed particular emphasis on strengthening Uniastrum Bank’s liquidity (loan to deposit ratio 93%), managing credit risk, strengthening infrastructure and assimilating the bank into the Group. In order to shield the bank further the Group has increased provisions. As a result, the Group’s operations in Russia for the fist quarter of 2009 recorded profit before provisions of ?4 mn whilst after the increased provisioning and tax, noted a loss of ?6 mn.
The Group is monitoring the developments in the international credit markets as well as the macroeconomic environment in Cyprus, Greece and the surrounding regions and takes measures to shield itself effectively.
The strategic priorities of the Group focus on maintaining the Group’s strong liquidity position, strengthening capital adequacy and managing risk effectively.
The Group has announced the issue of ?645 mn convertible capital securities. The issue will further enhance the tier 1 capital of the Group which at 31 December 2009 is expected to reach 10% . In parallel, the Group proceeded with the securitisation of ?1 bn of housing loans in Greece which will further strengthen the Group’s liquidity and allow the unhindered growth of its operations.
The Group is taking measures to offset the negative impact from the continuous pressure on profit margins. Such measures include the repricing of selected loan and deposit products and services, the prudent expansion of the Group in the new markets which have higher margins, the enhancement of other income and the containment of costs.
Having taken into consideration the results for the first quarter 2009 and the results to date, particularly the improvement of the spreads between deposits and loans in April and May, the Group estimates that it will achieve satisfactory profitability for the year 2009 that will be within the estimated range already announced. Specifically, the Group’s net profit after tax for 2009 is expected to be between ?300 mn and ?400 mn. In particular, regarding the profitability of the new markets, the Group expects a positive contribution from all the countries in which it operates, including Russia.
C. Financial Footings
C.1 Group Loans
At 31 March 2009 the Group’s loans amounted to ?25,23 bn recording an annual increase of 23%. By taking into consideration the prevailing conditions in the markets in which it operates, the Group followed a prudent credit policy and focused on proper risk management thus recording a limited increase of its loans of 0,4% compared to 31 December 2008.
C.1.1 Loans in Cyprus
At 31 March 2009 the Group’s total loans in Cyprus amounted to ?12,19 bn, recording an annual increase of 21% and a 1,9% increase since 31 December 2008. The loans in Cyprus represented 48% of the Group’s total loan portfolio.
In March 2009 the Group had the largest market share of 28,2% of the total loans of commercial banks and credit cooperatives in Cyprus (latest available data). The preservation of our leading market share is the result of the recognition of the Bank of Cyprus leading brand name, its extensive network and the effective marketing campaigns focusing on the business sector and mortgage lending.
C.1.2 Loans in Greece
At 31 March 2009, the Group’s total loans in Greece reached ?9,54 bn, representing 38% of the Group’s total loan portfolio. Total loans recorded a slight decrease of 1,3% during the first quarter of 2009, whereas the annual growth in loans amounted to 14%, exceeding the 11% growth rate of the market.
In March 2009 (latest available data), the Group’s market share in loans in Greece increased to 3,76% from 3,67% in March 2008.
The growth of the Group’s loan portfolio in Greece in commercial and housing loans reaffirms the growth potential of the network. The balances of commercial and housing loans at 31 March 2009 recorded increases of 13% and 17% respectively compared to 31 March 2008.
C.1.3 Loans in Russia
At 31 March 2009, Group loans in Russia reached ?1,1 bn representing 5% of the total loan portfolio.
Specifically, at 31 March 2009 Uniastrum Bank loans reached ?817 mn. The Group strengthens Uniastrum on credit risk issues and promotes a disciplined growth of its operations. At 31 March 2009, Uniastrum Bank’s capital adequacy ratio stood at high levels (17% based on Central Bank of Russia rules), which along with the healthy loans to deposits ratio of 93%, can support the expansion of its loan portfolio.
C.1.4 Loans in Other Countries
At 31 March 2009, Group loans in other countries reached ?2,4 bn, recording an annual increase of 20% and representing 9% of the total Group loan portfolio.
Particularly, the loans of the Group: • in Romania (?553 mn) and Ukraine (?213 mn) amounted to a total of ?766 mn, representing 3% of the Group’s total loan portfolio. • in the United Kingdom and Australia amounted to ?1,13 bn and ?452 mn respectively, representing 6% of the Group’s total loan portfolio.
C.1.5 Loans by Customer Sector
The breakdown of the Group’s loan portfolio in Cyprus and Greece by customer sector is shown in the table below.
