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

Ladies and gentlemen, thank you for standing by. I'm Rico, 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 6 months ended 30th June, 2020. [Operator Instructions] At this time, I'm glad 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, Corporate Finance Solutions; and Ms. Annita Pavlou, Manager, Investor Relations. Mr. Nicolaou, you may now proceed.

Thank you. Good morning, everyone. Thank you for joining us. I hope everyone remains safe and healthy. Our results for the second quarter show that despite the lockdown, we have continued to deliver on our strategic priorities while supporting our customers, colleagues and the community through COVID-19. Slide 4 summarize the key highlights for the quarter. I will briefly go over this. In the second quarter of the year, we faced what we very much hope would be the current peak of the health pandemic crisis in Cyprus, which was followed by the gradual easing of the restrictive measures leading to increased economic activity. The global impact from the pandemic, however, continues to effect the economy and uncertainty remains. We are aware of the key role that our bank has to play in the recovery of the Cypriot economy and we'll continue to support our customers to alleviate their short-term cash flow burdens. Despite the challenging market conditions, we reached an agreement for the sale of EUR 0.9 billion NPEs in Project Helix 2 earlier this month. We reduced our NPEs organically by a further EUR 279 million in the first half of the year, and we completed the sale of EUR 133 million NPEs in Project Velocity 2. All these combined de-risking actions have reduced NPEs in the first 6 months of 2020 by EUR 1.3 billion to EUR 2.6 billion and EUR 1.1 billion on a gross and net basis, respectively. The gross NPE ratio reduced to 22%, and to 11% on a net basis. Coverage, and this is important, has been maintained followed the impact of Helix 2 with exposure now covered by 58% with loan credit losses. We remain committed to further de-risking of the balance sheet, and we will continue to seek solutions both organic and inorganic to achieve this. At the same time, we are working with our clients to prevent future asset quality deterioration once moratoria periods and other government support schemes come to an end. The bank's capital position remains good, in excess of all our regulatory requirements. As of 30th June 2020, our total capital ratio was 17.9%, and our CET1 ratio was 14.4%, both pro forma for Helix 2. We continue to operate with significant liquidity surplus of EUR 3.9 billion. The improvement of our operational efficiency remains a key priority for us. Our cost-to-income ratio stood at 57%. Our total operating expenses for the second quarter of the year declined by 18% year-on-year, in large part, enabled by customers switching to digital. New lending for the second quarter was below our usual run rate at EUR 238 million due to the lockdown, which covered most of the second quarter. We expect loan demand to pick up in the second half of the year, especially for housing loans in the context of the government schemes for interest subsidies. The underlying result for the quarter was a profit after tax from organic operations of EUR 4 million, while the overall result for the quarter was a loss of EUR 100 million, including the loss of Project Helix 2 of EUR 68 million and loan credit losses of EUR 21 million for potential future NPE sales. Turning to Slide 5 that presents a short summary of Helix 2. As mentioned earlier, despite the economic challenges prevailing from COVID-19, we announced in early August, the agreement for the sale of EUR 886 million gross NPEs known as Helix 2. The transaction is expected to be completed during the first half of 2021. The consideration translates to 46% of gross book value, of which 35% is payable at completion and 65% is deferred and paid in installments over 48 months from completion without any conditions attached. The consideration can be increased through an earn-out arrangement depending on the performance of the portfolio. The sale reduced our NPE ratio by 6 percentage points to 22%, and combined with the other organic reductions, reduced net NPEs to EUR 1.1 billion, down 89% since peak. The accounted loss recorded in the second quarter was EUR 68 million, resulted in a capital impact of minus 48 basis points on CET1 ratio. At completion, the transaction is expected to have an impact of minus 36 basis points on CET1 ratio and will eventually turn to positive 10 basis points capital benefit upon the full payment of the deferred consideration. As shown on Slide 6, the 4 NPE sales we have completed have delivered a combined NPE reduction of EUR 3.8 billion. As I mentioned earlier, we continue to assess opportunities for balance sheet de-risking through additional NPE sales in the future. Moving now to Slide 7. Overall, this 2014 gross NPEs reduced by more than EUR 12 billion or 83%, of which EUR 8.6 billion has been through organic actions and EUR 3.8 billion through NPE trades. It should be emphasized, and this is important that this is a net reduction over and above the NPE inflows we had during this period, which were significant, and I can explain later with reference also to 2021. The gross NPE ratio reduced to 22% and 11% on a net basis. Overall, our NPE ratio reduced by 41 percentage points since the peak in 2014. Turning now to Slide 8. The Cyprus government had taken decisive steps early on and is managing the health crisis well. As shown on the graph, the 14-day moving average of new cases per 100,000 population for Cyprus remains well below the European average. Following the gradual opening of the economy, new cases are closely monitored through extensive sample testing, and this is part of extensive sample testing, and the government remains vigilant to prevent a second wave of infection. New measures have been instituted in July 2020 for the management of the recent increase in cases following the relaxation of the traveling restrictions. Moving on to Slide 9. The Cypriot economy recorded a GDP drop of 11.9% in the second quarter compared to 15% reduction in the Euro Area, reflecting the lockdown. Public projections under the best scenario continue to anticipate that the Cypriot economy will shrink by up to 7% in 2020 and then grow by 5% to 6.1% in 2021. The Cypriot economy has started showing nascent signs of recovery post lockdown and economic sentiment is starting to improve driven by improvement in nearly all sectors. As expected, international tourism arrivals during the summer were weak, although these were partly offset by domestic tourists. It is important to note that the impact of the revised macroeconomic estimate has been fully incorporated in the expected loss of the bank during the first half of 2020. Turning to Slide 11. Throughout this health crisis, we have prioritized keeping our people safe and healthy, while at the same time, providing all the support our customers need in order to overcome their short-term cash flow burden. Illustrating the actions of our responsiveness on Slide 11. Currently, we have implemented the moratorium of around EUR 6 billion to performing borrowers. At the same time, a total amount of EUR 689 million of new loans have been disbursed in the first 6 months of the year. We're