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

Ladies and gentlemen, thank you for standing by. I'm your Chorus Call operator. Welcome, and thank you for joining the Bank of Cyprus conference call to discuss the group financial results for the quarter ended March 31, 2020. At this time, I would like to turn the conference over to Mr. Panicos Nicolaou, Chief Executive Officer; Mr. 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, Corporate Finance Solutions; and Ms. Annita Pavlou, Manager, Investor Relations. Mr. Nicolaou, you may now proceed.

Thank you, Ms. Dawn. Good afternoon, everyone. Thank you for joining us. I hope everyone remains safe and healthy. Slide 3 summarizes the key highlights for the first quarter of 2020. I will briefly go over this. The COVID-19 pandemic is testing us all in ways we could never have anticipated and it's causing disruption, stress and uncertainty. Bank of Cyprus has an active role to play with supporting our customers and helping to rebuild economic growth. The bank's priorities under these unprecedented times remain clear: to protect the health of our customers and colleagues while ensuring the operational resilience of the bank; 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. Cyprus has successfully managed the spread of the virus, and this allowed a gradual relaxation of the restrictive measures. We are currently in the second phase of the government road map for the reopening of the society and the economy. The pandemic has deteriorated the macroeconomic outlook. Consecutively, and as we previously announced, we have updated the macroeconomic assumptions, underlying the current line calculation and the loan credit losses from Q1. This has led to an increase of EUR 28 million in loan credit losses, reflecting additional 88 basis points cost of risk. Due to the prevailing market and operational conditions arriving from the outbreak of COVID-19, the NPE sale is taking longer than originally anticipated. Currently, we are focused on proactively assessing the impact of COVID-19 on the loan portfolio. The bank entered business at the times with good capital, strong liquidity and funding position. We have capital way in excess of our loan requirement. As of 31st of March, our top capital ratio stood at 17.7% and our CET1 ratio up 14.3%. Our surplus liquidity amounted to EUR 3 billion and then on the quarter. The balance sheet repair continued in Q1 despite the COVID-19 lockdown. The organic NPE reduction for the first quarter amounted to EUR 142 million. NPE reduced to EUR 3.7 billion and EUR 1.6 billion on a net basis. The gross NPE ratio reduced to 29% and to 15% on a net basis. Exposures are now covered by 56% on credit losses and by 124% when tangible collateral is included. In May, we completed the sale of EUR 133 million of retail unsecured NPEs, known as the last Velocity 2. The transaction was capital neutral. The improvement of our operational efficiency remains a key priority for us. Following the successful completion of the voluntary exit staff in the previous quarter, the cost-to-income ratio decreased by 5 basis points to 58%. During the quarter, total operating expenses decreased by 14% quarter-on-quarter, 28 -- to EUR 84 million. Today, 70% of our customers are digitally engaged. We expect the increased digital engagement of our customers during the lockdown period to support our efforts to improve -- further our efficiency. New lending for the first quarter amounted to EUR 451 million, up 2% quarter-on-quarter. In the first quarter of 2020, we generated total income of EUR 145 million and a positive operating result of EUR 52 million. Loan credit losses for the quarter amounted to EUR 64 million, including COVID-19-related charge of EUR 28 million. The underlying results in the quarter was a loss after tax from organic operations of $23 million and a loss after tax of EUR 26 million. Turning now to Slide 5. The Cypriot government swift reaction has successfully contained the spread of the pandemic effects. Statistics has been very encouraging, demonstrating an ongoing slowdown in new cases. The daily reported cases remain consistently low despite the gradual relaxation of the restrictive measures that commenced from the 4th of May. Slide 6 provides the summary of the government road map and the reopening the Cypriot society and economy. The lifting of the restriction takes place in a gradual and controlled manner and is subject to no material increase in the reported COVID-19 incidents. Currently, we are in the second phase of the gradual relaxation measures. The hotels and the airports are expected to open mid-June. Slide 7 provides details from the bank's pandemic plan. For the interest of time, I will not spend much time on this as these slides were discussed on our 2019 investor call results. Slide 8 will present the fiscal measures to achieve benefit from government aimed at providing liquidity to businesses and preventing sharp rise in unemployment. Again, I have already talked to you about the various fiscal measures, payment [ not occurring ] and job production schemes announced in March. The government have now strengthened measures in May 2020 and includes liquidity support of small businesses and self-employed while subsidizing a part of the operating expenses such as rent and supplier payments. It's expected that over 36,000 small businesses and self-employed will benefit from this measure. Tax incentives from the reduction of rents on a voluntary basis, and liquidity support to agricultural sector. In mid-May, the [indiscernible] was withdrawn, as the government does not expect this to be approved by the Parliament. The government is working on a new set of measures expected to be announced this week for the support of small businesses and self-employed. This set of new law is expected to include liquidity support through loans and new tenant [indiscernible]. It's important to note that the withdrawal of the government [ grants ] does not affect our intention to support the variable and performing businesses hit by the COVID-19 in order to alleviate the short-term customer burden. Slide 9 provides a summary of the measures taken by the regulators for mitigating the COVID-19, [indiscernible] from the quarter. Again, I will not go over in detail. As a brief reminder, these measures are unprecedented and have already been put in place to provide flexibility in banks with regards to capital liquidity requirement. This will enable the banks to provide the necessary support to their customers. On Slide 10, we provide an update on the loan moratorium included in the government measures. As a reminder, the loan moratorium was started on 30th of March, and also we have special interest [indiscernible] for loans, overdrafts and credit cards for a period of 9 months until the end of 2020. The moratorium is available to all customers, both private individuals and businesses, with arrears less than 30 days as of 29th of February. The loan term will be extended so that the loan payments will continue to be as per existing schedule. During the moratorium period, interest will continue to accrue. It is important to know that as per the measure done by the regulators, the COVID-19 moratorium does not trigger automatic reclassification due to forbearance. As of 20th of May, we have received almost 20,000 -- 24,000 applications for EUR 5.70 billion of gross loans, accounting from 53% of the loan book, excluding the legacy. Applications from businesses amounted to EUR 3.74 billion or 72% of the non-legacy loan book, whereas applications we received from private individuals amounted EUR 2.04 billion or 52% of the non-legacy loan book. As we like to ask ourself that given the moratorium period, we will continue to closely monitor the creditworthiness of our customers who applied for [indiscernible] from the day after, not to prospectively and timely address any potential worsening of their credit quality, following that on the moratorium. Now I will hand over to Demetris to take you through a deep dive of our loan portfolio and elements of cost of risk, who will please reflect [indiscernible].

