Bank of Cyprus Holdings Public Limited Company (BOCH) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Myrtle, your Chorus Call operator. Welcome, and thank you for joining the Bank of Cyprus conference call to present and discuss the group financial results for the year ended 31st December 2019. At this time, I would like to turn the conference over to Mr. Panicos Nicolaou, Chief Executive Officer; Ms. Eliza Livadiotou, Executive Director of Finance; Mr. Demetris Demetriou, Chief Risk Officer; Mr. Panicos Mouzouris, Executive Director, RRD; Ms. Anna Sofroniou, Executive Director, Real Estate Management Unit; Mr. Nick Smith, Executive Director of Corporate Finance Solutions; and Ms. Annita Pavlou, Manager, Investor Relations. Mr. Nicolaou, you may now proceed.

Thank you, Myrtle. Good morning, everyone. Thank you, and welcome to the 2019 Bank of Cyprus Full Year Results. I hope everyone is safe and healthy. Under normal circumstances, our team and I will start presenting you the results of what has been an important year for the bank with significant reduction in NPEs, active cost management system reductions, branch closures and increase to the digital engagement of our clients. However, coronavirus has changed the economic and social landscape in an unprecedented way and in a very short time span. As a result, this morning, we will be focusing mainly on our role in addressing the crisis, focusing on a few topics as we navigate this environment. Towards the end, Eliza will briefly review our 2019 results. And of course, both of us, along with the team, will be happy to answer your questions. On Slide 3, the bank's priorities under these unprecedented times are clear: to protect the health of our customers and colleagues; to support them and the wider Cypriot economy; and to provide liquidity to businesses and households affected by the crisis to help alleviate their short-term cash flow burdens. We are determined to help all our stakeholders confront this challenge. As a management team, we have considerable experience in managing challenging circumstances. We have a robust pandemic plan in place, which ensures that all our operations and service coverage remains uninterrupted. Our investment in our digital transformation program has not only strengthened our operational resilience but more importantly, has enabled us to quickly respond to a changing landscape and fully deploy our digital service channels to our customers. The increased digital engagement level of our customers during this period is impressive and now stands at 70% as of end of March 2020, and we expect further increases in the near future. When bank entered these uncertain times, we had good capital, strong liquidity and funding position. We have a capital well in excess of our regulatory requirements. As of 31st of December 2019, our total capital ratio stood at 18% and our CET1 ratio at 14.8%, with a CET1 buffer of 380 points. Deposits remained broadly flat at EUR 16.7 billion, and we continue to operate with over EUR 3 billion of surplus liquidity. As at the end of December, our loan-to-deposit ratio stood at 64%. Turning to Slide 4 now. We are pleased to see the Cypriot government taking all the necessary measures early in the pandemic here and successfully managed to contain the spread of the pandemic in our country. Statistics are very encouraging. The sample testing per 100,000 population is among the highest within EU. At the same time, the confirmed cases are amongst the lowest. The daily reported cases have stabilized and remained consistently low, enabling the government to consider the gradual uplift of the restrictions, which are expected to be phased out as from early May. Of course, for a full open of our economy and to this industry, we recognize that we need to see with the national progress -- focus as well. Let me now move to Slide 5. We at Bank of Cyprus have as our top priority the health of our staff and of our customers while ensuring the operational resilience of the bank. We are actively managing the situation, and we have undertaken a set of measures in accordance with the guidelines and recommendations from the Ministry of Health to protect the health of our employees. A committee was established to monitor the developments, trace potential incidents within the bank and provide regular updates and guidelines to our staff. We have fully deployed our Pandemic Plan, and with now more than 40% of our people, excluding branches, working from the safety of their homes taking advantage of our technological transactions and digital solutions. Our branch network continues to operate on a rotational basis as a precautionary measure, with parts of the critical functions have been split in separate locations. Our digital channels provide alternative solution for customers to perform their daily banking transactions online. As I mentioned earlier, 70% of our customers are digitally engaged. Let me now go to Slide 6, which provide a summary of the measures taken by the regulators for mitigating the COVID-19 impacts. These measures are unprecedented and currently being put in place. The purpose of these measures is to help banks as much as possible, provide the necessary approvals for their customers. Specifically, the measures announced provide flexibility with regards to capital and liquidity requirements as well as providing guidance on the application of IFRS 9. Starting with the relaxation of the capital requirements, the regulators allowed banks to temporarily dip into the P2G and capital conservation and countercyclical buffers. Note that the countercyclical buffer for Cyprus is currently set at 0%. Moreover, the ECB front-loaded the ability to use lower quality own funds to meet Pillar II requirements. Finally, in April 2020, the Central Bank of Cyprus decided to delay by 12 months to January 2020 (sic) [ 2021 ] the phasing-in of the 50 basis points of our O-SII buffer. With regards to liquidity, the ECB is allowing banks to temporarily operate below the LCR requirement, although note that we are at double that level. In addition, it launched a new Pandemic Emergency Purchase Programme, which entails net asset purchases of EUR 750 billion until the year-end. Moving to asset quality measures. The ECB will exercise temporary flexibility regarding their unlikely-to-pay