participating in the government schemes aiming at providing liquidity to impacted business and private individuals. During technology -- sorry -- during the lockdown, technology and digital banking have been instrumental in changing customer behavior. It is very encouraging to note that this increased digital usage sustained post-lockdown. In fact, 72% of our customers are currently digitally engaged, and 83% of total transactions are performed through digital channels. Finally, we, at Bank of Cyprus, created a network known as SupportCY with the aim to contribute to government efforts in their fight against COVID-19. Approximately, EUR 500,000 have been distributed so far for the purchase of media equipment in support of educational activities. On Slide 12, we provide an update on the loan moratorium. As of June 2020, till the end of the application period, we have granted payment deferrals to 25,000 borrowers for EUR 6 billion of gross loans. As you probably know, the moratorium launched in March was very generous and comprehensive. And for many of the customers, this was considered as a benefit without any cost. Business loan moratorium amounted to EUR 3.91 billion or 76% of the non-legacy loan book and private individuals amounted to EUR 2.09 billion or 53% of the non-legacy loan book. For business, under moratorium, individual assessment of customers was initiated in May, starting with the high-risk customers. The 30 largest businesses under moratorium amounted to EUR 1.75 billion (sic) [ EUR 1.70 billion ] or nearly half of all the business loans under moratorium. We have so far completed the review of over 70% of this without triggering a change in their UTP status, and this is very important to note. Individual assessments of private individuals under moratorium have also commenced with priority to individuals with low credit scoring and employed in high-risk industries such as tourism. In addition, around 1/4 of private individuals under the moratorium have paid at least 1 installment until the end of June, giving us confidence that their payment culture has not deteriorated, and this happened just after the moratorium and during the lockdown within the first 3 months of the moratorium. We'll continue to closely monitor the credit worthiness for our customers. We are in regular contact with many of these customers who apply for this scheme and support them in order to effectively and timely address any potential worsening of their credit quality following the end of the moratorium. Moving now to Slide 13. Coming into the crisis, the group had a well-diversified non-legacy portfolio amounting to EUR 9.15 billion. We continue to closely monitor the book and set up strategies to prevent further asset quality deterioration. We continue to expect that the tourism sector will be the most impacted, representing 12% of the non-legacy book. Around 15% of the non-legacy portfolio is expected to have a medium impact, including sectors such as trade and manufacturing due to the impact of the strict lockdown of the previous months. Construction is expected to be only moderately impacted by COVID-19 and its operations recommenced on May -- on the 1st of May. Overall, 16% of our loan book is expected to experience a moderate impact. Finally, around 14% of the loan -- of the non-legacy 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. We are in close contact with our customers in order to primarily to assess the full extent of the COVID-19 economic side effects; and secondly, to provide relief in the form of payment deferrals, restructurings and liquidity assistance to our viable clients to help them alleviate their short-term cash flow burden. Turning now to Slide 14. As of the end of June, non-legacy loans to private individuals amounted to EUR 4 billion, representing 43% of the total non-legacy portfolio. Over 80% of the private individual loan portfolio is housing loans. This segment is very well collateralized with a low loan-to-value ratio. Around 65% of these loans have an LTV below 60% and 15% of the portfolio has an LTV over 80%. Other loans to private individuals amounted to EUR 0.7 billion as of the end of June. 61% of this portfolio is secured, of which 59% by property and the remaining 41% by other type of collateral. As previously mentioned, around 1/4 of loans to private individual take at least 1 installment by the end of June. Moving now to Slide 15, that provides a breakdown of the non-legacy business portfolio and our assessment of the impact of COVID-19. The non-legacy business loan book as of the 30th June 2020 amounted to EUR 5.18 billion and is well diversified with high quality collateral. Following the last crisis, we now have higher quality origination due to prudent underwriting standards. We make strong assessment of the repayment ability of our customers. To put this in context, 98% of our new exposures since 2016 were performing at the start of the moratorium. Finally, there is an effective foreclosure law in place following the amendments that took place in recent years. 89% of the business portfolio is secured, of which 79% by property. Overall, the business portfolio has a low loan-to-value ratio. Around 70% of the portfolio has loan-to-value ratio of less than 80%. Moving now to Slide 16. As I mentioned earlier, the sectors mostly impacted by COVID-19 are tourism and trade. As of June 2020, our total exposure to tourism amounted to EUR 1.06 billion. The unutilized liquidity of the sector remains broadly unchanged and amounted to EUR 0.31 billion as of the end of June. Around 95% of our tourism exposures are under payment deferrals. Our exposure to trade amounted to EUR 1 billion, around 29% of this is in lower risk essential retail services, not materially impacted by COVID-19, other supermarkets and pharmacies. The unutilized liquidity of this sector amounted to EUR 880 million as of the end of June. Around 60% of our trade exposures are currently under payment deferrals. Turning now to Slide 17 on new lending. New lending for the second quarter, as expected, amounted to EUR 238 million, down 47% quarter-on-quarter, reflecting the lockdown that was in place during most of this quarter. The demand for new lending is expected to pick up in the second half of the year, especially for housing loans in the context of a government scheme for subsidy of interest. As of 21st of August, there was a strong pipeline for new housing loans that amounted over to (sic) [ to over ] EUR 65 million. We expect to utilize all available tools to support our customers. At the same time, we will continue to apply prudent underwriting standards and make strong assessment of the repayment capability of our customers. Moving to Slide 18. During the lockdown, technology and digital banking have been instrumental in changing customer behavior. It is very encouraging that the increased usage of digital channel has been sustained post the lockdown. As shown on Slide 19, the statistics demonstrate that we continue to make solid progress on digital transformation. 72% of our customers are currently digitally engaged and 83% of total transactions are performed through digital channels. We expect the increased digital engagement of our customers to support our efforts to improve further our efficiency. I will now hand over to Eliza to take you through our performance for the second quarter.