Thank you, Panicos. Good afternoon to all. I will start from Slide 11. The Cypriot economy recorded a growth of 0.8% in the first quarter of the year, reflecting the COVID-19 lockdown. The public projections of the Ministry of Finance, EBRD, European Commission and the University of Cyprus are critical that under the base scenario, the Cypriot economy will shrink by up to 7% in 2020 and then grow by 5% to 6% in 2021. Our IFRS 9 macro economic productions are in line with these published productions. Under our base case scenario, we expect the Cypriot economy to shrink by 6.9% in 2020 and to grow by 5.4% in 2021. We also expect unemployment to increase from 7.1% in 2019 to 9.1% in 2020 and '22, to 7.6% in 2021. Having said that, the outlook remains uncertain. The impact of the pandemic on the Cypriot economy will largely depend on the duration and the intensity of the pandemic. Moving on to Slide 12. Coming into the crisis, the group has a well-diversified non-legacy loan portfolio amounting to EUR 9.15 billion as of 31st of March 2020. The plans to continue closely monitoring the book and set up strategies to prevent further asset quality deterioration. Based on our assessment on the impact of COVID-19 on the various economic sectors, we expect that the tourism sector will be the most impacted, representing 11% of the non-legacy loan. Around 18% of the non-legacy portfolio is expected to have a medium impact, including sectors such as trade and manufacturing due to the shrinkage in demand and effectively, consumption, stemming from the strict lockdown in the previous months. Construction is expected to be only moderately impacted by COVID-19, but its operations recommenced on May 4. Overall, 14% of our loan book is expected to experience a moderate impact. Finally, around 13% of the non-legacy loan book is expected to experience a low impact including sectors like education, real estate and health. We are setting up targeted and efficient strategies for each client segment and industry in order to address an issue. We are in close contact with our customers, to primarily to assess the full extent of the COVID-19 chronic side effects; and secondly, to provide relief in the form of payment dividends, restructurings, and liquidity assistance to our wider clients to help them alleviate the short-term cash flow burdens. Turning to Slide 13. As of 31st of March, the non-legacy loans to private individuals amounted to EUR 3.95 billion, representing 44% of the total non-legacy loan portfolio. Over 80% of the private individuals loan portfolio is housing loans. This segment is well-collateralized, with a loan-to-value ratio -- with a low loan-to-value ratio. Around 67% of these loans are an LTV below 60% and less than 15% of the portfolio has an LTV over 80%. Other loan to private individuals amounted to EUR 0.71 billion as of 31st of March 2020. 60% of this portfolio is secured, of which 60% by property, and the remaining 40% by other type of collateral. It is expected that over 35% of total employment will remain largely unaffected from the COVID-19 crisis. As this process including the government, semi-government and financial sectors, which are protected and have not indicated an intention [ for just products ]. 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. The government expects that over half of private sector employees and around 40,000 self-employed will benefit from employment compensation schemes. As previously mentioned, the moratorium applications received from private individuals amount to EUR 2.04 billion, and are driven by mortgages and personal loans. Moving on to Slide 14 that provides a breakdown of the non-legacy business portfolio now assessing on the impact of COVID-19. The non-legacy business loan assessed at 31st of March amounted to 5.4 -- EUR 5.2 billion and is well-diversified in high-quality products. Following the last crisis, we now have high quality origination via prudent underwriting standards. We make strong assessment of the paying capability of our customers. To put this in context, 98% of new exposures since 2016 are performing. Finally, there is an effective foreclosure in place following the amendments that took place in recent years. 88% of the business of the business portfolio is secured, of which 79% by property. Overall, the business portfolio has a low loan-to-margin ratio around 70% -- around 70% of the portfolio has a loan-to-value ratio of less than 80%. Moving on to Slide 15. As mentioned earlier, the factors mostly impacted by COVID-19 are tourism and trade. As of 31st of March, our total exposure to tourism amounted to EUR 1.03 billion, around 5% of this relates to food services. The unutilized liquidity of the sector remained broadly unchanged and amounted to EUR 0.33 billion as of 30th of April 2020. According to the government's road map for the reopening of the economy, airports and hotels are expected to open in mid-June. The government is taking actions in order to capitalize on the successful handling of the health aspect of COVID-19 to position the country as a safe tourist destination. Finally, around 96% of our tourism exposures applied for premium deferrals. Our exposure to trade amounted to around EUR 1 billion as of 31st of March, 28% of this is in lower risk essential retail services, not materially impacted by COVID-19, such as supermarkets and pharmacies. Unutilized liquidity of the sector amounted to around EUR 800 million as at 30th of April. 54% of our trade exposures applied for payment deferrals. Turning now to Slide 16 and the cost of risk. The annualized cost of risk for the first quarter increased to 2% of gross loans, of which 88 basis points reflect the initial impact IFRS 9 forward-looking information, driven by the deterioration of macroeconomic outlook. Excluding this, COVID-19-related charge, the cost of risk for first quarter of 2020 was 1.12%. The change in the macroeconomic assumptions also resulted in a migration of around EUR 435 million of gross loans from stage 1 to stage 2. Finally, as a reminder, interest on net NPEs not received in cash is fully provided for, which in Q1 represented 53% basis points out of the 112 basis point non-COVID cost of risk. On Slide 17, the bank's digital infrastructure initiatives provide alternative solution to our customers to carry out their daily banking transaction. Today, 70% of our customers are digitally-engaged, up by 5 percentage points since March 2019. Our active digital users increased by 15% since March 2019 to 263,000. As Panicos mentioned earlier, we expect an increased digital engagement of our customers during the long-term period to support our efforts to improve further our efficiency. Now I will hand over to Eliza to take you through our performance in the first quarter of 2020.

