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

Ladies and gentlemen, thank you for standing by. I'm Mridul, your Chorus Call operator. Welcome, and thank you for joining the Bank of Cyprus conference call to present and discuss the preliminary group financial results for the year ended 31st December 2020. [Operator Instructions] And the conference is being recorded. [Operator Instructions] 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. Nicolaou, you may now proceed.

Thank you, Mridul. Good morning, everyone. Thank you for joining our call. I'll start by highlighting some of the key achievements of the year on Slide 4. We all know that 2020 was not a normal year. The pandemic has caused fear and dislocation in societies around the world. But Cyprus, in our view, successfully navigated through the crisis. We entered 2021 remaining vigilant but more optimistic about the ability of society and economy to recover. During 2020, we had clear priorities. We played our role supporting our clients and the broader economy. We achieved significant progress reducing NPE while maintaining strong capital ratios. And we shared our view of the future of Bank of Cyprus with the launch of a new strategic plan. Firstly, we granted EUR 1.4 billion of new loans during 2020 supporting the Cypriot economy. We have supported our customers by granting payment holidays to over 25,000 clients, representing loans of around EUR 5.9 billion, all of which have expired on 31st of December 2020. Secondly, despite the challenging environment, we achieved further significant progress on balance sheet derisking. During 2020, pro forma for NPE sales, we reduced NPEs by EUR 2.1 billion from EUR 3.9 billion to EUR 1.8 billion and the NPE ratio from 30% to 16% whilst our coverage ratio was increased to 59%. At the same time, we have strengthened our CET1 ratio by 40 basis points to 15.2%. Thirdly, we closely monitored the loans under payment deferrals. We were and continue to be in close contact with our customers in order to provide support to alleviate short-term cash flow burden. Fourth, we will focus on cost management. In 2020, we achieved a 12% reduction in total operating expenses and maintained our cost-to-income ratio broadly flat at 60% despite revenue pressures. Finally, we launched our new strategic plan and medium-term targets last November. We committed to the reduce NPE ratio to single digits by end of '22 and up to 5% in the medium term. We set a clear path to sustainable profitability and delivery of shareholder returns, committed to generate an return on tangible equity of around 7% over the medium term. Slide 5 summarizes the key highlights of the quarter. I will briefly go over this. During the quarter, we extended a further EUR 374 million in new loans, up by 30% compared to the previous quarter as new demand increased post the first half 2020 lockdown. We generated total income of EUR 142 million, up 3% quarter-on-quarter and a positive operating result of EUR 45 million, broadly flat quarter-on-quarter. Cost of risk was essentially unchanged from Q3 at 99 basis points for the quarter. Total operating expenses for the quarter amounted to EUR 91 million, up 7% quarter-on-quarter, resulting to a cost-to-income ratio of 64%. The underlying result of the quarter was a profit after tax from organic operations of EUR 2 million whilst the result of the quarter was a loss after tax of EUR 49 million, including the provisions net loss of NPE sales of EUR 42 million. Overall, the loss after tax for the year amounted to EUR 171 million. The bank's capital position remains good and comfortably in excess of our regulatory requirements. As of 31st of December 2020, our capital ratios on a transitional basis were 18.7% for the total capital ratio and 15.2% for CET1 ratio, both pro forma for Helix 2. Deposits remained broadly flat in the quarter at EUR 16.5 billion. And we continue to operate with significant liquidity surplus of EUR 4.2 billion. As I mentioned earlier, despite the challenging environment, we have sustained our focus on further strengthening our balance sheet and improving our asset quality, where we have made material progress. In January 2021, we reached an agreement for the sale of EUR 0.5 billion of NPE portfolio, known as Helix 2 Portfolio B. Together with various NPE sales, we have reduced NPE by EUR 1.5 billion since December 2019. Combined with organic reductions