Thank you, Panicos. Hi, and good morning from me as well. So starting from capital, actually on Page 21. During the second quarter, we have generated 40 basis points of organic capital in operating profit and another 20 basis points of capital from the decrease in risk-weighted assets. These were offset by expected loan credit losses and impairments of around 30 basis points. Helix 2 has reduced capital by around 48 basis points in the second quarter and on completion, the cumulative capital impact is expected to improve by 12 basis points to minus 36 basis points with a further capital benefit equivalent to 46 basis points upon full repayment of the deferred consideration. The recent amendments in capital regulation have resulted in a benefit of around 70 basis points for the bank, 50 of which were actually recorded in the second quarter numbers. One final comment is that the ECB has completed an on-site inspection on the value of the group's foreclosed properties and the findings of this inspection relates to a possible prudential charge of up to 50 basis points of capital and are currently being reviewed by the bank's joint supervisory team. The size and timing of any charge remain uncertain and depends in part on the bank's progress in de-risking its balance sheet. Now moving through the income statement on Slide 26. Net interest income has decreased to EUR 83 million in the second quarter, mainly due to higher interest cash collections in the first quarter, offset by lower cost of deposits. The net interest margin has decreased to 1.88%. Noninterest income amounted to EUR 60 million for the quarter and is probably flat on a Q-on-Q basis. Total expenses reduced to EUR 87 million compared to EUR 93 million in Q1 due to COVID-related lower staff costs and seasonality of the Deferred Guarantee Fund contribution. Loan credit losses for the second quarter amounted to EUR 23 million, reflecting a cost of risk of 76 basis points. During the quarter, we recorded additional impairments of EUR 25 million on specific, large, illiquid REMU properties. Provisions and net losses relating to NPE sales amounted to EUR 104 million in the quarter, including the Helix 2 loss of EUR 68 million and the loan credit losses of EUR 21 million for potential future NPE sales. The overall result was a loss after tax of EUR 100 million for the quarter, and a loss after tax of EUR 126 million for the six months. Now starting from net interest margin on Slide 27. As already mentioned, our NIM in the quarter amounted to 188 basis points. Yields in the performing book increased to 338 basis points. And despite the competitive pressure, an effort to improve credit spread is currently underway. The cost of funding decreased to 25 basis points as the reduction of cost of deposits continue. The cost of deposits recorded decline by 3 basis points during the second quarter. Finally, the EUR 1 billion takeup in the TLTRO III has a potential annual benefit of EUR 5 million for net interest income. Turning now to Slide 28 on noninterest income. In the second quarter, this was roughly flat at around EUR 60 million. Net fee and commission income amounted to EUR 33 million this quarter, down 13% on a Q-on-Q basis, clearly negatively impacted by the COVID lockdown implications. Specifically, as previously indicated, transaction fees amounted to EUR 12 million for the second quarter and were 22% down on a Q-on-Q basis, mainly due to lower volumes of transactions. Transactional fee volumes are expected to recover to pre COVID-19 levels as the Cypriot economy continues to recover in parallel. Net insurance income amounted to EUR 18 million in the quarter compared to EUR 11 million for the first quarter, primarily due to a change in the valuation rate and lower motor vehicle insurance claims. Overall, recurring income for the quarter was at EUR 51 million compared to EUR 49 million in the first quarter as the higher net insurance income has offset a reduction in net fees and commissions. The introduction of liquidity fees to a broader group of corporate clients that was delayed due to COVID-19 is currently under consideration and will be introduced, once market conditions allow. Finally, fees and commissions review is also currently underway. Now finally moving to costs on Slide 30. Cost-to-income ratio, excluding bank levies, stood at 57% in the quarter compared to 58% in Q1, principally reflecting the lower total operating expenses. Total operating expenses of EUR 81 million for the second quarter were down 3% on a Q-on-Q basis and 18% on a year-on-year basis. Specifically, staff costs reduced to EUR 47 million, relating to mostly one-off cost savings from special annual leaves to vulnerable groups and suspension of the NHS contribution during the lockdown period. Other operating expenses for the second quarter amounted to EUR 34 million and are broadly flat on a Q-on-Q basis. The special levy and contributions to the Single Resolution Fund and Deposit Guarantee Fund for the quarter were at EUR 6 million. And as a reminder, as from 1st January 2020 and until July 2024, the group is subject on a semiannual basis all the contribution to this Deposit Guarantee Fund in Cyprus. With that, I hand over to Demetris to take you through asset quality and cost of risk.