Thank you, Demetriou. In the interest of time, I will go through some selected slides on the Q1 performance, and we can always discuss anything else you might like to ask in the Q&A session or on by [ natural ] calls afterwards. So starting from Page 19. We have a good capital position well in excess of our SREP requirement. As of 31st March, our total capital stood at 17.7% and our CET1 ratio at 14.3%. The ECB's capital relaxations announced in March 2020, allowing the front-loading of the ability to use AT1 and Tier 2 to make Pillar 2 requirements reduced our CET1 requirement to 9.7%. Our CET1 capital buffer as of 31st March was around 460 basis points. The temporary relaxation of the capital conservation buffer provides a further additional CET1 buffer of around 250 basis points. Summing it all up, the bank's CET1 buffer increases to 710 basis points. Finally, in April 2020, the Central Bank of Cyprus decided to delay by a year the phasing in by 50 basis points of the O-SII buffer until January 2022. Now turning to Slide 20. During the first quarter, we have generated 40 basis points of capital in operating profit and another 20 basis points of capital from the decrease of risk-weighted assets. These were offset by expected loan credit losses and impairment of around 50 basis points, 20 of which reflect the deterioration of the macroeconomic outlook due to COVID. CET1 ratio was also negatively affected by the decrease in revaluation reserves as a result of the decrease in fair value -- in the fair value results for fair value debt securities that reduced the capital by around 25 basis points. Since 31st March, the mark-to-market valuation of the debt portfolio held at fair value to OCI decreased by a further EUR 5 million. This change is recognized directly in equity. Now moving to Slide 21. Our risk-weighted asset intensity remains broadly flat Q-on-Q at 62%, and the total risk-weighted assets dropped by around EUR 290 million following the further derisking of our portfolio. Now a few points on the key liability metrics, as shown on Slide 22. Our deposits decreased by 3% Q-on-Q to EUR 16.2 billion, and the reduction in deposits on a Q-on-Q basis was -- it took place before the outbreak of COVID, reflecting mainly the introduction of liquidity fees in early March 2020 and seasonality in the first couple of months. Approximately 2/3 of deposits represent those who are individual passport owners of Cyprus, while only 4% of those are Russians. The group maintained strong deposit market share of around 35% over the quarter end, and we continue to operate with significant excess liquidity of Cypriot euro as of 31st March, 2020. Now moving to the legacy portfolio, starting on Slide 23. In the first quarter, the gross NPEs reduced by EUR 142 million to EUR 3.7 billion and to EUR 1.6 billion on a net basis. Overall, since 2014, gross NPEs reduced by EUR 11.3 billion or 75%, of which EUR 8.6 billion has been through organic actions and EUR 2.7 billion through NPE trades. The gross NPE ratio reduced by 1 percentage point on a quarter basis to 29% and to 15% on a net basis. Overall, the NPE ratio reduced by 34 percentage points since peak in 2014. Despite the COVID-19 outbreak in May 2020, we have completed the sale of EUR 133 million retail unsecured NPEs known as Project Velocity 2. This transaction is capital neutral. Now moving to coverage on Page 25. The bank's NPE coverage ratio increased by 2 percentage points to 56% at the quarter end. The bank stats today above the European average coverage ratio of 45%. And total coverage including tangible collateral increased to 124%. Average of reperforming NPEs is relatively low at 25%, reflecting the lower risk associated with this type of NPEs, whereas the coverage of core NPEs increased to 60%. Now turning to Slide 26. The NPE reduction continued in Q1, but at a slower pace, reflecting the COVID lock down in March. NPE outflows for the first quarter amounted to EUR 158 million, while inflows in the first quarter amounted to EUR 16 million, representing only around 1% of the performing loan book. Write-offs for the quarter amounted to EUR 71 million, representing 45% of organic growth NPE reduction. As we have previously explained, we continue to expect that the proportion of write-offs will be volatile in any given quarter. Slide 27. As in the bank's loan portfolio is of utmost growth important for the group and our stakeholders. Today, the bank's EUR 3.74 billion of gross NPEs fall into 2 principal baskets. Firstly, we reperforming NPEs, which totaled EUR 360 million. As a reminder, reperforming NPEs are loans that have been restructured, have no arrears but still classified as NPEs but are expected to exit the NPE definition in due course. As shown on the slide, around 83% of these reperforming NPEs are available for exit by the end of 2021, subject to continuing to meet all relevant exit criteria. It's important to note that the exit date may be extended if