of EUR 600 million, overall, we have now reduced the stock of delinquent loans by EUR 2.1 billion to EUR 1.8 billion and our NPE ratio to 16% and to 7% on a net basis both on a pro forma basis. NPE coverage was maintained at 59%, reducing the residual risk for our balance sheet to just EUR 0.7 billion. Slide 6 provides an overview of the journey the bank has been on these past few years and where we want to be in the medium term. We have been through a period of considerable change and have now led the foundations for delivering great shareholder value. Our near-term priorities include the completion of our balance sheet derisking through organic NPE reduction and potential disposals as has been the case over the past few years. As well as ensuring our cost base remains appropriate, we further invested in our digital capabilities. Over the medium term, our priorities will evolve. We will be increasingly focused on capitalizing on our strong market position across both banking and financial service products to enhance our revenues. At the same time, we are very focused on improving our operating efficiency and driving down costs. And combined with the expected normalization of the cost of risk, we have a clear path to generating sustainable profitability. Slide 7 provides a summary of the actions we have been taking for the support of our customers and our society. Slide 8 provides a summary of the measures taken by the government for mitigating the COVID-19 impact. We are pleased to see the government's sustained efforts to address the pandemic through comprehensive and far-reaching measures in 2020 that accounted for over 4% of GDP. In January 2021, additional package of up to EUR 400 million was introduced to help support business and customers impacted by the January 2021 lockdown. The main feature of which are, firstly, subsidized plan for businesses and those self-employed impacted by lockdown, which includes coverage of rents and other operating expenses. A second loan moratorium specifically for business and private individuals impacted by the lockdown -- by the second lockdown. This will last until 30th of June 2021. And importantly, eligible borrowers will be entitled to a total moratorium of up to 9 months, which includes any time they spent on moratorium during 2020. Finally, an extension of plans for the subsidization of interest rate of new housing and business loans until December 2021. The subsidy of the interest rate is up to 4 years. Focusing now on macroeconomic condition on Slide 9. Cyprus GDP contracted by 5.1% in full year 2020, a smaller decline than the near 7% contraction across the Euro area, demonstrating its ability as an open, small and flexible economy to quickly recover from economic crises. However, the reintroduction and tightening of containment measures in Q4 2020 for the second wave is likely to cause some loss of momentum in economic recovery in early 2021. Based on revised projections, GDP growth in 2021 is estimated to range between 3.2% and 4.5%. In governments that successfully managed the pandemic to date, Cyprus ranks first among EU countries in terms of coronavirus testing and fifth globally for the management of the pandemic. The development of effective vaccines is encouraging and successful vaccination programs, both in Cyprus and abroad, should act as strong catalysts for both global and local economy recovery. Cyprus is expected to have vaccines for 70% of the population over the age of 18 by the end of June 2021. Tourism was down 84% in 2020 due to international travel restrictions. We expect recovery in the second half of the year, helped by the fact that 2 countries with well-progressed vaccination plans, the U.K. and Israel, account for over 40% of our tourist arrivals. Slide 10, new lending. New lending continued to grow in the fourth quarter and amounted to EUR 374 million, up 30% quarter-on-quarter, driven mainly by corporate and supported by retail housing as economic activity continues to improve. For 2021, demand for new lending is expected to increase in line with the economic recovery, especially for housing loans in the context of the government interest subsidy scheme. As of 15th of February, there is a strong pipeline for new housing loans amounted to EUR 130 million. Overall, the new lending in 2020 totaled EUR 1.4 billion compared to EUR 2 billion for 2019, reflecting the impacts of the pandemic. New