C.1.6 Non-Performing Loans (“NPLs”)
Despite the expected negative effect on the Group’s loan portfolio arising from the adverse economic environment, the quality of the Group’s loans was maintained at high levels. At 31 March 2009, the ratio of loans in arrears for longer than three months which are not fully covered by tangible collateral (“non performing loans”) over the total loans of the Group (non performing loans ratio), stood at 4,3%. The corresponding ratio at 31 March 2008 and 31 December 2008 was 3,6% and 3,8%, respectively. At 31 March 2009, the non performing loans ratio for the loan portfolio in Cyprus was 4,4% (31 March 2008: 4,9% and 31 December 2008: 4,2%). At 31 March 2009 the corresponding ratio for the loan portfolio in Greece stood at 4,3% (31 March 2008: 2,9% and 31 December 2008: 3,4%).
In parallel, the provision coverage ratio (provisions/NPLs) stood at 65% as at 31 March 2009. The remaining balance of NPLs is fully covered by tangible collateral. It is noted that the coverage ratio including tangible collateral as calculated in accordance with the rules of the Central Bank of Cyprus (taking into consideration forced sale value) amounts to 112%.
C.2 Group Deposits
The Group’s total deposits at 31 March 2009 reached ?28,06 bn, recording an annual increase of 17% and a small increase of 0,4% since the end of 2008, comparable to the increase of the Group’s total loans during the same period.
The strong liquidity of the Group, with a loans to deposits ratio of 90% and its minimal reliance on wholesale funding (14%), provide the Group with a strong competitive advantage, particularly under the current adverse conditions that prevail in international money markets.
C.2.1 Deposits in Cyprus
In Cyprus, Group deposits reached ?15,07 bn, recording an annual increase of 9% and a small increase of 0,3% since the end of 2008.
The Group has the leading market share (29,1%) of total deposits of commercial banks and credit cooperatives as well as of foreign currency deposits (41,7%).
C.2.2 Deposits in Greece
At 31 March 2009, the Group’s total deposits in Greece recorded an impressive increase of 22%, amounting to ?10,56 bn.
In March 2009, the Group’s market share of deposits in Greece reached 3,89% compared to 3,51% in March 2008.
C.2.3 Deposits in Russia
At 31 March 2009, the Group’s deposits in Russia amounted to ?898 mn. The loans to deposits ratio of Uniastrum Bank decreased to 93% at 31 March 2009 from 98% at 31 December 2008, signifying the increasing confidence of Uniastrum Bank’s customers since its acquisition by Bank of Cyprus.
C.2.4 Deposits in Other Countries
At 31 March 2009, the Group’s deposits in other countries reached ?1,53 bn, recording an annual increase of 4%.
Specifically, Group deposits: • in the United Kingdom and Australia amounted to ?1,07 bn and ?327 mn respectively, and • in Romania and Ukraine amounted to ?80 mn and ?50 mn respectively. C.3 Shareholders’ Funds
At 31 March 2009, the Group shareholders’ funds amounted to ?2,02 bn. The Group capital adequacy ratio in accordance with Basel II requirements was 10,5% and the tier 1 capital ratio was 6,8%. The issue of ?645 mn worth of convertible capital securities will further enhance the Group’s tier 1 capital and the tier 1 capital ratio is expected to increase to 10% at 31 December 2009.
D. Analysis of Results for the 1st Quarter of 2009
D.1 Net Interest Income and Net Interest Margin
Net interest income amounted to ?181 mn, recording a decrease of 2% compared to the corresponding quarter of 2008. The relevant income was affected by the decreases of the Euro and other currencies’ base rates and the squeeze of deposits spreads. The Group takes measures to offset these negative consequences by evaluating the market conditions and repricing its loan portfolio and its deposit products. The net interest margin of the Group for the first quarter of 2009 amounted to 2,13%, compared to 2,49% and 2,52% for the first and fourth quarters of 2008 respectively.
The net interest margin of the Group’s operations in Cyprus amounted to 1,87% for the first quarter of 2009, compared to 2,19% and 1,90% for the first and fourth quarters of 2008 respectively. In Greece the net interest margin amounted to 1,54% for the first quarter of 2009, compared to 2,58% and 2,13% for the first and fourth quarters of 2008 respectively. The decrease of the net interest margin both in Cyprus and in Greece is due to the augmented competition, especially on deposits. The de-escalation of the competition on deposits in the last couple of months, is expected to have a positive effect on the Group’s net interest margin. An improvement has already been noted in the deposit and lending spreads during April and May 2009.