reperforming loans are eligible and choose to apply for the loan moratorium. Secondly, currencies amounting to EUR 3.38 billion. The COVID outbreak has inevitably slowed the pace of organic NPE reduction and has delayed the planned inorganic trade. The group focus is on arresting any potential asset quality deterioration in the performing book. Once economic conditions normalize, the group expects to resume its efforts to improve its asset quality position by seeking solutions both organic and inorganic. Core NPEs includes ESTIA-eligible NPEs of around EUR 820 million. We have received applications for EUR 383 million of these. However, 76% of these applications remain incomplete, with a deadline for completion of 30th June. For now, from the applications assessed to date, EUR 42 million are eligible and around EUR 30 million are nonviable. Our plan for this portfolio: prioritize realizing collateral using write-offs to incentive quicker cash or debt for asset swap solutions and using foreclosures or other enforcement rules where borrowers are not willing to cooperate. This will continue to be facilitated by the onboarding aspects into revenue at a conservative, around 25% to 30% discount to open market value. As a last point, I would like to mention that following the COVID outbreak, the foreclosure profits has been suspended until 31st August, 2020, in line with the latest decision of the Association of Cyprus Banks. Now moving to income statement on Slide 32. Net interest income remained broadly flat Q-on-Q at EUR 85 million in the first quarter, including approximately EUR 4 million of interest collections not previously recognized. Net interest margin increased to 1.95%, positively impacted by the lower volume and cost of deposits. Noninterest income dropped to EUR 60 million for the first quarter, following a reduction in insurance income and a slowdown in REMU gains due to the COVID lockdown. Total income for the quarter decreased to EUR 145 million compared to EUR 156 million in the fourth quarter of last year. Now expenses. Total expenses for the first quarter decreased to EUR 93 million from EUR 103 million for the fourth quarter due to lower staff costs and operating expenses. As a result, the cost-to-income ratio decreased by 5 percentage points on a Q-on-Q basis to 58%. Loan credit losses amounted to EUR 64 million, of which EUR 28 million reflects initial impact of IFRS 9 forward-looking information, driven by the macro outlook as discussed previously. The overall loss after tax amounted to EUR 23 million for deferred cost. Now moving to Slide 35, where we analyze the drivers of NIM. Our NIM in the quarter improved to 1-9-5, 195 basis points, mainly due to the lower volume and cost of deposits. The yield on the performing book reduced to 324 basis points in the quarter as they remain under pressure, mainly due to the continued low interest rate environment. The legacy book is increased to 560 basis points, positively affected by increased interest collections in the quarter. Finally, the cost of funding decreased to 30 basis points, positively impacted by the reduction in the cost of this funding declined by another 5 points in Q1. Turning to noninterest income on Slide 38. Noninterest income for Q1 decreased to EUR 60 million. Recurring income was EUR 49 million in the quarter, down by 9% Q-on-Q, mainly due to lower insurance income. Net fee and commission income remains broadly flat at Q-on-Q at $38 million. Net fee and commission income comprises 44% from transactional income and negatively affected by the COVID outbreak. The remaining is non-transactional and therefore, more resilient. Net insurance income amounted to EUR 11 million in the third quarter compared to EUR 16 million in the previous quarter, reflecting primarily the negative market performance following the COVID outbreak and higher insurance claims. Revenue net gains amounted to EUR 1 million for the quarter compared to EUR 6 million in Q4, reflecting the slowdown in the new sales due to a lock down in March. REMU profit remains volatile. Now turning to costs on Slide 38. Our cost-to-income ratio excluding bank loans stood at 58% for Q1 compared to 63% in Q4 2019, principally reflecting the lower total operating expenses. Staff costs for the first quarter reduced to EUR 49 million compared to EUR 53 million in the previous quarter, reflecting the net savings from the successful voluntary staff exit plan. Operating costs were also reduced to EUR 35 million for Q1, attributable to lower consulting expenses and property. Special levy and contributions to the single resolution fund and the deposit guarantee fund for the quarter amounted to EUR 9 million, including a EUR 2.9 million contribution to the deposit guarantee fund. As a reminder, as from January 2020 and until July 2024, the group is subject, on a semiannual basis, of a similar level of contribution to the DGS fund. With that, I hand back to Panicos for closing remarks.