assessment. In addition, the regulator will exercise full flexibility when discussing with banks the implementation of their NPE reduction strategies. Finally, the ECB is encouraging financial institutions to avoid procyclicality in models to determine expected credit losses. The ECB will actually provides central macroeconomic scenarios to support banks in applying IFRS 9 provisioning policies, while banks should also give a greater weight to a long-term outlook when estimating expected credit losses. In addition to the ECB measures, we have the EBA and ESMA guidelines, which cover the following key points. The COVID-19 moratorium does not automatically trigger increased credit risk. Banks are expected to distinguish between borrowers whose creditworthiness will not be significantly affected by the current situation in the long term from those that would be unlikely to return to creditworthiness. These restrictions will help institutions to mitigate any potential cliff effect from transfers between stages. The general COVID-19 moratorium does not trigger automatic reclassification due to forbearance. The COVID-19 moratorium extends 90 days past due deadline via the modified payment schedule. And finally, the EU stress test has been postponed to 2021 to allow banks to prioritize operational continuity. All the above are indicative of the capacity being provided to the banking system to proceed with all the necessary actions in order to help borrowers. Moving now to Slide 7. I will spend some time on discussing the measures taken by the Cypriot government, which are also important in addressing the consilience of the crisis. In response to the outbreak of COVID-19 in Cyprus, the government quickly introduced fiscal measures, which accounted for 5.4% of Cyprus GDP, aimed at providing liquidity to businesses and [ self-employed ] preventing a sharp rise in unemployment. The package announced by the government is considered to be one of the most generous amongst EU members. During April, the government has successfully raised EUR 3 billion of funding from the international and local markets in order to cover the measures undertaken to confront the economic impact of the COVID-19 outbreak and to strengthen state reserves leaving us with a strong mode of recovery of Cypriot economy. Coming to [ amendments ] in detail. First, the Parliament voted for the suspension of loan repayments of interest and capital for 9 months remaining until the end of the year for all eligible borrowers with no arrears for more than 30 days as at the end of February 2020. In addition, the government is promoting a government guarantee program of EUR 2 billion for the provision of low-priced loans to companies and self-employed. EUR 250 million has been set aside to be used [indiscernible]. The content has been approved by the Council of Ministers and is pending Parliament's approval. According to [indiscernible] in the program, as of today and as approved by the Council of Ministry, the government will guarantee 70% of the loan amount. Furthermore, the government introduced additional liquidity-supporting measures such as the suspension of VAT and delayed additional increases of contributions for the national health system. Finally, the government has introduced income support schemes for companies impacted by COVID-19 to protect jobs and avoid layoffs, which is estimated at over 50% of private sector employees and approximately 40,000 self-employed in benefit from the wage compensation schemes. Packages, we saw some benefits from the measures taken by the Eurogroup in early April, more specifically, to help us to have access to EUR 400 million funding for companies with a focus on SMEs through the European Investment Bank; a loan facility of EUR 160 million with favorable terms for the protection of layoffs during crisis; and finally, to reassess Pandemic Crisis Support through the Enhanced Conditions Credit Line of EUR 440 million. Moving now to Slide 8. In 2019, the Cypriot economy grew by 3.2%. And whilst clearly, COVID-19 has caused a deceleration of the short-term prospect of the Cypriot economy, it is an open, small and flexible economy, which has demonstrated historically that recovery from economic crisis can be quick. The spread of COVID-19 is expected to have a significant impact, both on the global and Cypriot economy, at least from the first half of 2020. The impact of the Cypriot economy will largely depend on the duration and the intensity of the pandemic. The sectors most adversely affected initially by COVID are expected to be tourism, trade and construction. As the pandemic still unfolds, it is not possible to assess the full likely impact. The decisive actions announced by the government, along with the coordinated monetary, fiscal and regulatory measures announced by the European authorities are expected to mitigate the impact of the effects of the [ crisis ]. However, there will clearly still be an impact. Moving to Slide 9 now. We are cautiously optimistic for the resilience and the recovery capacity of the economy. The government measures provided liquidity injection accounting to almost 1/4 of the country's GDP for the support of the EUR 23.6 billion of performing loans in the banking system. More specifically, the governmental assistance approved by the Council of Ministers will provide approximately EUR 2.5 billion liquidity to affected businesses and self-employed. Furthermore, an additional amount of EUR 400 million is available for the funding of businesses through the European Investment Bank with a focus on SMEs. Support will also be provided through the loan moratorium as it is estimated that it would provide partial relief to businesses and individuals of approximately EUR 2.3 billion. In addition, it is important to note that the banking industry, and [indiscernible] in particular, have the expertise to offer the liquidity in a timely and effective way to affected businesses. This is very important and very high in our priorities. To summarize, the measures taken by the authorities and government are comprehensive and far reaching for the support of the performing businesses and the economy to withstand the conciliation of the pandemic. Turning now to Slide 10. On Slide 10 to 13, we will discuss our exposure to the most affected sectors of the economy and our strategy to mitigate the impact on our customers and effectively, the bank. The group has a well-diversified performing loan portfolio amounting to EUR 9.2 billion as at 31st of December 2019. We will continue to closely monitor the book and set up strategies to prevent asset quality deterioration. The extensive travel bans, the slowdown in production as well, we’re seeing change in demand and effectively the consumption stemming from the strict lockdown, have an adverse impact on tourism, trade and construction sector of the economy. The exposure of our performing book to tourism and trade, which amounts to EUR 1 billion, while the exposure to construction is lower, about EUR 0.5 billion. As at the year-end, the bank has no exposure to aviation. Of course, any prolonged outbreak in -- of COVID-19 will eventually impact all sectors to a certain extent with a few exceptions. We are setting up [indiscernible] and efficient strategies for each client segment and industries, while in close contact with impacted customers in order to primarily -- to assess the full extent of the COVID-19 economic side effects; and secondly, provide relief in the form of payment deferrals and restructurings as appropriate. We will provide liquidity to affected customers to help alleviate their short-term cash flow burden through the government-guaranteed facilities and other lending products from the bank. And it is great to know that the government-guaranteed facilities have been approved by the Council of Ministers, but are still pending to the Parliament. On Slide 11, we provided information about the loan moratorium included in the government measures. The loan moratorium was started on 30 of March 2020 [indiscernible] clients for loans are addressed and credit cost for the period until the end of the year. [indiscernible] is available to our customers, both private individuals and businesses, for less than 30 days past due as at the end of February 2020. The loan terms will be extended so that the loan repayments will continue as per the existing schedule, given the moratorium interest will continue to accrue. It's important to note that after the [indiscernible] the COVID-19 moratoriums does not trigger automatic reclassification [indiscernible] due to forbearance. As at 23rd of April 2020, we have received approximately 20,000 applications for EUR 5.2 billion of global loans and accounting for 56% of the performing loan book. Applications from businesses amounts to EUR 3.4 billion or 66% of the performing book, whereas applications received from private individuals amount to EUR 1.77 billion or 45% of the performing book. I would like once again to emphasize that during the moratorium period, we'll continue to closely monitor the creditworthiness of our customers who applied for the schemes to support them from the day after in order to effectively and timely address any potential worsening of their credit quality, following them of the moratorium. Moving on to Slide 12. As of the end of 2019, performing loans to private individuals amounted to EUR 3.94 billion. It is expected that over 35% of total employment in Cyprus will remain unaffected from the COVID-19 crisis, having workforces employed within government, semi-government and other financial sectors. In addition, measures announced by the government include an employment compensation scheme for businesses impacted by COVID-19 to protect jobs and avoid layoffs until mid-June 2020. This scheme provides with the compensation for 60% of the wage cost, for up to 60% to 90% of the workforce, depending on the extent of loss of turnover and number of employees. It is important to note that a requirement of the scheme is that no employee will be fired since 1st of March 2020. The government expects that over half of private sector employees and around 40,000 self-employed will benefit from the employment compensation scheme. As previously mentioned, the moratorium applications we received from private individuals amounted to EUR 1.77 billion from the EUR 2.95 billion we currently have in our books and are driven by mortgages and personal loans. Moving now to Slide 13. Let's now go through a deep dive through our exposure to the most affected sectors, tourism and trade. As of 31st of December 2019, our total exposure to tourism amounted to EUR 1.01 billion. 6% of this relates to food services that are better positioned to manage social distancing through take-out and drive-through facilities. The accommodation sector is expected to be under the most significant pressure. Most customers in this sector entered the crisis well, with significant liquidity, following strong performance in recent years. Specifically, the unutilized liquidity of the sector as at the end of March 2020 amounted to EUR 340 million, most of them being deposits in the account of the clients. 80% -- 88% of our tourism exposure already applied for payment deferrals. Our exposure to trade is similar as at the end of December. 28% of this is in lower risk essential retail services not materially impacted by COVID-19 such as supermarkets and pharmacies. The unutilized liquidity of the sector amounted to EUR 830 million as at the end of March 2020. For this sector, 53% applied for payment deferrals. Slide 14. During this unprecedented time, our bank continues to operate smoothly, supported by its digital transformation program. The bank's digital transaction initiatives provide alternative solution to our customers to carry out their daily banking transactions. Today, 70% of our customers are digitally engaged, up 6 percentage points since December 2018 (sic) [ 2019 ]. It is evident that following the outbreak of COVID-19, the ratio of online banking transactions to total transactions increased by 15 percentage points to 45%. The bank has launched various initiatives aiming to provide better, faster and safe alternatives to customers. As a result, these include, amongst others, the issuance of debit cards free of charge until the end of May 2020; and additionally, new customers can receive free subscription to Internet banking; new customers can open an account via the bank website and receive a debit card free of charge; and other measures. I will now hand over to Eliza to take you through the highlights for the full year 2019 on Slide 15. Eliza, the floor is yours.

Thank you, Panicos. Hi from me. I only intend to take you through the headline slide for [indiscernible] of the timing of the issuance of our full year numbers. So if we start with Slide 16. Our capital position remains good. Total capital and CET1 ratios stood at 18% and 14.8%, respectively, well in excess of our regulatory requirements. The derisking of our balance sheet continued in 2019. The organic gross NPE reduction in the fourth quarter amounted to EUR 205 million, bringing total organic reduction since -- for the year to EUR 889 million, ahead of our guidance of around EUR 800 million reduction for the year. Since we peaked in 2014, our gross NPEs declined by 74% to EUR 3.9 billion or EUR 1.8 billion on a net basis. Our gross NPE ratio was reduced to 30% and exposure of 64% coverage by expected loan credit losses. Due to the prevailing market and operational conditions arising from the outbreak of COVID-19, the NPE sale currently is delayed and will take longer than anticipated to complete. During the quarter, our deposits increased marginally Q-on-Q by 1% at EUR 16.7 billion, whereas the loan-to-deposit ratio stood at 64%. In March 2020, liquidity fees were introduced to specific customer groups. In fourth quarter of 2019, we also successfully completed our voluntary staff exit plan, resulting in an annual gross savings in staff costs of 13% or EUR 28 million and a reduction of the full-time employees by 11%. The one-off cost of the VRS (sic) [ VEP ] scheme was EUR 81 million and was recognized during the fourth quarter. Also, the number of branches were reduced by 18% as facilitated by the ongoing digital transformation. As Panicos mentioned earlier, the percentage of digitally engaged customers increased to 70% as at the end of March 2020. New lending for the fourth quarter amounted to EUR 443 million and EUR 2 billion for the year, up 9% compared to the prior year. New lending for the full year '19 is at its highest level since 2015. In the fourth quarter, we generated total income of EUR 156 million and a positive operating result of EUR 53 million. Our cost of risk was at 0.9% for the fourth quarter, remaining broadly flat Q-on-Q. The underlying results for the quarter was a loss after tax from organic operations of EUR 6 million and a profit of $36 million for the full year. During the fourth quarter, there was a provision to net loss of NPE sales of EUR 86 million, which included, as previously announced, loan credit losses within the context of IFRS 9 of EUR 75 million for the anticipated balance sheet derisking through NPE sales. Following the one-off cost of the VEP of EUR 81 million as well as the net loss of the NPE sales of EUR 86 million, the loss after tax was at EUR 186 million for the quarter and EUR 70 million for the full year. Now turning to Slide 16, a few key points on our liquidity metrics. Our deposits are stable year-on-year at EUR 16.7 billion, and we continue to operate a significant excess liquidity of EUR 3.2 billion as at 31st December '19. Our loan-to-deposit ratio at the end of the year stood at 64%. And finally, our cash balances increased to EUR 5.1 billion. We also note that the ECB allows banks to temporarily operate below the LCR requirement of 100% in OpEx to allow the deployment of readily available liquidity during this period of market stress. In addition, the updated TLTRO terms are significantly more generous. And the June 2020 subscription has now been breached with liquid tenders of LTRO facilities. Finally, the ECB launched a new Pandemic Emergency Purchase Programme for an amount of EUR 750 billion, and purchases will be conducted until the end of this year. Now moving to Slide 17 on capital. We have a good capital position, well in excess of our regulatory requirements. As at 31st December '19, our total capital stood at 18.0% and our CET1 at 14.8%, with a CET1 buffer of 380 basis points. In front-loading, we have the ability to use AT1 and Tier 2 to meet Pillar II requirement, given an additional CET1 buffer of 131 basis points. The temporary relaxation of the capital conservation buffer also provides a further additional CET1 buffer of 250 basis points. Summing it all up, the bank's CET1 buffer increases to 761 basis points. Finally, as mentioned earlier, in April 2020, the Central Bank of Cyprus decided to delay by a year the phasing-in of -- by 50 basis points of the O-SII buffer until January 2022. Slides 20 to 42 provide a lot more detail of our performance in the fourth quarter, and we can discuss both at the Q&A session and in bilateral calls with all of you accordingly. So with that, I hand back to Panicos for closing remarks on Slide 18.

Thank you, Eliza. COVID-19 is a health crisis, presenting an unprecedented external economic shock. The current economic uncertainty means that we cannot, at this stage, have clear visibility of the future impacts of COVID-19 on bank group operations and financial results, and these, in particular, principally dependent on the rate and extent of the spread of the virus with direct and indirect impact on customers and the effectiveness on the regulatory and fiscal measures taken to support the economy and mitigate the impact of the virus. We have good capital and strong liquidity position as we entered the crisis. The government has taken all the right measures to contain the virus and provide superior injection of liquidity to businesses and private individuals. However, we acknowledge the deterioration of the short-term prospects of the Cypriot economy. As a consequence, we will not give the macroeconomic assumptions underlying the IFRS 9 calculation of loan credit losses for Q1 2020 in line with the relevant regulatory guidance, and we anticipate that this may result in increase of organic provisions in Q1, although the exact quantum of any such increase is as of yet unknown. While we are currently seeing lower transactional income and lower demand for loans, the ongoing economic uncertainty means that we do not have sufficient visibility about the likely future impact on the group operations or financial results. And we are also, currently, not in a position to guidance for the current financial year. However, we are confident that the bank's good capital base and strong liquidity position has to be able to support our clients through this period of extreme volatility, playing our part in limiting the impact of the pandemic is Cyprus. Our medium-term strategic priorities remain clear, with a sustained focus on strengthening our balance sheet and improving asset quality and efficiency in order to continue to play a vital role in supporting the Cypriot economy. This concludes our presentation, and we are now open for questions. Thank you. Thank you very much.