The Group’s net interest margin in the other countries (excluding Cyprus and Greece) was 3,32% for the first quarter of 2009, which includes the net interest margin for the new markets (Russia, Romania and Ukraine) which was 4,64% for the first quarter of 2009. The Group’s objective of disciplined growth of the loan portfolio in new markets with significantly higher interest margins is expected to lead to an increase of the Group’s net interest margin.
D.2 Income from fees and commissions and foreign exchange Net fees and commission income recorded a satisfactory annual increase of 13% and amounted to ?54 mn for the first quarter of 2009, compared to ?48 mn for the corresponding quarter of 2008. The foreign exchange income for the first quarter of 2009 amounted to ?20 mn from ?8 mn for the corresponding quarter of 2008. The increase is mainly due to gains from transactions for hedging foreign exchange risk.
D.3 Income from Insurance Business Total income from insurance business amounted to ?15 mn. Profit before tax from insurance business amounted to ?10 mn contributing 13% to Group profit after tax.
Total expenses for the first quarter 2009 amounted to ?156 mn, recording an annual increase of 31%, mainly due to increased staff and operational costs because of the Group’s network expansion in Greece and the new markets. Specifically, the Group increased its branch network from 305 branches at the end of the first quarter of 2008 to 589 at the end of the first quarter of 2009, and the number of employees from 6.996 to 11.999 during the same period. The increase is mainly due to the acquisition of Uniastrum Bank.
The cost to income ratio for the first quarter of 2009 was 57,7% compared to 43,7% for the corresponding quarter of 2008, despite the significant expansion of the Group’s network in Greece, Russia, Romania and Ukraine in 2008 and the decrease of net interest income. Excluding Uniastrum Bank, the cost to income ratio for the first quarter of 2009 stands at 52,8%.
The extensive and young branch network in both Greece and Russia is expected to add significant value in forthcoming years, especially in terms of business volume growth and profitability.
An analysis of the Group’s network and human resources is shown in the table below:
Staff costs for the first quarter of 2009 amounted to ?98, recording an annual increase of 32%, mainly due to the increased costs relating to the expansion of operations in Greece, Russia, Romania and Ukraine. In contrast to the staff cost for the first quarter of 2008, the staff cost for the first quarter of 2009 includes the staff cost of Uniastrum Bank and Bank of Cyprus Ukraine. The staff cost in Greece recorded a 4% annual increase in response to the increased business volumes (14% increase in loans) and the staffing of 21 new branches which have commenced operations since 31 March 2008.
The other (non-staff) operating expenses of the Group, including the operating expenses for the start up of operations in all the new markets, recorded an annual increase of 29% and amounted to ?58mn. Excluding Uniastrum Bank, the Group managed to contain the other operating expenses for the first quarter of 2009 at the same levels as those of the corresponding quarter of 2008.
For the first quarter of 2009, the cost to income ratio of the Group’s operations in Cyprus stood at 47,4%. The corresponding ratio in Greece was at the very satisfactory level of 67,3%, especially considering the low maturity of the branch network, the start up cost of new branches and the intense competition.
D.5 Provisions for Impairment of Loans
The Group has significantly increased the provision charge for impairment of loans for the first quarter of 2009 (annual increase 138%), having taken into consideration the worsening of the economic environment and the expected partial deterioration of the loan portfolio. Despite the aforementioned increase, the provision charge for impairment of loans (?35 mn) was contained to 0,6% (2008: 0,4%) of total Group loans, reflecting both the high quality of the Group’s loan portfolio as well as the very satisfactory level of accumulated provisions, which include an accumulated general provision of 1% of total loans.
At 31 March 2009, the provision coverage ratio stood at 65%. Additionally, the balance of the non-performing loans is secured by tangible collaterals. The coverage ratio, including tangible collaterals as calculated in accordance with the rules of the Central Bank of Cyprus (based on forced sale values), stood at 112%.
* b.p. = basis points, 100 b.p. = 1 percentage point (1%)
** For presentation purposes the net gains or losses on sale and change in fair value of financial instruments have been calculated after the loss attributable to non-controlling interests.
* b.p. = basis points, 100 b.p. = 1 percentage point (1%)
** For presentation purposes, the net gains or losses on sale and change in fair value of financial instruments have been calculated after the loss attributable to non-controlling interests.
1. All geographical sector analyses are presented following restatements made to bring each sector’s capital to the same percentage level of the sector’s risk weighted assets.
2. The Group’s Interim Condensed Consolidated Financial Statements for the quarter ended 31 March 2009, are available at Registered Office of the Bank of Cyprus Public Company Ltd and on the Group’s website, as follows: