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

Ladies and gentlemen, thank you for standing by. I'm Myrtle, your Chorus call operator. Welcome, and thank you for joining the Bank of Cyprus Conference Call to present and discuss the group financial results for the 6 months ended 30 June 2021. 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; and Mr. Demetris Demetriou, Chief Risk Officer. Mr. Nicolaou, you may now proceed.

Thank you. Good morning, everyone. Thank you for joining our first half 2021 financial results conference call. I'm joined by Eliza Livadiotou, Executive Director of Finance; Demetris Demetriou, Chief Risk Officer; and Annita Pavlou, Manager, IR. After my introductory remarks, Eliza will go into more detail on our financial performance, and then we will turn to Q&A. Slide 4 summarizes the key highlights of the second quarter. I will briefly go over this. During the second quarter, Cyprus experienced strong recovery in economic activity against the backdrop of increasing vaccination coverage and the relaxation of restrictions. Around 80% of the other population in Cyprus has been vaccinated with the first dose and 74% have completed their vaccination regime on track with the government target. GDP grew by 12.9% in the second quarter, significantly better than expected earlier in the year. Underscoring our commitment to continue to support the company's intense growth, we extended a further EUR 407 million of new loans in the quarter, reaching EUR 894 million of new loans in the first half of the year, an increase of 30% compared to the same period last year. Now turning to our performance this quarter. Leveraging on the stronger economic environment in the quarter, our strategies begin to deliver results, demonstrated by the improvement in our performance before nonrecurring items, which nearly doubled on the prior quarter. During the quarter, we generated total income of EUR 152 million, up 11% quarter-on-quarter, and a positive operating result of EUR 57 million, up by 28% versus the previous quarter. Our cost of risk reduced by further 14 basis points to 52 basis points. We delivered a profit after tax and before nonrecurring items of EUR 34 million, which is double that EUR 17 million of the first quarter. After reorganizing nonrecurring items, the results for the quarter was a loss after tax of EUR 7 million and a profit of EUR 1 million for the first 6 months. This strong quarterly increase in total income helped drive a 2 percentage point reduction in our cost to income ratio despite the 7% increase in total operating expense. The net capital provision remains good and capital excess of our regulatory products. As of the end of June, our total capital ratio on a traditional basis were 19.2% for total capital ratio and 14.2% for CET1. Following the successful refinancing of our Tier 2 capital notes in April 2021, we proceeded with the inaugural issuance of EUR 300 million MREL Senior Preferred notes in June 2021, whereby earlier achieving our interim regulatory MREL requirements. Deposits on our balance sheet increased in the quarter by 3% to EUR 16.8 billion. The process of balance sheet repair continues. In June 2021, we completed Helix 2 and we recognized EUR 1.3 billion of NPEs from our balance sheet. We also organically reduced NPE by EUR 170 million in the first half of the year. The stock of NPEs amounted to EUR 1.6 billion, and the NPE ratio stood at 14.6% and 6.4% on a net basis. Overall, since the peak in 2014, we have now received this frozen fee by EUR 13.4 billion or 89% and NPE ratio by 48 percentage points. We continue to work towards further accelerating NPE reductions through additional sales and we remain on track with achieving a single-digit NPE ratio. At the same time, we continue to closely monitor the performance of loans which have been granted payment deferrals in the previous year. As of mid August 2021, 96% of performing loans whose payment deferrals have expired presented no arrears. This is a better performance than expected now nearly 8 months after payment deferrals and bodes well for future trends. Slide 5 provides an overview of macroeconomic conditions. As I mentioned in my opening remarks, the economy recorded a strong rebound in the second quarter with GDP growing by 12.9%. The strong consumption and business activity in the first 5 months of the year as evidenced by the upward trend of several leading economic indicators paved a way for a strong economic recovery in 2021. Another current sign is a strong pickup in sales activity starting from late June and continuing to date. The July arrival recorded a significant year-on-year increase reached 64% of 2019 level. A similar trend is expected for August and September. And in addition, we do expect that the tourist season is likely to be extended further into the year. The Ministry of Finance currently expects a GDP growth of around 5.5% for 2021, significantly higher than the 3.6% growth previously forecast as recently as April. Going forward, the launch of projects under the Recovery and Resilience Plan of EUR 1.2 billion over the next year is expected to further support domestic activity and employment through higher investments and to enhance growth potential via reforms. Finally, the $1 billion government guarantee scheme recently approved by the European Commission is expected to further support the economic recovery. Slide 6, new lending. New lending remained strong in the second quarter and amounted to EUR 407 million, making a total of EUR 894 million of new loans in the first months of the year up 30% year-on-year. The demand for housing loans remains strong in the context of the government interest rate subsidy scheme. However, we approved 220 million loans under the scheme, and we'll continue to have a strong pipeline of about EUR 100 million as of mid-August. New lending to corporate amounted to EUR 162 million for the quarter, up 64% year-on-year as economic activity continues to improve. New lending, of course, continues to be carefully considered against our [indiscernible] criteria with a high quality origination via prudent underwriting standards and we make strong assessment of the repayment capability of our customers. Turning now to Slide 7 to 10, where we provide an update on the performance of loans that were under expired payment deferral. The performance of the moratorium portfolio remains strong as performance was better than expected, nearly 8 months after the deferral expiry and bodes well for future trends. As shown on slide, EUR 4.9 billion loans, more than 95% of the performing loans are under payment deferrals and instalments due by mid-August. 96% of these performing loans present no arrears, of which around EUR 500 million have been restructured, monthly concentrated in the tourist sector. Restructurings have always been a very important part of how we manage credit rate. We have a targeted restructuring solutions following rigorous assessment of repayment ability aiming to alleviate pandemic-related short-term cash flow burden. And our tax record here is outstanding. Over recent years, more than 96% of performing loans presented no arrears, and we expect that to be the case as we go forward. Arrears remained low and about 95% early in arrears of less than 30 days. It is important to note that the inflows from the moratorium portfolio in the first half of 2021 amounted to EUR [indiscernible] million. Slide 8 provides an overview of the non-legacy loans to private individuals. As of the end of June, non-legacy loan to private individuals amounted to EUR 4.2 billion of which over 83% relates to housing loans. This segment is well collateralized with 2/3 of customers having loan-to-value ratio below 50% and only 7% of the portfolio has an LTV more than 100%. Other loan to private individuals amounted to EUR 700 million as of the end of June, the majority of which is secured. We are very encouraged by the trends within our performing gross loans to private individuals under -- by obtaining the [indiscernible] entire book have installments due by mid-August and 92% continue to present no arrears. Moving now to non-legacy business loans on Slide 9. The non-legacy business loan book as of end of June amounted to EUR 5.2 billion and is well diversified with high-quality collateral. Following the outbreak of COVID-19, the sector most adversely affected is tourist and to a lesser extent, trade, transport, manufacturing and construction. The portfolio has a low loan-to-value ratio with almost 3 customer portfolio having a loan-to-value ratio of less than 80%. 95% of the performing business loans were under expired payment deferrals had installment due by mid-August. And 99% presented no arrears of which EUR 470 million have been restructured, related mainly to tourism sector. Slide 10 provides an update of our exposure to a sector that was mostly impacted by COVID-19, tourism and trade. As at the end of June, our total exposure to tourist and trade amounted to EUR 1.14 billion and EUR 0.91 billion, respectively. The unutilised liquidity of the tourist sector remains broadly unchanged and amounted to EUR 0.34 billion at quarter end. The majority of these loans entered the crisis with significant liquidity, which has been mentioned. 96% of tourism loans are secured by property. And then, 93% of these loans have a loan-to-value ratio below 80%. EUR 930 million of tourism related loans were under the expired payment deferrals scheme, of which 94% had installment due by mid-August. Nearly, the entire book presented no arrears, of which EUR 281 million have been restructured. Our exposure to trade as at the end of June amounted to EUR 910 million of which EUR 320 million were under expired payment deferrals. 94% had installment due by mid-August with 97% presented no arrears of which only 10 million have been restructured. I will now hand over to Eliza to take you through the financial performance for the second quarter of the year.

Thank you. So I'll start with Slide 13 on the income statement. Net interest income amounted to EUR 76 million for the second quarter, flat Q-on-Q of which 8 million related to NII from Helix 2, which will follow our very next quarter. This Helix 2 lost income will be partially offset by the interest income of the deferred consideration. Moving now to NIM. During the second quarter, the margin was impacted by the following. The increase in the TLTRO borrowing by EUR 300 million to EUR 3 billion, increase in customer deposits by EUR 407 million to EUR 16.8 billion and the increase in wholesale funding by EUR 400 million. The percentage of average interest earning assets are held in liquid form has increased to 50%, which has had a dilutive impact on the net interest margin, reducing it to 1.49% for the second quarter. When adjusting for the impact of the EUR 3 billion TLTRO funding, the NIM amounts to 1.66% for the second quarter. Noninterest income for Q2 increased to EUR 76 million compared to EUR 60 million in the prior quarter. The increase is driven mainly by the higher net fee and commissions, higher net insurance income and higher revaluation gains on financial instruments. We shall discuss this further on Slide 15. Other operating expenses increased to EUR 89 million for Q2, up 7% on a Q-on-Q basis, mainly due to seasonally lower operating expenses in the previous quarter. Total loan credit losses, provisions and impairment amounted to EUR 24 million in Q2 compared to EUR 26 million in Q1, and our cost of risk improved by 14 basis points in the quarter to 52 basis points. Profit after tax and before nonrecurring items was at EUR 34 million in the quarter and EUR 51 million for the 6 months. We achieved a return on tangible equity before nonrecurring items of 8.1% for Q2 and 6.1% for the half year. Advisory and other organic restructuring costs amounted to EUR 15 million for Q2, including EUR 12 million relating to a tender offer for the existing Tier 2 capital notes. After recognizing exceptional cost of EUR 26 million relating to NPE sales of which we EUR 14 million related to the completion mechanics of Helix 2 and is expected to unwind over time to NII, the overall result was a loss after tax of EUR 7 million for Q2 and a profit after tax of EUR 1 million for the first 6 months of the year. Now moving to the drivers of NIM on Slide 14. As I mentioned before, our NIM in the quarter decreased to 149 basis points and was negatively impacted by an increase in liquid. It's important to understand the impact of the TLTRO funding, of course, on NII and marketing. In June, we increased our TLTRO III borrowing by EUR 300 million, bringing it to a total of EUR 3 billion. The bank has exceeded the benchmark net lending threshold and hence we recorded NII benefit of EUR 7 million for the 12 months to June 2021 over the respective period in the income statement. The potential NII for the period after that being June '21 to June '22, has now increased to EUR 15 million based on current ECB rates and provided that the bank meets the new net lending threshold. The benefit of the TLTRO borrowing is reflected in the 4 basis point improvement of the yield of the liquid shown on the top right graph. Performing book yields reduced to 287 basis points Q-on-Q, mainly due to a nonrecurring catch-up adjustment of 7 basis points. Performing book yields remain under pressure, mainly due to the sustainable low interest rate environment and competition pressure. We believe that the reference rate with pricing is reaching its end, and we are aiming for higher credit spreads in the post-COVID environment. Finally, the cost of funding continues to decrease as we price down the cost of deposits. Our funding cost is also positively impacted by the significantly lower coupon of the Tier 2 notes issued in April and the annual debt issuance in June with the full impact as of Q3. Now moving to Slide 15 on noninterest income. In the second quarter, noninterest income increased to EUR 76 million, up 26% Q-on-Q, reflecting higher net fee and commission income, higher net insurance income and higher revaluation gains on financial instruments. Net fee and commission income increased to EUR 45 million in the second quarter, up by 18% Q-on-Q, mainly due to the extension of liquidity fees to a wider customer group, the introduction of a revised price list in February in 2021 as well as higher volumes of transactions in 2Q. Fees in the quarter also include a EUR 2 million fee relating to specific client transactions. Net fee and commission income for the first 6 months increased to EUR 84 million, up 18% year-on-year and in total amount of EUR 5 million relating to NPE sales-related servicing fee for a transitional period currently expected to end in early fourth quarter. Net insurance income increased to EUR 18 million, up by 36% on the previous quarter, driven by a EUR 2 million better quarterly performance of investment, notably lower claims and improved pricing in the life insurance business, as well as growth in premiums, lower claims and seasonality in the general business. I will provide more info about the insurance businesses in the following slide. Net FX and other income increased to EUR 9 million, up 40% Q-on-Q, driven by higher revaluation gains on financial instruments. REMU gains increased to EUR 4 million in 2Q compared to EUR 2 million in the previous quarter, and I remind you that REMU sales remained volatile. Moving now to Insurance on Slide 16. Net insurance income for our life business EuroLife amounted to EUR 18.3 million for the 6 months compared to EUR 16.3 million for the same period last year and contributing 14% to total noninterest income. EuroLife remains a market leader in the life insurance business with a market share of 25%. However, we believe it can do more. We're making good progress on the various initiatives we have undertaken, aiming to grow EuroLife total regular income by over 13% in the medium term compared to 2019 levels. Moving now to the next insurance Slide 17. Net interest income of our Genikes business amounted to EUR 12.8 million for the 6 months remained broadly flat year-on-year, contributing 9% to total noninterest income. Genikes Insurance is also making good profit on the latest initiatives aiming to grow the gross written premium by more than 50% in the medium term. Looking now at expenses on Slide 18. Total operating expenses in the second quarter were up 14% compared to Q1 at EUR 39 million (sic) [ EUR 38 million ], mainly reflecting seasonality in the previous quarter. Despite the Q-on-Q increase, our cost to income ratio for 2Q fell by 2 percentage points to 58%, reflecting a higher contingent Q-on-Q increase in total income, compared to the Q-on-Q increase in total operating expenses. Staff costs were at EUR 51 million in the quarter, nearly flat Q-on-Q while operating expenses increased to EUR 38 million compared to EUR 32 million in Q1. Again, due to seasonally lower marketing, consultancy and professional fees in the prior quarter. Note, however, that the cost-to-income ratio adjusted for the lost income from Helix 2 was at 61% in the second quarter. As a reminder, our cost income ratio is expected to be in the mid 60s in 2021 as revenues remain under pressure and operating expenses increased due to higher IT and digitization costs. Beyond this year, however, we expect our cost income to decline through specific initiatives, including exit solutions to [Technical Difficulty]. Also, over the medium term, we are expected to reduce -- the cost to income is expected to reduce to mid 50s. During the quarter, we renewed the collective agreement with the staff union for years '21 and '22, of which a new pay grading structure linked to the value of each position of employment is introduced, as well as the performance-related pay component as part of the annual salary increase. This renewal is expected to increase staff costs for 2021 and 2022 by 3% to 4% per annum, which is, in fact, in line with the impact of the renewals in previous years. However, when taking into consideration the impact from the various efficiency initiative, the group medium-term guidance, which includes maintaining annual total operating expenses below EUR 350 million remains unchanged. Now turning to capital on Slide 22. Our CET1 ratio and total capital ratio as of June stood at 14.2% and 19.2%, respectively. During the second quarter, we have generated 50 basis points of organic capital through operating profit, around 20 basis points from the reduction of risk weighted assets and 10 basis points from Helix 2 completion. These were affected by expected loan credit losses and impairment of around 10 basis points and the previously flat REMU OSI prudential charge of 40 basis points and fee sales related loss of another 10 basis points and 30 basis points from other capital actions over the cost of the tender offer of the existing Tier 2 and the AT1 coupon payment. Our CET1 ratio on a fully loaded basis was at 12.9% as of June. With regards to our MREL requirements, so many successful financing of our Tier 2 in April this year, we proceeded in June with issuance of EUR 300 million of senior preferred notes, thereby early achieving our January 2022 interim MREL requirement. Now moving to asset quality, starting from Slide 25. Following the completion of Helix 2 in June with recognized EUR 1.2 billion of loans from our balance sheet reducing our NPE ratio by around 10 percentage points to 14.6%. On completion, we received EUR 165 million in cash with the remaining around of the total consideration of EUR 560 million payable in 4 installments up to December 2025 and without any conditions attached. Overall, Helix 2 is capital accretive. The capital impact [indiscernible] completion, including the impact in full year 2020 is negative 48 basis points. Upon the full payment of the deferred consideration and without accounting for any positive impact from the earnout, Helix 2 is expected to have a positive capital impact of 64 basis points and the group CET1 ratio on the basis of 30 June figure. Moving now to Slide 26. During the second quarter, NPEs were reduced by EUR 1.4 billion to EUR 1.6 billion and EUR 0.6 billion on a net basis. The reduction was driven by the completion of Helix 2 relating to EUR 1.3 billion of growth loss with the remaining reduction of EUR 112 million achieved organically. Following the completion of Helix 2, the gross NPE ratio dropped to 14.6% and 6.4% on a net basis. The bank NPE coverage ratio increased to 60% when taking into account tangible collateral at fair value, NPEs are fully covered. The coverage of re-performing NPE is relatively low at 19%, reflecting the lower risk associated with this form of NPE where coverage of core NPEs increased to 66%. As a reminder, Slide #28 gives a longer-term perspective on our NPE journey and target. We have a clear path to reduce our NPE ratio to single digits by 2022 and to around 5% in the medium term. Our CapEx has been excellent reducing NPEs by almost 90% over the past 6.5 years, the vast majority of NPE. We have a high experienced and highly effective team in place and we expect NPE reductions to continue in 2021 through both organic and inorganic action. With that, we continue to work with our advisors towards further escalating the NPE reduction through additional NPE sales. We expect to have a higher coverage of almost 50% in the medium term excluding end collaterals. Now moving to Slide 29. And as shown on the left graph, almost 2/3 of our loan book is classified in Stage 1 and 20% in Stage 2. The coverage ratio of these 2 stages were at 1.3% and 2.6% respectively, while the coverage of Stage 3 loans was maintained at 50% post completion of Helix. And it was mentioned earlier, we are pleased with the performance of the moratorium book of only EUR 16 million have migrated to Stage 3 during this quarter. In addition, during the second quarter, there was an overall net transfer of EUR 23 million of loans from Stage 2 to Stage 1, arising as follows: Firstly, EUR 480 million from Stage 2 to Stage 1, of which EUR 190 million relates to moratorium loans. And secondly, a transfer of EUR 457 million loans from Stage 1 to Stage 2, mainly due to forbearance and applied overlay. Now moving to Slide 30 on cost of risk. The underlying cost of risk for the second quarter was further reduced to 52 basis points of COVID loan and included a reversal of 75 basis points, driven mainly by the migration to Stage 1 from around EUR 300 million non-moratorium exposures that were previously in Stage 2 due to specific government previously applied. We are at current trend in the first 6 months of the year, and we remain committed to our indications that the expected cost of risk for 2021 will be significantly lower than the 2020 levels. Finally, as a reminder, interest on net NPEs not received in cash is fully provided for, which in the second quarter represented 17 basis points out of the 52 basis points cost of risk. Let's have a look now at our asset disposal volume and value on Slide 31. REMU sales are recovering following the relaxation of restrictive measures. Asset disposal continue across all property classes. As shown on the slide, REMU sales for the first 6 months were EUR 85 million compared to EUR 27 million in the same period last year. In addition, there's a strong sales pipeline of EUR 85 million at the end of the quarter of which more than half related to buying SPAs. Now moving to Slide 32. If you will take our achievement and ongoing actions regarding the corporation of ESG factors into our business, we are looking to get an optimization with a clear strategy supported by effective corporate governance aligned within ESG priority. We have set a dedicated Executive Committee, the sustainability committee to oversee our ESG agenda, review the evolution of our ESG strategy, monitor the development and implementation of our ESG objectives and embed our ESG priorities in our business targets. And with that I'll hand back to Panicos for his closing remarks.

Thank you, Eliza. Moving now to Slide 34 and 35. Slide 34 provides the summary of our journey and our priorities going forward. I will not spend too much time on this since this part has, of course, haven't changed, and we have previously discussed this. I am very encouraged that we got delivery on this commitment this year and our work positions to deliver on them over the medium term. We remain absolutely committed to our strategic initiative of complete de-risking, revenue enhancement and cost optimization in order to deliver our return on tangible equity of our [indiscernible]. This concludes our presentation, and we will now open the floor for your questions.

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

I have a few questions. The first one is on new lending volumes. I think the first half numbers are quite good and probably I would guess that is on the high end of the expectations. So just wondering what is the outlook for the second half. I see on Slide 6 that you put some bars already for July. Is there any data you can share regarding August taken into account the results? It tends to be like a slower month. But yes, your outlook for the second half also given in mind the GDP estimates that you mentioned in the presentation that Finance Minister going for around 5.5% and then look at your assumptions for the plan, which are below 4%, right? So just wondering how that links to each other? Then the second is on the NPE side, asset quality. Just wondering what is the latest on your potential NPE trade, and if you can expect something for 2021? If that's the case, I remember in the previous call, we discussed that your base case is always for at least a capital-neutral transaction. So if you can also confirm that? Then my third question is in relation to your cost of risk, I think even if you adjust for the one-offs and for the reversals and COVID charges, it looks like the underlying cost of risk is running below your expectation or even the market expectation. So are you -- I think your comments that your 2021 cost of expectation is significantly lower than 2020. But if we're indeed into a good trend here, are you ready to change your guidance lower, especially the medium-term guidance that now sits at 70 to 80, which seems to be out of sync with the last 2 quarters. And just finally, a question on capital. So in the scenario that you go ahead with an NPE transaction this year or you can report a single-digit NPE ratio by year-end or even pro forma single-digit NPE by year-end, and this transaction, as we discussed before, it's done in a capital-neutral way, are you already considering any capital returns to shareholders within distribution also in light of the prohibition that you've been going through? So if there's anything you can share on that, it will be great.

Okay, thank you, Jonas. I will take the questions on the NPE and dividend distribution, then I will hand over to Chief Risk Officer to answer the cost of risk-related questions. So new lending volumes, we're very glad of what we see. I mean, we are 30% up versus previous year. We previously guided, as we remember, automatically better than 2020. This continues to be the case. And we do expect a good return on half the year on lending because of the pipeline we have, especially on the retail side. So lending will be strong in 2021 and will be approaching the 2019 level. This is how we have as of today. In terms of NPE, as you know we are -- as we already mentioned, we have started working on a new trade. There are big momentum on the new phase. Timing, of course, is still depending on market conditions, but our tactic is to complete the trade by year-end. So this is optimum. And seeing the new NPE -- there are very low new NPE flows because of the very good performance in the moratorium. The continued good performance on the organic NPLs, we do feel comfortable with what we have guided to the market before. In terms of -- as you rightly mentioned, our -- we have done a number of trades in the past than it has been proven to be broadly at least capital-neutral. We don't have any reason to believe that the history, I would call, will not be the same. And yes, you know that our overarching priority to start delivering results to return to our [indiscernible], and we do expect that by reaching a single-digit NPE ratio and prove that we have a sustainable digital model able to deliver organic profitability, a different experience as you have seen in Q2. If we can spend that, it would be the right time to initiate discussion with the regulator for lifting the dividend per division. Demetris, do you want to answer and comment on the cost of risk question, please?