Thank you, Eliza. COVID-19 presents on unprecedented external economic shock. At the moment, we are clearly phasing into a period of significant economic uncertainty, and we are taking a measured and prudent approach in how we position the bank going forward. We are mindful of the need to preserve our capital and financial liquidity strength as well as playing our part in supporting the economy as we go through this difficult period. The gradual reopening of the Cypriot economy is encouraging, and we remain cautiously optimistic. The deterioration of the short-term prospect of the Cypriot economy has led to an 88 basis points increase now at cost of risk. Our current liquidity funding and capital vision position us well to withstand the crisis. We entered the crisis with a well-diversified loan portfolio. However, we have no clear visibility of indirect and direct impact of COVID-19 on our customers and the effectiveness of the elaborate fiscal measures taken by the economy and mitigate the impact of the virus, we will closely monitor their performance. Our middle 10 strategic priorities remain clear. We can sustain the focus on strengthening our balance sheet and improving asset quality and efficiency in order to continue to create a wider role in supporting the Cypriot economy. This concludes our presentation, and we are now open for questions. Thank you all for having the patience to listen to us.

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

I have 2 questions on asset quality. First is on Slide 26. I was just wondering if you could run through briefly the -- what you saw in terms of dynamics of Q1 inflows and outflows. I suspect that most of this performance is reflecting January and February, given the macro situation. And if you have any color on how we should think about these dynamics now in the second quarter, that will be very helpful. I remember that you previously -- you commented on that you're still expecting a reduction in the stock of NPEs for 2020 and just wondering if this still holds? And then my second question is on Slide 16. On a similar note, if there's any visibility on the cost of risk going forward? I assume that if we don't expect any major changes in terms of macro estimates for the year, we should not see additional one-offs in your cost of risk as well. And if that's the case, I was also wondering if the 112, 110-or-so basis points that you booked in Q1 could be a run rate for the rest of the year on an underlying basis? I'll leave it at that.

Thank you, Jonas. I will go ahead with the first question, and then I will hand over to Demetris to further question on the cost of risk. Sorry, Slide 26, indeed, you see that you have, let's say, the lowest inflows of NPE in this quarter, and this is very encouraging. As you said, this was mainly in the first 2 months of the cost. But given the moratorium and the measure we are taking on properly assessing the [indiscernible] of our clients, we do not expect significant inflows of NPE through the remainder of the year. However, on the outflows, there is a plan. We are constantly monitoring. But is this is kind of let's say more unknown. So yes, I think you should keep the confusion that you don't expect during the next couple of months, only significant NPE inflows in our portfolio. Demetris, [indiscernible], any color on this slide as well?

Well, let me look at the cost of this, and I'll start first with macroeconomic parameters, I think that was the first part of the question. So what -- first with the agri macroeconomic plan, that's following the public advice that we gave same as well. We considered various scenarios of the different degrees of adversity, and we combine the most prudent rating to derive our forecast of the way forward. As we indicated, [indiscernible] coming there from this slide. So currently, I would say as well, [indiscernible] the next year as well. If this continues, then pressure of the macro economic environment [indiscernible] default, will ease off gradually. However, we will need to wait and see how this materializes. And up until the time when we have substantial evidence that the situation has stabilized and has improved, we would continue to be prudent in the way to look at this scenario. Now as far as run rate of the cost of risk, 104 basis points as indicated is reasonable given the situation today. But I have to note here that a significant driver of this 104 basis points is the provision we take for the non-cash interest recognized on NPEs. As shown in the presentation, this is a charge of around 53 basis points. So going forward, a sale and recognition of an NPE part of the portfolio is expected to have a positive impact on the provisions going forward. Well, I hope that answers your question.

The next question comes from the line of Daragh Quinn with KBW. Mr. Daragh Quinn, can you hear us? We'll continue to the next question. Next question comes from the line of Cunningham Corinne with Autonomous Research.

A couple, please. Just let us know what you're thinking in terms of loan growth. I know you mentioned that the government guarantee schemes are not back in place yet, but you don't expect that to affect the support you're going to provide. So if you could give us a scale perhaps of how much you expect loans and RWAs to increase from that? And then on the capital front, are there any releases of capital from elements such as IFRS 9 or some changes in the software deduction? Could you guide us through any changes in RWAs or capital calculations that might come from either of those types of things?

Okay. Thank you, Corinne. I will try to answer your question on loan growth. And then Eliza -- hand it over to Eliza for the RWAs question. So okay, as you are giving -- may have noted that 2019 new loans was a regular year for the bank, EUR 2 billion. And even Q1 of this year was up 2% versus 2019 cost [indiscernible]. But I wouldn't be prudent to you. If I was to say that, I expect, let's say, the same amount of new loans in 2020, '22 -- 2020 need to [indiscernible] . So I expect lower volume of new loans, and this volume of new loans will be mostly related with providing liquidity assistance to our clients, which we already do. And as we said, the absence of any debt guarantee does not, in any way, change our way of seeing things in providing the liquidity to our viable clients. So I expect unless if we launch in 2020, but I also expect that the funding book to remain broadly flat to this year given the moratorium. Eliza, how do you want to do this?

Yes. So Corinne, I think you're referring to the announcement of the European Commission a couple of -- 3 weeks ago or so. So yes, we do expect a benefit to come through from those. We haven't put in the slide because, as you know, it's not yet legally in place. However, actually, the biggest benefit for us is this SME factor on the risk-weighted assets. We expect around EUR 350 million benefit coming from those. This is based on kind of high-level information without knowing whether this is paid yet, because it has not been announced. And we do expect -- actually there is the possibility that we may have another modest level of benefit from software as the technical guidelines have not yet issued a [indiscernible] , to what extent our software or intangibles will qualify, so that remains a potential positive, but as of this time unquantified. I hope this helps. And on the last one is mine, you mentioned actually. Yes, there is -- it's good that the dynamic part of IFRS 9, so. Any COVID provisions we may take will be phased out and will start to be impacting capital as from 2022. However, the impact of that, we expect is more just based on what we currently see. Of course, this depends on how the market assumption and how we kind of call out [indiscernible] roles if we end up with more Stage 1 and Stage 2 provisions, we will have a bigger capital benefit. Effectively what that said, what that decision or the commendation said, is any IFRS 9 COVID-19-related provisions on Stage 1 and 2 loans, new provisions, can be -- can keep capital with a 2-year time line.