lending continues to be carefully considered against robust [indiscernible] and 99% of new exposures in Cyprus since the beginning of 2016 were performing at the start of the moratorium. Turning now to Slide 11, where we provide an update on the performance of loans that we are under moratorium. We are experiencing encouraging trends following the end of the moratorium. And we are cautiously optimistic based on customer behavior so far. Specifically, as I mentioned earlier, around EUR 5.9 billion of loans were under payment deferrals that expired on the 31st of December 2020. As shown on the slide, EUR 3.6 billion had an installment due by mid-February with 95% of those resumed payments. An additional amount of around EUR 700 million are due to have an installment due by the end of March 2021. We will continue to closely monitor the performance of these loans and in close contact with our customers in order to detect potential arrears early and offer solutions as necessary. A second moratorium was launched by the government in January 2021 for those customers impacted by the second lockdown with payment deferrals until the end of June 2021. In this second moratorium, the total months under moratorium cannot exceed a total of 9 months, including any period under moratorium in 2020. Given the strict eligibility criteria, the participation in this moratorium is very small. The application period has expired. And during this period, we have received applications for just EUR 27 million. Up to today, we have approved EUR 70 million -- EUR 17 million, sorry. The bottom left graph of the slide shows the resiliency of the delinquency buckets for the total loan book. The percentage of arrears as a percentage of the portfolio remains broadly unchanged indicating that the quality of the portfolio is resilient. Let's now go to Slide 12 that provides an overview of the non-legacy loans of private individuals. As of 31st of December 2020, non-legacy loans to private individuals amounted to EUR 4.1 billion, of which EUR 2.1 billion were under payment deferrals that expire at the year-end. 82% of those loans had a payment due by mid-February, of which 93% resumed payments, providing comfort that the general moratorium has not negatively impacted the payment culture. Overall, over 80% of the private individual loan portfolio is housing loans. This segment is well collateralized with almost 2/3 of customers having a loan-to-value ratio below 60% and 8% of the portfolio has an LTV of more than 100%. Other loans to private individuals amounted to EUR 690 million as of December 2020. 62% of this portfolio is secured, of which 60% by property and the remaining 40% by other type of collateral. Moving now to the non-legacy business loans on Slide 13. The non-legacy business loan book as of the 31st of December amounted to EUR 5.1 billion and is well diversified with high-quality collateral. The business loans that were under moratorium amounted to EUR 3.8 billion. Over 50% had an installment due by mid-February, of which 97% resumed payments. Overall, 90% of the non-legacy business portfolio is secured, of which 80% is by product. The portfolio has a loan-to-value ratio with almost 3/4 of the portfolio of less than 80%. Following the last crisis, we now have higher-quality origination via prudent underwriting standards. We make strong assessment of the payment capability of our customers. Slide 14 provides an update of our exposure to the sectors that were mostly impacted by COVID-19, tourists and trade. As of 31st of December, portfolio exposure to tourists and trade amounted to EUR 1.1 billion and EUR 0.9 billion, respectively. The unutilized liquidity of the tourist sector remains broadly unchanged from September and amounted to EUR 0.32 billion as of the end of the year. Around EUR 1 billion or 91% of tourist-related loans were under the expired deferral scheme. Around 1/3 had an installment due by mid-February 2021, of which 98% resumed payment. Cumulatively, around half of the loans under the expanded payment deferrals will have an installment due by the end of March 2021. Our exposure to trade as of the end of the year amounted to EUR 890 million, of which around EUR 500 million were under payment deferrals. Over 2/3 of this were installments due by mid-February 2021 with 97% returning to regular payment. I will now hand over to Eliza to take you through our performance in Q4.