Thank you, Eliza. Good morning to all. I will start from Slide 32 on IFRS 9 staging and coverage. As shown on the left graph, pro forma for Helix 2, around 61% of our loan book is classified in Stage 1 and 70% -- 17% in stage 2. The coverage of these 2 stages, pro forma for Helix 2, stood at 1.5% and 2.5%, respectively, while coverage of stage 3 loans was maintained and amounted to 52%. During the second quarter, there was a one-off migration of around EUR 360 million of gross loans from Stage 2 to Stage 1 due to enriched data availability. Turning to Slide 33 and the cost of risk. The annualized cost of risk for the first half of 2020 was 1.39% of gross loans of which 59 basis points reflect the initial impact of IFRS 9 forward-looking information, driven by the deterioration of macroeconomic outlook recognized in the first half. Excluding this COVID-19 related charge, the cost of risk for the first half of 2020 stands at 80 basis points. The cost of risk for the second quarter has benefited from a release in provisions of 76 basis points, out of which 59 basis points relate to one-off items. Excluding the one-off reversal effect on the COVID-19 related charge of 30 basis points, the underlying cost of risk for the second quarter amounted to 105 basis points and is broadly in line with the respective Q1 charge. In addition, during the second quarter of 2020, we recorded an accounting loss for Helix 2 of EUR 68 million, EUR 21 million loan credit loss for anticipated future NPE trades and impairments of EUR 25 million on specific, large, illiquid REMU properties. Finally, as a reminder, interest on net NPEs not received in cash is fully provided for, which in the second quarter represented 58 basis points cost of risk. Moving to Slide 34. Tracking the bank's loan portfolio is of utmost important for the group and our stakeholders. Today, the bank's EUR 2.58 billion of gross NPEs pro forma for Helix 2 fall into 2 buckets. Firstly, re-performing NPEs totaling EUR 0.3 billion. As a reminder, the re-performing NPEs are loans that have been restructured, have no arrears, are still classified as NPEs but are expected to exit the NPE definition over time. Most of the re-performing NPEs are under the moratorium. Secondly, core NPEs amounted to EUR 2.28 billion. We will continue to seek organic solutions, including the realization of collateral via consensual and nonconsensual foreclosures. In parallel, we continue to assess potential opportunities to accelerate the decrease in NPEs through further NPE trades in the future. At the same time, we don't lose sight of the fact that arresting any asset quality deterioration is of paramount importance, and we are working with clients to this effect. Moving now to Slide 35 on NPE inflows and outflows. The NPE reduction continued in the second quarter at similar levels to the first quarter. NPE outflows for the second quarter amounted to EUR 145 million, only modestly lower to the first quarter levels despite the lockdown and other such measures as the fees and foreclosures, while, as expected, inflows in the second quarter were limited due to the moratorium. Write-offs for the quarter amounted to EUR 84 million, represented 58% of organic gross NPE reduction. As we have previously explained, we continue to expect that the proportion of write-offs will be volatile in any given quarter. Now turning to Slide 36 on coverage. The bank's NPE coverage ratio increased by 2 percentage points to 58% at the quarter end, pro forma for Helix 2. The bank stands today above the European average coverage ratio of 46%, and total coverage, pro forma for Helix 2, including tangible collateral, increased to 125%. Coverage of core NPEs also increased to 63%. And with that, I hand over to Panicos for his closing remarks on Slide 39.