And just to be clear, when you said the SME factor, the EUR 360 million benefit, that would be a reduction in RWAs by 2019?

Yes.

Yes, yes, yes.

It's a beneficial -- it's a more favorable capital treatment given by the European Union to encourage lending to SMEs. And it so happens that in Cyprus -- actually quite a lot, some of our corporate portfolio also qualifies for this SME definition because of the size of the country and the company. So we it starts to benefit disproportionately from this positively. Evidently we'll see around -- definitely it's actually a revenue adoption, so it brings forward something that would have happened down the road in 2021. And it's a permanent benefit, unlike the temporary capital conservation after another, more temporary benefits. This is an actual hard benefit, assuming it gets [indiscernible] soon.

The next question comes from the line of Robert Sheward with Toscafund.

Just a couple of questions, please. Firstly, on fee income. I was wondering if you could just discuss that a little bit most definitely around the kind of structural versus cyclical, which is, I think that the -- yes, just to get a sort of bit of color going forward. Then on interest income, similarly, I was wondering, I appreciate you just sort of partly asked the question around balance sheet size performing book so it's actually going to stay at a similar level. I was wondering if you could just give me a bit of an indication what front versus back book yields were [indiscernible] portfolio for Q1 for the EUR 450 million revenue lending. And then my follow-on, which is on the NPE sale, appreciate that currently off for now. Have any kind of potential discussions is completely sort of gone? Or are they keeping on going slower? The portfolio, federal? Or should we just -- we visited at the later stage?

Thank you for that question. I will start with the last 1 and then hand over to Nick about the LNP trade. Nick?

Rob, it's Nick. Hope you're well, thanks for the question. I can't really say a lot more over and above what I said on the relatively recent full year 2019 announcement call, which is, look, obviously, COVID has interrupted our hope for an H1 execution, but we're kind of tentatively focusing on a delivery into the second half of 2020, but I'll be, going to caveat that with -- there is a high degree of uncertainty, many of which are kind of outside of our control, so I think we need to keep this situation collectively under continuous reassessment. But our endeavors remain, and our hope is focused on the second half of the year.

Thank you, Nick. Eliza on the income side?

And so on fees drop, if I refer you to Page 36, where we have the fees, and they are -- they were EUR 38 million this quarter or EUR 39 million the previous quarter, so that's the kind of run rate. We see that risk, as I mentioned, relates to the 44% transaction now. And all of that, actually, not a lot of the policies, we expect a roughly 20% drop due to profit for Q2, Q3. Hopefully recovering or expected to recover from Q4 to start recovering and fully recover next year. But there is actually the main reason for the drop -- the expected drop, 2 faults: the first 1 is card, card usage, which is leading to consumption and therefore, macro and is also linked to tourism, and that, and there the use of cards, foreign cards in Cyprus; and the other element is international transfers, mainly coming from our international banking services [indiscernible] . Now on [indiscernible] spreads, I will refer you to Page 34, 1 of the pages I haven't covered. There, you will see some you see the effective yields of the legacy and the non-legacy portfolio. And I would see that from the non legacies of the performing book, there's definitely acute positive -- I mean, the front book is slightly lower than the average. But we don't have the number, the exact number, when we go public.

Okay. Okay. So yes, so basically, non-legacy is slightly [indiscernible].

Yes. So it is...

Revenues.

As -- don't forget that new lending this year will be actually relatively modest. And actually, the back book, the non-legacy back book will, to a large degree, continue to be in place by -- until the end of the year, this remark sorry [indiscernible]...

So is the higher rate?

No, what I'm more thinking about, sort of the reason of my question is more around the sustainable [indiscernible] profit basically, assuming at some stage that the legacy is not around or a portion of the new legacy of software [indiscernible] my thinking. But obviously even when you say effective yield, I mean maybe you said [indiscernible], but are we talking -- I mean I don't know, maybe you can answer that in a slightly different way. If you look at mortgage rates, for example, what are they coming in at now -- or maybe at the beginning of the quarter, because maybe it's slightly unrealistic to that today?