The first question comes from the line of Floriani Jonas with Axia Ventures.

I have a few questions. So starting on the NPE side of things, I was looking at Slide 25. And I was just wondering if you could share some color on how do you see your tools and ability to deliver outflows of NPEs in 2020. I understand that what's going to happen on the upper part of this slide, in terms of inflows, redefaults, et cetera, it's a big unknown. But how confident you are that you're able to deliver the actions you delivered in 2019 as similar to the bottom part of the slide? So this is question number one. And then the question two relates to that. I think we've heard some earlier comments from Cyprus regarding a potential bad bank. So just wondering if there is any related discussion on that, if there's anything you can share. And then finally, I will end with new lending expectation for 2020. You had a very good volume of new disbursements in 2019. I'm just wondering, now that you have all of this support and ability to support viable customers, if you see a major change in the volume of disbursements in 2020 versus '19, right? You closed '19 with EUR 2 billion. So I was looking if you could share like a volume expectation for 2020. I'll leave it there. And if there's anything else, I will try later.

Okay. I will -- thank you, Floriani. I will provide some short answers, and then I will give the floor to Panicos and he could comment on the NPE. And on Slide 25, I just wanted to mention that for 2020 and because of the moratorium, the moratorium does not trigger any automatic NPE flows, but with respect to loan volume, they -- as we've said, they're in continued assessment of the portfolio. And while we will consider that a risk, a signal of unlikely to pay in the long term, then we will be triggering our NPE. So the moratorium is kind of providing time and comfort so that we avoid NPE inflows. So this is my, let's say, the answer on this, but I'm sure that maybe Panicos can say much more on this. On the production of bank, yes, we have seen this in the news both on the European level and also in the local terms. It's something that is on the very, very early stages and -- so we don't know if this could -- we don't know any case about this or I cannot comment further. On the new lending for 2020, yes, I mean in the -- in this year, we probably will deal with providing liquidity support in profits from the clients. I do expect lower volumes than 2019, but I also do expect because of the moratorium, lower returns to our performing book. And as you may have noticed in the previous year, despite the significant new lending, we haven't seen our performing book growing too much because of the securities on repayments we had in the previous years of this group as well. So there will be lower volume than the 2019, but at the same time, there will be lower repayment of this book as well. Nick, can you be more specific on the NPEs on Slide 25 or Panicos?

Yes. I would like to add on Panicos said on NPEs of 2020 by saying that [indiscernible] by COVID-19 has a relation [indiscernible] that we are planning to be executed. [Indiscernible], we have a very strong pipeline. We are expecting NPE reductions to continue at a slower pace in 2020, mainly because most of the government services are not fully operational at this point of time. But as soon as the economic conditions normalize, we expect to resume our efforts to improve asset quality position and seeking solutions for the [ pandemic or economic ] impacts. This would mean that looking to our current NPE book and we put on one side, the portfolio that is for trade, the remaining NPEs are currently separated into 4 categories. And there is a separate strategy for each one of these categories. I will continue by saying that the remaining NPEs are separated into 4 categories. I will give you some more color on the categories that we are working on. With COVID, you know that we are working on a new strategy depending on whether the client have applied for the scheme or it's a strategy to foster or we are speaking about sensitive cases, so we've got a plan there how to resolve the SPA portfolio. We are still having some large groups in the portfolio that we have a clear leverage plan for each of them. Then we've got a restructured portfolio that we are monitoring closely -- close, so that it will exit NPE status in the near future. And then we've got a core portfolio, which, with a mixed strategy, will be applied depending on the category of the client. That means that whether there is a client that we have a cash flow there, if we are speaking about clients which have [indiscernible] or clients for which a restructuring is planned and is under its way. So I will say that we have, for our existing people, an action plan that we are committed to deliver. And we have shown the last 5 years that we have delivered EUR 11 billion NPE reductions, 75% of that was organically. So we have the knowledge and the experience to continue delivering sufficient NPE reductions for 2020 as well. Nick, can you comment on the trade, please?

Sure. Look, I've spoken about this before. As you know, it's part of our thinking and part of our focus and has been for some time now. We've talked about it on, probably, the last 2 or 3 quarterly calls. I think we'll be -- we've made good progress in developing that solution. You know it's an area we've got a strong track record in. We've delivered 3 previous trades and all of them are value-enhancing to the bank and our shareholders. I think that naturally you'd expect given the current circumstances. Both practical and financial people are taking a short pause, to be frank, to sorts out their own issues. And I'm fully expecting beyond that short pause to pick up that story. I think we've previously guided you into our hope. We weren't promising it, but I hope that we would deliver transactions during the first part of 2020. That's clearly been delayed by the current pandemic. And I'm focusing now more on the -- tentatively on the second half of the year. But obviously, we'll have to keep that under review because there are many, many uncertainties outside of our control right now on that issue. But it's still there, and it's still being actively developed.

Just a quick follow-up. Do you have any update both on the NPE flows but also on lending as of Q1 already?