Thank you, Panicos, and good morning from me, too. So I'll start with Slide 17 on the income statement. Net interest income amounted to EUR 80 million for the quarter, broadly flat Q-on-Q. And the net interest margin decreased to 1.75% as the pressure on lending yields continued. Noninterest income increased to EUR 62 million in the quarter, up 11% Q-on-Q, positively impacted by higher fee and commission income as transactional volumes gradually recovered following the first lockdown during the first half of 2020 and also higher REMU revaluation gains. Overall, noninterest income was at EUR 237 million for the year, driven by lower net gains on disposal of stock of properties, lower revaluation gains on financial instruments and lower other income, negatively impacted by the COVID-19 crisis. Total operating expenses amounted to EUR 91 million for the quarter, up 7% Q-on-Q, mainly due to seasonally higher operating expenses. Total operating expenses for the year amounted to EUR 340 million, down 12% year-on-year, following the successful completion of our voluntary staff exit plan in the fourth quarter and lower operating expenses resulting from forecast of management to contain cost and savings from the first half 2020 lockdown. Total loan credit losses, provisions and impairments amounted to EUR 40 million in the fourth quarter compared to EUR 38 million in Q3, driven mainly by higher provision for litigation and other financial instruments. Loan credit losses for Q4 remained broadly flat at EUR 31 million, reflecting a cost of risk of 99 basis points. Exceptional items for the fourth quarter amounted to EUR 51 million and consists of provisions or net losses of NPE sales, including restructuring expenses of EUR 42 million, the cost for targeted voluntary exit scheme of EUR 6 million and the deferred tax credit levy of EUR 3 million. The overall result was a net loss after tax of EUR 49 million for the quarter, or EUR 171 million for the full year 2020. Moving now to the drivers of NIM on Slide 18. I will briefly go over the charts on this slide. So our NIM in the fourth quarter decreased to 175 basis points after significant surplus liquidity and low interest rates continued to put pressure on asset yields. Our margin dynamics are complicated. And there are several important underlying components that I would like to analyze. First, performing book yields remain under pressure due to the sustained low interest rate environment and competition. But reference rate repricing is reaching its end, and we are aiming for higher credit spreads in the post-COVID environment. Second, higher-yielding, higher-risk legacy loans are reducing as we successfully exit NPEs. And third, the cost of funding continues to decrease as we price down the cost of deposits. In the fourth quarter, the deposit cost was reduced to 5 basis points. Moving to Slide 19 now on noninterest income. During full year 2020, noninterest income was materially impacted by the slower economic activity mainly in the first half of the year as a result of the pandemic. Overall, noninterest income for the year amounted to EUR 237 million compared to EUR 307 million in 2019, driven mainly by lower REMU gains, revaluation gains on financial instruments and other income. In the fourth Q, noninterest income increased to EUR 62 million compared to EUR 55 million in Q3 reflecting early recovery from the first half 2020 lockdown. Net fee and commission income increased to EUR 38 million in the quarter, accounting for 27% of total income due to seasonality, higher non-transactional fees and increased economic activity following the first lockdown. Net insurance income remained broadly flat Q-on-Q at EUR 14 million. And I will provide more information about the insurance business in a couple of slides. REMU net gains increased to EUR 5 million, mainly due to higher net revaluation gains relating to specific properties in Greece. REMU sales remained volatile. Net FX gains, net gains on financial instruments and other income amounted to EUR 5 million in the quarter and are broadly flat Q-on-Q. Now turning to Slide 20. The accelerated derisking of the balance sheet is expected to continue to put pressure on revenues in the near term. Specifically, Helix 2 reduces NII by EUR 7 million per quarter, although as a reminder, interest on net NPEs is not received in cash -- or interest on net NPEs, which is not received in cash, is fully provided. And hence, we should see a similar reduction in loan credit losses. As we presented in our medium-term strategic plan, we have multiple initiatives underway to increase net interest income and less capital-intensive noninterest income with a focus on fees, insurance and the nonbanking business. I will start with the NII initiatives. Firstly, over the medium term, the performing book is expected to grow by around 10% and broadly offset the core interest income from the declining legacy book as we successfully exit NPEs. We will address challenges from low rates and surplus