Yes, thank you, Panicos. Well, Jonas, you are right. The GDP matter or data published is better than expected. But I have to say that unemployment rate are in line with our expectations and our provision models are more sensitive to unemployment data. As we previously said, because of the moratorium and the uncertain [indiscernible], we are calling our cost of risk guidance, and we will remain so taking also into consideration that there will be the gradual lifting of the government support measures at some point in time. Now of course, we are encouraged by this strong performance 8 months after the expiry of the moratorium. And we may achieve our cost of risk target earlier than we generally expected. For now, what we will do is that we will confirm what we previously said, that 2021 cost of risk is expected to be slight -- to be significantly lower than financial year 2020, which stood at 120 basis points, and we will keep you updated.

The next question comes from the line of Quinn, Daragh with KBW.

First question on NPEs. Maybe just if you could provide a little more color around the 4% of the payment deferrals that are in arrears and the 10% that are in restructuring? How do those amounts impact or will impact NPE inflows over the coming quarters? Or will it just be absorbed within from stage 1 to stage 2? And then a second question on margins on the core loan book. So still seeing pressure there. I wonder just give an update on your outlook, do you expect that pressure to continue? Will that be impacted as well by the loan guarantee program? Will that imply lowering of margins in the future? If you could just give an update on that, that would be great.

Okay. I will start with NPE question, and then I'll hand over to Eliza for the NIM and margin question. I would just start by saying that the 4% on arrears or the 10% in restructuring are not an indicator of future NPEs, and this has been prudent to be the case in the first half of the year. We don't have any reason to believe that this will not be the case on the second half of the year. I would just comment by saying that the 4% that you see in our arrears, almost 95% are related to earlier arrears. And what -- the remaining arrears, it's -- are arrears less than 30 days. So these are arrears that actually are getting paid -- they are not picky and they are getting paid a few days after their installment due date. On the restructuring, Daragh, you know this has been clearly structured for years now. I mean by having 10% restructuring on the whole book of the moratorium, we consider this to be a huge success. And for most of you that we follow our story, you should have noticed that more than 90% of the restructuring of this year have been proven to be very, very successful and are not in arrears as of today. Why we do restructuring? I mean restructuring is referred to the tourist sector. We offer solutions. We design flexible [indiscernible] and on the assumption that the industry may recover -- will recover until 2024. So if and when this recover at quicker rate then this will be captured through cash repayment. So we are comfortable on the restructuring part and on the arrear part because it has been there for 8 months. It has only resulted in any new NPE flows. So I will hand over to Eliza to comment on the margin question.

Thank you. So on margins, we did see a bit more pressure this quarter. However, the underlying return of the reduction in performing loans has been effectively [indiscernible] basis points touchup which is nonrecurrent. So the underlining through exist on loans is 294 basis points which is a level we expect to be continuing into the next quarter. We will start in '22 from the continuing drop of the EURIBOR and the lending rate of 2 basis points, which is what's coming. We also had a negative impact coming from the mix success of housing loans, from increased housing loans, which you might remember, benefits from a government subsidy on the interest of the first 4 years. So the combination of this is what led us to get [indiscernible] for adjusted yield. We believe that this is the run rate based on what we currently see in terms of forward rates. As regards to currency, the law has not yet seen in an assets comes through from the European Commission is not yet in an asset. So yes, there are pricing cuts in the legislation, which are still not yet finalized. However, we don't believe that it will materially impact the lending season. The short amount of time that we have in our disposal [indiscernible] this loan. It's already end of August or 1st of September. So we only got 4 months to go. So we don't expect a material impact from that.