For NPE -- for -- we do, but I don't think -- we don't think this is the right time to discuss this. We will shortly issue in Q1 results. Just to your questions on us on new lending, we are guiding for lower demand for new loans from here, from Q2 to Q4. And -- but the volume of loans actually will probably not vary that much from where it was at year-end because of the moratorium. Given the significant levels of moratorium take-up, as you've seen here, this means that the loan book will actually remain broadly flattish -- the performing loan book, I mean.

The next question comes from the line of Nowaczek Andrzej with HSBC.

Can you provide an update on state guarantees, please? When do you expect the law to be approved? And what impact do you think this will have for not just the new volumes but also profitability of those new loans and over what time period? And my second question is, what is the latest on the relaxation of lockdown restrictions? In particular, what are the scenarios here for hotels reopening and when?

Okay. I will take this, and Eliza will comment again. Okay. On state guarantees, I mean, actually, we said that this has been approved by the Council of Ministers, but not yet passed through the Parliament. Our information is that this will happen next week. But policies, we'll never be sure. So as of today, the percentage of each loan guaranteed now is -- maybe is 70%. I don't know if this will change. It will be -- because of the discussion that this may go higher to certain sectors of the economy, maybe up to 80% or 90%. And the -- actually, the rates are lower, as you may imagine. But given the cost, given the state guarantees, which require no caveat from the bank, I think, the returns, depending on which rates will end up in them, will be sufficient enough. So we believe that we can -- that within the next few months, we're going to see this going through the pipeline because it's something that both the Ministry of Finance as well is discussing with [indiscernible] to secure the majority that we needed. In terms of relaxation, actually today, we expect an announcement from the President about the relaxation in phases. We expect the first phase to begin on Monday. And set the category like construction or the sector -- [ IT ] sector, but I would not -- I don't even want to go, and let's say, [indiscernible] presenting the press. But it's obvious that -- let's say, hotels are in the last phase of the relaxation, which is positioned in June or early July. I think, Eliza, maybe want to say something on the state guarantees.

On the relaxations, Nowaczek, if I may add, there is -- the government is talking to the press over the last few days about their plans to push hard to make sure that hotel occupancy within the restrictions of -- that the remaining restrictions that would be placed at the time will start beefing up from late June and early July of 20%. And they're talking about forming a pact with other countries that have similar low COVID incidents, ratios, like Greece and Israel, in order to promote these destinations as sales and good options for touring. So this is a plan that's currently out being developed. And I think with Q1 numbers in the next few weeks, we would be able to talk more about it, more strategically about both the government and relative to the market.

And also, if we extend the tourist season, I mean for -- let's say, for the remaining of the year in Q4, September to November and December. I mean because as you know, Cyprus has a very few months of tourism, so -- but -- and in good weather even in -- even until December. So another 2 Q's extending the tourist season, for -- from September to October and November and maybe even -- and during December and January. But as Eliza said, we probably have not to say -- let's say, in May, probably we will announce the Q1 results.

Also on profitability and time period of the government guarantees, although the -- we haven't seen the final version of the law or the latest available, we understand that the intention is that they have up to 6-year loans. The headline NII profitability, net of the state guarantee fees will be lower than normal commercial loans, but the ROE remains reasonable. So because of the government guarantee and the -- we will equate from the portion of the loans that's guaranteed. So we are supportive of this team. It's also, we think, a very good tool, which will enable customers -- it will set against defaults in the future. It will provide good and low-volume liquidity. The one thing I do want to mention is that the crisis is actually a -- from an NII perspective, it's actually an opportunity to review and revise where possible the pricing of the existing portfolio as customers that require further assistance from the bank on a liquidity level. So this is one of the strategies we want to pursue as soon as some sort of normality comes back to the market.

And further on the [indiscernible] because after the existing, let's say, [indiscernible], this is -- it's an allocated amount per bank. So we estimate to be allocated 40% -- around 40% of this amount of the EUR 2 billion. So...

The next question comes from the line of Cunningham Corinne with Autonomous Research.

Can you hear me okay?

Yes.

That's great. A couple of questions. Have you actually given a date for your Q1 reporting yet?

No, we haven't, but we will confirm it closer to a time. It's all contingent on operational ability as well. We should be able, in the next few weeks, to reach an announcement on the date.