liquidity. And we will intensify our efforts to price away or price correct to deposits through liquidity fees and improved credit spreads. Now moving to noninterest income initiatives. As of February, we have extended our liquidity fees to a wider group of customers and introduced a new price list. These actions are expected to have a positive impact of around EUR 13 million per annum on our fees. We will also aim to increase the average product holding through cross-selling to the underpenetrated customer base. And more widely, we are working to generate new revenue sources through the introduction of a Digital Economy Platform, leveraging the bank's market position, knowledge and digital infrastructure. These initiatives are expected to improve our fee and commission income from around 0.7% of total assets to nearly 1% of total assets in the medium term. And the revenues per risk-weighted assets are expected to increase to around 6% from the current level of 5% as many of the initiatives improved revenues in a more capital-efficient way. Overall, we expect revenues over total assets to improve from around 260 basis points to 280 basis points over the medium term. Now moving to insurance on Slide 21 and 22. In the past, we haven't spoken about them in much detail. But over the last few years, our life and the non-life insurance subsidiaries have delivered sustainable and healthy profitability. And going forward, insurance arm will be one of the important sources of increased revenues. Slide 21, I'll start with our life insurance business. Net insurance income for EuroLife amounted to EUR 33 million for the year compared to EUR 35 million for 2019. Despite the challenging environment, EuroLife increased its gross written premiums by 6%, driven mainly by the 17% growth in its agency force. During the year, EuroLife increased its market share across major products. However, we believe it can deliver more. We are aiming to grow total regular income by over 35% in the medium term by expanding its product and customer base and further leveraging on the bank's strong franchise. Moving to Slide 22. Net insurance income for our general insurance business increased by 2% year-on-year to EUR 23 million, driven mainly by the reduction of net claims, positively impacted by better claims management and COVID-19 and the lockdowns. We are making some important improvements, aiming to further grow gross written premiums by capturing fair share based on the bank's customer base. We are revamping our bancassurance channel, and we are expecting more synergies with our life insurance sales network as we are expecting to enhance digital sales. Overall, we expect our market share in general assurance to rise considerably over the next few years and our gross written premiums to grow by more than 50% in the medium term. Now moving on to costs on Slide 23. Overall, total operating expenses for the year were down 12%, reflecting our focus to contain costs. The staff cost reduction of 11% reflected the impact of the voluntary staff exit plan in the fourth quarter of 2019. Other operating expenses for 2020 were down 12%, resulting from various initiatives undertaken to reduce operating expenses and savings from the first half lockdown. Despite the significant reduction in expenses in the year, our cost-to-income ratio remained broadly flat at 60% as revenues continued to be under pressure. Total operating expenses for the quarter were up 7% Q-on-Q, driven by higher operating expenses, mainly due to seasonality. Specifically, staff costs amounted to EUR 50 million for the quarter and are flat Q-on-Q and operating expenses were at EUR 41 million, 16% up Q-on-Q, due to seasonally higher marketing, property and professional fees. In Q4, we ran a small targeted voluntary staff exit plan at a total cost of EUR 6 million with an annual gross savings of EUR 2 million or 1% of the payroll cost. On Slide 24, we discuss the medium-term cost outlook. We remain focused on further improvement of our efficiencies through specific initiatives, including exit solutions to relieve full-time employees and further branch footprint rationalization. These initiatives are expected to deliver total operating expenses of under EUR 350 million in the medium term, a reduction of over 10% from the 2019 base after continued significant IT investment over the coming years. In addition, restructuring expenses are expected to reduce to single digits following the successful completion of our balance sheet derisking. Our cost-to-income ratio is expected to rise in the near-term as revenues remain under near-term pressure and operating EPS increase due to higher IT and digitization investment costs. However, we then expect our cost-to-income ratio to decline. And over the medium term, this is expected to reduce to the mid-50s level. Now turning to Slide 27 on capital. Our CET1 ratio as of December 31 increased to 15.2% on a pro forma basis for the Helix trade. It's important to emphasize that during a very challenging