Thank you, Demetris. Our results this quarter show that we continue to deliver on our strategic priorities while supporting customers, colleagues and the communities through COVID-19. We will continue to support the recovery of the Cypriot economy. At the same time, our key strategic focus remains the improvement of the asset quality and efficiency of the bank and this is something that we constantly delivered all these years with a proven track record, even under the worst circumstances like this quarter during the COVID-19 lockdown. This concludes our presentation and we'll now open for questions.

[Operator Instructions] The first question comes from the line of Floriani, Jonas with Axia Ventures.

I have a few questions. The first one is on expected volume of new lending in the second half. I acknowledge that you mentioned that most of the pickup is expected to come from mortgages. But what about corporate and SMEs? Anything you can share in terms of your expectations for those guys in the second half? Second is on NPEs de-risking, I take your comments that you still continue to pursue opportunities for transactions whenever that is possible. Is there anything now in the pipeline? I mean are you in active conversation with investors for some parts of your portfolio? I think I remember that the initial expectation plan is towards for a bigger amount. So maybe there is something that is in more advanced stages at this point in time. So if you can share something on that, it will be great. And then finally, just wondering if there's any guidance for the year you can share. More specifically, your views on NII fees, expenses and also level of impairments going forward? And then maybe something on expectation for NPE flows? I mean, I think at this point in time, it's probably very difficult to assess or to have a view on next year. So if you have something for the short-term to share, I think it'll be great.

Sorry to interrupt, Mr. Floriani, we have lost connection to the conference room. So just hold on your line and the rest of you, please bear with us for second so we reconnect the presenters. Thank you. [Technical Difficulty] Hello, everyone. The management is back on the line. Mr. Floriani, can you please repeat your last question?

Hi, guys. I mean, where did you stop hearing? Did you get my first and second question?

Your first question about the expected new lending on the second half. We lost at that. And what is the second one?

So yes, the second was on the de-risking of the balance sheet. I take your comments that you mentioned that you continue to look for inorganic opportunities on the NPE side. I think it's fair to assume that the original expectation for Helix 2 was probably higher for a bigger portfolio. So I'm just wondering if there's any advanced stages of interactions between you and potential investors for what could come next on NPEs. And then finally, the third question was on expected guidance for 2020. Anything you can share in terms of income statement and balance sheet would be great.

Okay, okay. Related to your first question about the new lending -- expected new lending for the remaining of the year, we expect to be higher than what we have presented in Q2. It will be something between our Q2 number and our usual run rate, which was around 450, 500 a quarter. So -- but I mean, yes, you're going to see increase in the housing loans. So our utilization of approved loans for liquidity, as we said, they'll have provided to our clients, so it would be higher. But as you know, this depend on the timing of the utilization because our new lending is not -- the approval is just -- is the utilization of the new lending. So I cannot be, let's say, very specific on the amount, but it will be higher than Q2. On the de-risking of the balance sheet in relation to future NPE trades, I will ask Nick to answer the question. Nick?