Okay. And my next question was on liquidity. So the liquidity position currently looks like favorable. But if you start to factor in the nonreceipt of interests, nonreceipt of loan repayments and possible drawdowns under the government guarantees loan scheme, what's your tolerance for the liquidity position? What do you think that would look like sort of going towards the end of the year?

Okay, we've actually -- yes. Sorry. Sorry. We actually are on multiple scenarios, Corinne, on this, including 100% or near 100% acceptance of the moratorium in the extreme. And we don't -- we are nowhere near the 100% LCR ratio actually in all scenarios. The moratorium, the whole installment, the -- this is the 100% take-up of the moratorium. It's roughly EUR 1 billion of inflows that will not come in. And our surplus liquidity, from a regulatory perspective, is at EUR 2.2 billion. We will be partly offset by lower new lending on assets before in any case. So we don't -- we're not worried about it because it is not -- I mean we are clearly monitoring it and managing it, but it's not at a level where we need to take action. The other point to say that the -- although the ECB relaxations are rare [indiscernible], the TLTROs, the collateral rules, our covered bond remains available if you need to use it to borrow. So we have a lot of backup liquidity as well if we need it.

The next question comes from the line of Sheward Rob with Toscafund Asset Management.

Just quickly, can I just follow up on the cost point? So I appreciate the movement given the VEP that happened in Q4. I was just wondering if you kind of think about that EUR 28 million run rate, I think, savings on cost. I was wondering if there was a bit of a better way of looking at it in terms of the net saving when you consider the renegotiations, et cetera. How should we think about that going forward, please?

Eliza?

Okay. Rob, we've -- as we've mentioned before, we do -- we did plan for another round of cost reductions down the road. I mean the timing of this now needs to be discussed again. It may or may not change. It depends on how things evolve. If it was -- but it wasn't an immediate next phase. It was planned a few quarters down the road. Having said that, we are also rethinking about everything else, all the non-staff costs and back at the drawing board to identify more savings to the ones that we have planned in any case for -- especially for 2020 and then, of course, for the following year. So we'll -- we are -- this is work in progress because COVID is only just for a short number of weeks. So we will be able to give more color on this, I think, as...

I think, Eliza, the number -- probably, the net saving is close to EUR 23 million after accounting for the collective agreement of the union, but we have some of the -- enough strategy...

For the IFRS, yes.

Yes, yes. So it's EUR 23 million after. We have the -- our -- actually, our COVID action plan, which is well, and it's becoming even more important given the prices and the reduction in our, let's say, revenues at least for 2020. So yes, it's becoming more important, and it will be more aggressive versus our original plan.

Okay. And just if I think about 2020 and the cost base compared to roughly EUR 400 million underlying last year, the cost base, can you keep that flat? Or can that still come down by an announce of the provocative plan of action part of the VEP?

I mean, see, the EUR 23 million that Panicos mentioned, you should assume is a reduction -- is a net reduction of staff costs. And as I said on the non-staff costs, we are trying to find more savings to even our plan. What I do -- I should mention, what is put is one is that -- in fact that in carrying deposit -- current shift in costs. And the other is that we do expect to have to incur incremental fees for the deferred tax credit law that went through last year. There were -- there was a EUR 12.5 million charge in 2019, and we expect roughly EUR 6 million or thereabout annual charge going forward as an increased fee for this benefit. But net-net -- net of lease, we should assume -- we should expect or you should expect savings compared to '19.

Yes. More [indiscernible] working regarding our payments first as we're trying to clear the amount.

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Nicolaou for any closing comments.

No, as I said, this is a period that is of uncertain times and going through this period, our bank has, as we said, a good capital and strong liquidity for our clients. We will be in a better position to provide more visibility on the 2020 numbers, together with our Q1 results -- announcing our Q1 results later in the year in the same method. So thank you all for your time. And of course, we will be willing to take any questions off-line from anyone that wants to see -- to [indiscernible] on our accounts and on our, let's say, presentation. And either -- I'm sure that both myself, Eliza and the remaining on the executive team will be willing to have a call with everyone that wants to have more visibility and more clarification on questions in our 2019 accounts and also in how we see things moving forward in Cyprus and the portfolio of the bank going forward due to the corona crisis. So nothing else from my side. Thank you all for your time. And I hope we will all stay healthy for the remaining of the season. Thank you.