Market rate [indiscernible]

Market rate, are let's say, gradually rising. I have seen them gradually rising the last couple of months, while it's still on the rate close to 20, 25, 2.5%, where business loans are up. I mean we are seeing average spreads for new business loans of 3.5%. So we don't expect the coming lines at the bank book, who is higher priced because of the moratorium will not decrease us, we used to happen in the previous years. We expect the rates to remain broadly flat or -- and it's high property to become debt, I mean their effective reach on the loan book. But it's actually that, that makes it leading.

Actually, on the mortgage loan book, Rob, we don't really see a big difference between front and back book average rate state. Positive net loans were [indiscernible] were prices in most of these days than maybe pre-COVID.

The pricing I mean, [indiscernible] lumpy coverings is clear.

We have a follow-up question from the line of Cunningham Corinne with Autonomous.

I just wanted to ask about TLTRO and whether you had plans to use that and perhaps you can give us an idea of scale or impact that, that might have on your NII, if you do choose to go ahead?

Eliza, this is yours.

Okay. So yes, we are looking into it. We haven't yet decided whether -- and how much to go for. If I was a betting person, I'd say we'd probably go on -- go apply going in the -- participate. However, the benefit actually relate -- it can be from 0 to around 50, 60 basis points, depending on the lending that we expect we have done and expect to do in the period during which the TLTRO formula works. And this is something that we are still trying to decipher, so I cannot give you clear visibility yet of numbers. Is it something we consider in the next couple of weeks ahead of the deadline of participation.

We have another follow-up question from the line of Robert Sheward with Toscafund.

So just on TLTRO, just a follow-up on that question, did you say the maximum that you could draw and I think the line just [indiscernible] when I was [indiscernible] ? And then just on operating expenses, so obvious good performance this quarter, I appreciate that you've done [indiscernible] this time last year. Outside of some of the moving parts around levies, et cetera, would you expect this sort of run rate to continue?

Okay. On the -- I couldn't hear very well the first question, but on the question of what the expenses, I mean we are using a clear [indiscernible] there was a COVID action plan within the bank pre-COVID. This has been revised and has been more aggressive post-COVID, and we expect, let's say, a reduction versus 2019, not only on the staff costs, which are expected because of the -- of what you plan you have [indiscernible] I think that was on the, you may not have heard of [indiscernible] you expect -- we expect to have a meaningful cost reduction during the year, yes. On the first question, sorry, I couldn't very well. So if you can, please?

I just wasn't sure, sorry, I couldn't hear whether what you and Eliza said, whether there's a maximum TLTRO benefit in terms of take-up or you just expect to take as much as possible?

And I'll ask Eliza to...

No. What I said is the benefit of the order of 50, 60 basis points maximum, but whether we can take that or I mean, benefit from that or not, I mean to what extent, we can benefit from that or benefit from that, it depends on our new lending to certain types of customers, local within a certain period. In Europe, there are some restrictions, so we're working through our numbers again to see to what extent we feel what is the probability we feel will benefit. And depending on where we get to, we also apply for an amount, depending on our transport that we will actually benefit from it. So forget the TLTRO product, it's effectively a carry trade. So it's -- we will borrow and place back from ABB at the market, not do you think about it. So it's a matter of making sure we can benefit. We feel we will end up participating, but the expense and the benefit is fading [indiscernible] .

But the amount of -- the amount of, in TLTRO, though you can apply for it, it's more by [indiscernible] , correct?

Yes, its number is really, is [indiscernible]. Yes.

Mr. Sheward, are you done with your questions?

Yes. That's fine.

If I can just go back to the TLTRO question, apologies for reverting. Actually, the amount we can apply for it, whether this number is in excess of EUR 5 billion. But our thinking if we are to apply is for amount of the [indiscernible] like Panicos mentioned, just to make sure there's no confusion on this point.

Thank you very much. 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. Thank you.

A final comment on our strategy, and I would like to emphasize this, it remains the same. We're want to strengthen our balance sheet, but at the same time, improve our efficiency, which we could manage especially comes with changing our operating model, reducing our costs and of course, bringing forward what aggressively our digital agenda, reducing [indiscernible] is a commitment. It's a commitment, together with accelerating debt reduction through organic and inorganic [indiscernible] and talking about an upcoming union trade [indiscernible]. That's it for the -- of course, we'll be more than happy to discuss in 1 by 1, let's say, conference call that we try to view that. We'd like to tell and mention about the strategy of the bank and about the results of Q1. Thank you all for participating, and I wish you all stay safe and healthy. Thank you.