Floriani, thanks for the question. Look at -- you're right, the original targeted Helix 2 size was larger than we ultimately ended up with, as you commented on. I think, look, right now, I think we're super pleased that we managed to get transaction completed at the front end of the timing window that we guided to you to over the last couple of investor calls, despite the sort of obvious challenges of trying to get deals done in a post-COVID environment. So we've seen that around the market. So we're super pleased it got done. I think in terms of what comes next, yes, you're right. We flagged in the presentation that we would continue to assess all options to deal with the NPLs, including exploring the options for future trades. I describe where we are on that as right at the start of that journey again. And if I call it just for now as sort of third Helix trade than we're exploring options, and I don't think that will continue for certainly some time actually before we embark on the Board's preference in terms of how we structure any targeted follow-on trade. But my personal view is that's a -- that's most likely to be a next year issue. But look, let's keep up with a revision as we go through the exploration of the options.

Thank you, Nick. And then, Eliza, on the guidance this year.

On guidance. For NII, I would say that Q3 and Q4, we expect them to be broadly in line with Q2, net of the new lending, the moratorium, which means that our repayments are lower. So net-net, and even the fact that the Helix 2 portfolio on an IFRS basis, if you like, continues to accrue interest. If you look at it, pro forma, you need to remove the NII that comes from that book, and there are numbers in the pack to guide you on that. On fees, the guidance we gave last quarter actually continues to be in place. We were expecting around 20% drop in transactional fees. You will see that we are broadly there this quarter. And we expect this minus EUR 20 million to gradually reverse in line with GDP trajectory. On costs, I would say that Q1 is a more representative quarter than Q2. Q2 did benefit from the fiscal incentives, which partly helped the bank, and it also benefited from lower OpEx because of the lockdown. So I would say that moving to Q3 and Q4, use Q1 of your guidance in Cyprus and offices are now open. So actually, OpEx is more or less back to a normal quarter, I would say. And on cost of risk, Demetris?

Yes, on cost of risk, as I indicated during my speech, the second quarter has been impacted by one-off reversal of 59 basis points, which is related to data quality improvements. If we are to adjust for this and for the COVID impact for the second quarter, the cost of risk is broadly -- is calculated at 105 basis points, which is broadly in line with our COVID adjusted cost of risk of Q1, which was 112 basis points. All in all, for the half, the run rate of cost of risk without the COVID effect is around the 110 basis points mark. And our expectation is that this would be the COVID adjusted run rate for the remainder of the year. I remind you here again that, out of this, almost half relates to interest on NPEs not received in cash. Now from what we see today, one can conservatively assume that the COVID effect in the following quarters will also be at the -- at similar or lower levels to our Q2 COVID effect.

The next question comes from the line of Boulougouris, Alexandros with Wood & Co.

I have 3 questions, if I may. The first one is regarding the losses you booked in Q2 regarding the real estate unit. I think it's about EUR 25 million impairments. Should we expect more going forward in the next quarters? This is my first question. And maybe clarify a bit more on that. The second is on the Helix 2, just to understand a bit the accounting treatment with the deferred payments because you book a loss of EUR 60 million, if I'm correct, in Q2 -- not EUR 60 million -- EUR 68 million. But there will be a capital -- a negative capital impact of 36 bps, which then turns into a positive 10 bps with the full payment of the deferred consideration. Accounting-wise, will there also be some capital gain that you will book in the following quarters because of that, just to understand that and when should we assume that -- sorry, the closing of the deal, maybe you mentioned that in the presentation, but that's also another question. And the third question, if I may. Regarding the moratoriums, which are due to end on the end of December? Do you -- would you expect any extension of that, maybe on the sectors that have been more heavily impacted like tourism?

Okay. Thank you. I will start myself with the last question about the moratorium, and this is an opportunity to mention a couple of things about the moratorium because as it's important for everyone to understand how we think about that. So just as a small reminder, you understand and you remember that this government moratorium was launched in March. It was very generous and very comprehensive and for many of our customers, taking advantage of the moratorium was just a benefit with no cost and for most of them was not even a sign of distress. So it's important to mention this. And as I already mentioned earlier in my presentation, we have already gone through individual assessment of many of our clients and especially the top 30 businesses, and almost 70% to 80% of this has been reviewed and they haven't trigged any UTP status for this year and for the next year going forward. So it's important to understand because having in mind that these are -- let's say, this significant amount of loan moratorium provides -- create some questions, especially for the future, it's important for us to and for you to understand what this means under the local Cypriot perspective. So regarding the specific question about the expansion. This is something that we don't have any specific knowledge if this is going to happen or not. As a bank, our view is that the moratorium was generous and the uncertainty that was created because of this high pickup of the moratorium is not beneficial for the bank, not beneficial for the economy. So we'll not talk to your any question on the moratorium. At the same time, we are not exclude any -- and this is something that the Central Bank and the Ministry of Finance will look into it. We're not excluding any, let's say, short extension of any moratorium on a specific sector, for example, like tourism, but I don't expect to see the same kind of moratorium with no clear criteria and no payments at all. So if this will happen, which we don't know, it will be a small part of the existing moratorium. I mean the country has allowed EUR 12 billion of moratorium now. If this happens, let's say, for the tourism industry, it will be in the range of EUR 1 billion or EUR 1.5 billion. But I don't expect to be, as I described, a benefit with no cost. It will be based on certain criteria. And it will include also payments, interest plus part of the capital. So at least this is my view. But as I said in the beginning, I mean, it's something that the Ministry of Finance and the Central Bank will look into it. We don't know that based on the existing EBA rules, any new moratorium has to be decided and concluded by the end of September this year actually. This is the latest information we have. So I will pass to Eliza to talk about the remaining 2 questions, about the Helix 2 accounting treatment and the losses on the real estate.