year, we managed to reduce our NPE ratio from 30% to 16%, maintain our coverage at around 60%, both pro forma for the NPE sales, and increased our capital ratio by 40 basis points. Specifically, during the fourth quarter, we have generated 40 basis points of organic capital through operating profit and 20 basis points of capital from the decrease of risk-weighted assets. The recent amendment in capital regulations resulted in a benefit of around 20 basis points for the bank in Q4 arising from prudential treatment of software assets and the IFRS 9 dynamic component. These were offset by expected loan credit losses and impairments of around 30 basis points and a further 20 bps on the accounting loss of the Helix 2 Portfolio NPE sales. As previously mentioned, the on-site inspection and review by the SSM on the stock of REMU properties was completed. The findings relate to a possible prudential charge of up to 46 basis points, the majority of which is expected to be taken at 30th June 2021, depending on the bank's progress in disposing the properties impacted by this prudential charge. The group is currently evaluating a potential Tier 2 issuance in the context of the outstanding EUR 250 million Tier 2 issue, which is callable in January 2022, subject to market conditions and applicable regulatory authorization. Separately, the group will also consider initiating its MREL issuance as part of its overall capital and funding strategy. Now I'll take you quickly through the asset quality section as well. So starting on Page 31, where we present a short summary of Helix 2. Despite the challenging economic conditions, in January '21, the group announced the sale of additional EUR 529 million of NPEs, a project known as Helix 2 Portfolio B. The gross consideration amounts to 44% of the gross book value and 31% of the contractual balance payable in cash, of which 50% is payable at completion and the remaining 50% is deferred up to December '25 without any conditions attached. The accounting loss on Portfolio B recorded in the fourth quarter amounted to EUR 27 million. Combined with the sale of NPEs of EUR 886 million signed in August 2020, we have reduced NPEs by EUR 1.4 billion, representing another milestone in the delivery of one of the group's core strategic objectives of improving asset quality. Overall, Helix 2 resulted in a capital impact of minus 76 basis points on group's CET1 ratio for 2020. At completion, Helix 2 is expected to have an impact of minus 42 basis points on CET1 and will eventually turn to a positive impact of plus 24 basis points upon the full payment of the deferred consideration. Now moving to Slide 32. During the fourth quarter, gross NPEs were reduced to EUR 3.1 billion and to EUR 1.2 billion on a pro forma -- sorry, on a net basis. Pro forma for Helix 2, gross NPEs decreased to EUR 1.8 billion and EUR 0.7 billion on a net of provision basis. The gross NPE ratio is reduced to 16% pro forma for Helix and 7% on a net basis. Overall, our NPE ratio is reduced by 14 percentage points since December '19. The bank's NPE coverage ratio remained broadly flat to 59% on a year-end pro forma for Helix 2. When taking into account tangible collateral at fair value, NPEs are fully covered. Coverage of reperforming NPEs is relatively low at 20%, reflecting the lower risk associated with this stock of NPEs, where coverage of core NPEs increased to 65%. I'll switch over on Slide 34. We have a clear path to reduce our NPE ratio to single digits by 2022 and to 5% over the medium term. Our track record here has been excellent, achieving an 88% reduction over the past 6 years, the vast majority organically. We have a highly experienced and highly effective team in place. And we expect NPE reductions to continue in 2021 through both organic and inorganic actions. We expect to have a high coverage of over 50% in the medium term, excluding any collateral. Our cost of risk is expected to be reduced to around 70 to 80 basis points in the medium term. Now turning to Slide 36 on cost of risk. The annualized cost of risk for the quarter was broadly flat Q-on-Q at 99 basis points of gross loans, of which 37 basis points reflect the impact of IFRS 9 forward-looking information, driven by the deterioration of macro outlook. Cost of risk for the year accounted for 118 basis points, which is in line with our expectations. Out of this 118 bps, 43 basis points or EUR 54 million reflect COVID-related charges. We have updated the macro assumptions underlying the IFRS 9 calculation of loan credit losses, taking into consideration the prevailing market conditions and the reintroduction of restrictive measures to contain the second wave of the pandemic in Cyprus. Our IFRS 9 macroeconomic projections remain in line with the published projections. Finally, as a reminder, interest on net NPEs not received in cash is fully provided for, which in Q4, represented 43 basis points out of the 99 basis points cost of risk. And with that, I'll hand back to Panicos for his closing remarks.