Perfect. Sorry, just on the NPEs. So the guidance is still for organic net reduction in NPEs in 2021?

Yes, never -- yes, for a net of currency reduction in NPEs, you already seeing [indiscernible] negative -- net reduction of currency.

I mean the EUR 170 million net of currency reduction.

The next question comes from the line of [Lukas Alexey] with Bank of America.

Thank you very much for the call, and thank you for your very good performance this quarter, times are challenging and you still managed to deliver profit. My question is on the macro side. You cited some very interesting numbers. One number is about building funds 35% year-on-year and above 2019. So I was curious what's going on in Cyprus? Why building activity is so strong? And another question is about tourism arrivals, 54%. Honestly, it sounds very low. Of course, it has nothing to do with Bank of Cyprus. So what's happening on the macro side? Is the government too restrictive with admission of tourists? Honestly, I expected the Cyprus would be performing much stronger than other Mediterranean countries because it allows the tourist not only from EU but also from Eastern Europe, from Russia, and historically, you've been receiving a lot of tourists from Britain and Russia, the 2 main sources of tourists. So -- and we see in other countries which have independent of the transient era policies like Croatia, very strong arrival. So what's going on in Cyprus? Why arrivals are so low in 2021?

No, I will start by saying that based on our, let's say, as I said before, we do expect to reach the -- we are conservative on tourist predictions. So we expect to reach the 2019 level in maybe 2023 and 2024. So I don't consider the -- I mean the July number, 54%, it comes with no competition from U.K. because, as you know, the lifting from U.K. happened in late July. So this was mainly tourist arrival coming from Eastern Europe, mainly Russia and from Continental Europe. So as I said, this is something that the tourist certainly will continue. And we do expect this performance in investors to continue. So I will be standing with you, in the sense that it leaves you a profit, so I do consider this to be a very business performance given that this is a very real, gradual recovery of the tourism sector. So our initial estimations were actually well than the actual numbers that we see today. On the business permits, I mean, there has been a [indiscernible] they are 55% up year-on-year. It's sometimes closely, let's say, with the low number of business permits that we are issuing at the year in 2020, but there is a swift demand on locals, on real estate investments. And this is a kind of a reflection of the ample liquidity now we are seeing in the market and especially coming from locals in Cyprus. So all in all, and the macro is included fully in my opinion, point to the right direction of a strong recovery of the economy, of the [indiscernible] and better than our sales and the need to find a sector in our previous call in May.

Okay, a quick follow-up. You mentioned arrivals from Britain were halted until July. Was it because of restrictions on the Cyprus side or because of the British side?

We don't have any restrictions on -- I mean we don't have any restrictions in Cyprus. I mean, those that have been vaccinated -- not vaccinated, can't enter the country. So if you are mostly related from Britain and those are -- what happened. There was -- I think in late July, there is also kind of [indiscernible] restrictions, meaning that those that were visiting countries like Cyprus [indiscernible], they can go now back to U.K. without the need of a quarantine for a week or so. So this was -- there is no also, let's say, low numbers of British tourists in July. But we have started [indiscernible] in September.

So just to add, if I may. Also, you shouldn't forget that it a very low percentage of Cyprus traveling across. So a lot of -- I mean, when you look at lots of countries, for example, in the coming months, it was higher than [indiscernible] 54% because of the local tourists affect, which slightly compensated for the lost foreign revenue and have a [indiscernible].

And if you combine this with the performance of the portfolio, there are no arrears and they maintain EUR 300 million of unutilized liquidity and normally 30% of this have been -- got through a delivery payment schedule as from the pre-pandemic [indiscernible] I think this sector is well positioned to tolerate the pandemic-related shocks. I think the portfolios are being managed at Cyprus.

[Operator Instructions] 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.

Thank you all for your participation and for taking the time to listen to our presentation and making questions. Myself and the team will be more than happy to take any questions offline and arrange one-to-one calls with anyone of you. Thank you very much. Have a nice day.

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