Okay. So Alex, on the EUR 25 million impairment we had this quarter, around half of it relates to a specific property, a large property we've had very distinct kind of issues and with properties in very advanced stages of being sold. So it's a very case specific. The other part of the impairment, the other half, again, related to some illiquid legacy product fees, which we have kept at reasonably high -- relatively high percentage of OMV and which, because as I have been just for a large number of years, we are taking some more prudent customer valuation. We do not expect a repetition of this amount. There may be modest, minor drops. Again, as some of these older properties are becoming older, but very modest. We don't expect anything material to come through in the next short number of quarters. I do want to remind you that the properties on the balance sheet are held at an 80% on average, at 80% of their open market value. So we do have a 20% buffer from any potential price reduction in the market. We don't expect any, by the way, our projections, I mean, because the real estate prices do not indicate any drop. But even if there was to be a drop, there's a 20% buffer before that hits our balance sheet. Maybe Anna could give some guidance, some color on the real estate market and how we see it. Anna?

Yes. The real estate market is holding up for the -- amidst COVID-19 breakthrough. It has started to recover post lockdown, and this is evidenced by land registry transactions. Main investor activity is fueled by local demand. As far as our group is concerned, we have a healthy sales pipeline, both in terms of contracts that are signed in excess of EUR 53 million in accepted offers.

Okay. And on the accounting treatment of the deferred payment, now this deferred payment carries or attract 100% risk weight. As it gets repaid, it will be releasing, clearly, the RWAs that are attached to the release of the repayment. And also, in accounting terms, it will be interest-bearing at between 3% and 4% yield -- accounting yield. It's an unwinding of the discount in accounting terms. So there will be an NII net positive from this.

And the recurring starts, it starts from next year.

Yes. [Technical Difficulty] interest on the balance sheet.

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

I have a couple of follow-up questions on the NII outlook. Would you say that the Helix 2 loans are representative of your legacy portfolio in terms of yield and maybe cost of risk as well? And therefore, the foregone NII should be somewhere in the vicinity of EUR 30 million per annum perhaps? Also on NII, that EUR 5 million NII potential from the TLTRO that you mentioned, that's based on EUR 1 billion. Can this increase beyond EUR 1 billion? And lastly, is there a potential to reduce cost of funding, specifically on customer deposits?

Eliza, you can handle, right?

Okay. So NII. The Helix 2 yield I would say is representative of the rest of the NPL portfolio. Remember, NPLs yield low yield interest income on their net loan balance, net of provisions. So on a net basis, I would say that it is representative. On the TLTRO, the EUR 5 billion -- the EUR 5 million rather NII benefit on an annual basis is expected to start to come to the P&L up from Q3. The TLTRO application was in June or draw down. We've applied for EUR 1 billion. We do have the capacity to increase that EUR 1 billion more. However, the decision was to go for EUR 1 billion because there is also a risk in the TLTRO rules that this NII pickup does not come through if net new lending doesn't meet the milestones, the thresholds. So we want to monitor a bit more the behavior of the performing loan book before we decide whether we are going for additional transfers. But at the moment, we've decided for the EUR 1 billion. I wouldn't guide to anything higher, but there is a possibility down the road we may apply for more. On cost of funding, it's gravitating towards 0. There is a possibility to reduce it a bit more and as I mentioned also in the script, we are considering to introduce a, what we call, a liquidity fees, which is the way that we have applied negative rates effectively through a fee arrangement down the road when market conditions allow us to do this. We have -- we were planning to do it earlier, COVID has delayed us. So it's probably a 2021 P&L benefit, I would say, early to mid-2021, again subject to market conditions here in Cyprus.