Thanks, Eliza. Let's go now to Slide 41. 2020 was a significant year for our journey. We have made significant progress and delivered on what we previously communicated. Our strategic priorities are clear, complete restructuring and the derisking of the bank as soon as possible and set the bank on the path for sustainable profitability and, of course, deliver on shareholder value. Today, our near-term priorities include the completion of our balance sheet derisking as before through organic NPE reduction and potential disposal as well as ensuring our cost base remains appropriate with further investing in our digital capabilities. Over the medium term, our priority will evolve. We will be increasingly focused on capitalizing on our strong market positions across both banking and financial service products and to enhance our revenues. At the same time, we are very focused on improving our operating efficiency and driving down costs. And combined with the expected normalization of the cost of risk, we have a clear path to generate sustainable profitability. Turning now to Slide 42. Bringing all of this together, we remain committed to our medium-term financial targets that we shared with you in November. We are in a strong position to take advantage of our many strengths over these next few years. We are committed to generating a return on tangible equity of around 7% over the medium term. The building blocks behind that include a commitment to reduce total operating expenses to below EUR 350 million and to complete the derisking of the business, demonstrated with an NPE ratio into single digits by the end of 2022 and to around 5% over the medium term. We expect our normalized cost of risk will reduce between 70 to 80 basis points, appropriate for a bank with our mix of businesses. Maintaining a strong capital base has been a key tenet over the past few years. And that remains unnegotiable for the bank going forward. Our business plan is based on us maintaining a CET1 ratio of at least 13% over the first period of our plan. This concludes our presentation. I will now open the floor for your questions. Thank you.

[Operator Instructions] The first question comes from the line of Quinn, Daragh with KBW.

All right. One question on the organic NPE reduction plans that you have for 2021. Just if you could update us on that target and how we'll interact with the performance of the loan book on debt holidays. And my second question is could you remind us just of your strategy regarding TLTRO and perhaps some [indiscernible] to take there and the impact that could have on NII, particularly given the kind of performing loan growth that you're delivering? And then a final question, if I may, on capital. If you could just maybe remind us of the different moving parts of the CET1 ratio, what you expect for 2021 in terms of the NPE sales and real estate charges, et cetera, just if you could give us [indiscernible] you think the net impact of those in '22.

Okay. Thank you, Daragh. Okay. If I understood well, the first question is about the organic NPE reduction for 2021. So I would just say that because we have previously guided the market that both organic and nonorganic transactions, meaning trade, will actually deliver a reduction in our NPE ratios for 2021 as well, including any new inflows because of the moratorium, which has been showing very encouraging signs. Organic reduction, you know that we have seen that works. As the NPE stock is reducing and trade accelerates, we would expect a small quarter-on-quarter reduction of under EUR 200 million that we used to deliver in the past. But if we will continue the organic delivery, and combined with any sales, we will move towards a further NPE ratio reduction in 2021 as well. I will pass over to Eliza for the TLTRO and CET1 kind of questions for Eliza.

Okay. So on TLTRO, as you know, we currently have EUR 1 billion of this. And we are hopeful -- we are encouraged by the trends we see that we will be able to -- we expect to be able to get the EUR 5 million interest benefit arising from it. There is also a new TLTRO program that's been announced and which we will consider in applying. There are possible dates to apply it starting from March and every quarter thereafter. The downside cost of that is not there. It's a new type of TLTRO product. So this is something that's under consideration. But it's a net -- it's an easier decision, let's say, to make. And we have room for around EUR 1.5 billion, incremental, I mean. On CET1, the moving parts for '22, let me try and summarize. So first of all, there's the IFRS 9 phasing-in, so you'd have to start from 1st January '21 as a starting point. The other moving parts are, obviously, the organic evolution of the balance sheet; the completion of Helix 2, and there was a slide on that in the deck; any impact from Helix 3, depending on whether it's signed or completed or only signed by the year-end; and the REMU prudential charge, which is disclosed on the capital slide.