[Operator Instructions] The next question comes from the line of Memisoglu, Osman with Ambrosia Capital.

A couple of questions on my side. First on the big picture macro side. Do you think the government measures so far are adequate? Would you expect them to introduce new things from a support perspective? Then on the second one, you did comment on the moratorium. I was just wondering if you could give us a bit more color on maybe what percentage of these loans -- I understand most of them don't even need to be in moratorium, but if you could give us any color of what percentage would you think would turn to be problematic maybe as early as next year? And then on the NPE reduction, with all these moving parts, where do you see the NPE ratio declining to at the end of '21? How should we envision your actions on that front next year?

Okay. Thank you, Osman. On the measures of the government, I would say that so far has been proven adequate and currently, most of the measure expire in October. But as we see this happening, usually, before the measure expire, usually the Ministry of Finances -- they review the situation, and usually they extend. So this is our current expectation as of today. On the moratorium, okay, it's very hard. I would like to have both questions on the moratorium and on the NPE, let's say, with one comment and I will not provide you any specific numbers. But I would say that you need to know that this bank is kind of -- is not a bank that -- with a lot of patient bankers and all sort of -- of all the legacy stock. I mean, we said earlier in our presentation that we have managed to reduce our NPE from EUR 15 billion to EUR 2.6 billion. This EUR 12.4 billion on a net basis. During this period, we have more than EUR 3 billion new NPE entry. So we are used to have NPE entry. And because we have been living in the crisis for many years now, and we have managed on a net basis to continue decrease. So for next year, yes, we do expect to have some -- to have NPE entries. It wouldn't be prudent from our side to say that I will not have new NPE entries. But we expect that the old legacy book, the upcoming reduction over the old legacy book, it will offset any new NPEs from the COVID-19 effect. And over and above our mix, we are looking to explore our options for another trade. We are -- receive [ this much and the profit ] will be an additional reduction in our NPE. So we're expecting a declining trend on the NPE for 2021. And -- okay. And for the remainder of the year, I mean, we expect some decline on our NPE ratio.

Okay. On this year as well, okay.

[Operator Instructions] The next question comes from the line of [indiscernible] with Goldman Sachs.

One quick question from me. On Slide 33 of the presentation, you mentioned a one-off reversal of 59 bps for the cost of risk in the second quarter. Could you please elaborate on what that relates?

Demetris?

Yes. [indiscernible] didn't hear the question. With the introduction of IFRS 9, there was a significant part of the portfolio which was in Stage 2 because of data quality issues. The main data quality issue we had was grading and origination. I remind you that a part of the portfolio was transferred to Bank of Cyprus from Laiki Bank in 2013, and there was data missing at the time. This data quality issues have been -- we have been working on this data quality issues through various exercises that we have done over the last couple of years. And at each, let's say, milestone of the exercise, a significant part of the portfolio we got the data that we required. We did product grading of the portfolio. And a part of that has been transferred to Stage 1. This reversal mainly related to that.

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, Rico. As a summary of all we just said is that I want to highlight the fact that this was a significant -- this was -- the lockdown quarter of Cyprus because most -- for most of this quarter, all business were closed, including the airports. And as we are an island, we are actually kind of isolated. So despite that, we, for the Bank of Cyprus, this was a quarter of significant and material reduction in our NPE, while at the same time, we increased our coverage on the NPE. We maintained our capital ratios without even getting the benefit of the repayment of GBV which are 36 basis points and will be gradually will be added to our capital during the next couple of years. We haven't seen any -- actually we have more increase in our -- doubled this quarter-on-quarter. The liquidity is strong. It is easy to understand this. So at the same time, we reduced our -- we'll continue to reduce our gross operating expenses 18% year-on-year. And digital, this is one of the good outcomes from the lockdown because you have seen this a bit sticky. And we've seen figures in our digital engagement, in our digital transactions. And this is something that will give help us manage our stock and our efficiency going forward for the remaining of the -- for the next couple of years. So we consider this to be a good quarter for the bank. And we are looking forward to have more information to give you on Q3 because at that point of time, we'll provide more information about, let's say, for 2021, about moratorium for business and how we see our credit portfolio -- performing credit portfolio for 2021 and 2022. So thank you all for participating in the call. Usually, August and summer is actually, it is difficult to have many of you on the call, but thank you for taking your time. Both myself and certainly, the management and, of course, the Investor Relations teams and Annita would be more than happy to having bilateral discussion with you and provide you with more details on the results and on the future. Thank you.

Ladies and gentlemen, the conference has now concluded. You may disconnect your telephone. Thank you for calling. Have a pleasant evening.