If I may add, Eliza, I mean, the question is about the NPE trade. And so far, as you have seen, we have been able to deliver trades at around capital-neutral, so -- and it's also important to remind you all that from Helix 2, A and B, there is a capital of 60 basis points from the DPP. So as gradually the DPP is starting to be paid, then the 60 will be casually delivered in terms of capital generation.

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

Congratulations for the progress in end of year, and thanks for the presentation. So my first question is a follow-up on my colleague's question. So I remember we discussed that we expected reduction -- organic reduction of NPEs that you just mentioned should be around EUR 200 million per quarter or so going forward. I also remember that you mentioned that at that point in time, last year, the expectation of loans and the moratoriums turning into NPEs could be around EUR 1 billion, so pretty much saying that the organic measures would be able to pretty much offset the new flows. Have this expectation now changed, given the good start in the resumption of payments? So just wondering what you have now in the budget for new flows that you'll be able to offset to the reduction. My second question is on lending for 2021. I see on Slide 10 that you have the January figure there. Just wondering if it's fair enough to take this as a run rate for the coming months and then project the 2021 new disbursements to be somewhere between 2019 and 2020, I don't know, EUR 1.7 billion or EUR 1.8 billion. And then finally, it's a question on capital on your Tier 2 comments. So I'm wondering what is the level of Tier 2 over capital you're expecting to have after this market transaction is done? Because now you're at 160. Is the idea to have this number a bit higher, maybe 200 or 250 basis points [indiscernible] going forward?

Thank you, Jonas. I will start with the NPE question. I will firstly say that we have never guided the market that there will be EUR 1 billion of new NPE entries because of the moratorium. So I just -- we are experiencing very encouraging signs at the first 1.5 months of the moratorium. As you've already seen, we have 95% of those that have to pay are financially fit without even needing to provide any [indiscernible]. So this is very encouraging. We remain cautiously optimistic. And all these results at the expiration of the moratorium provide us comfort and confirm our guidance to you that we expect a further reduction in our NPE ratios during 2021 as well. With respect to the organic reduction, I would like to remind us all that as we accelerate the trades and add the NPE that's used in a speedier way than initially anticipated, then it's expected to have, let's say, lower amount of organic reduction per year. I mean you see that the total NPE is EUR 1.7 million, EUR 1.8 billion on just the remaining book. So yes, there will be organic reduction. It's -- we have delivered around EUR 140 million, EUR 150 million Q-on-Q 2020. As the book reduce, obviously, you should expect lower amounts of organic reduction. But I would also like to emphasize that the organic reduction, that future NPE trades and any new NPE inflows, as I previously mentioned, we are very encouraged from what we are experiencing after the expiration of the moratorium, will lead to a reduction in our NPE ratio in 2021 and, of course, the single-digit NPE ratio in 2022. As regards to lending, yes, January was very encouraging. It was very positive. And for those of us living in Cyprus, January was a full and strict lockdown month. We have reopened gradually starting from February. So yes, we expect a better performance in new NPE entries, in new lending and disbursements in 2021. And as we guided, we expect 20% to 25% higher than 2021 -- 2020. So it will be reasonable to assume a new lending figure between something between 2019 and 2020. In respect to capital and Tier 2, I will hand over to Eliza to comment on this.

Okay. Then so on Tier 2, the regulatory room -- not room, but regulatory Tier 2 capacity we have is at 2.75% of risk-weighted assets. So we do have some room to call a bit higher as and when we get there to refinance the existing bond. But that all depends on market conditions. And [indiscernible] no decisions have been made to that effect.