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 preliminary group financial results for the year ended 31st December 2021. [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; and Mr. Demetris Demetriou, Chief Risk Officer. Mr. Nicolaou, you may now proceed.

Thank you. Good morning, everyone. Thank you for joining our full year 2021 financial results conference call. I'm joined by Eliza Livadiotou, Executive Director of Finance and Legacy; Demetris Demetriou, Chief Risk Officer; and Annita Pavlou, Manager, IR and ESG. As well as our regular quarterly results, importantly today, we are updating and upgrading our midterm strategic target as the majority of our presentation will focus on that. Eliza will give a briefed and normal update on our financial results, and then I will present our updated medium-term strategy and targets. Our comments on the results will be briefer than normal. Our disclosures are unchanged, and you will find all the usual formation in our presentation pack and associated materials. And of course, we remain available for questions both during this conference call and afterwards. I will start by highlighting some of the key achievements for the year on Slide 5. We'll deliver a profit after tax before non-recurring items of EUR 91 million. The reported result for the year was a net profit of EUR 30 million after restructuring and other related costs of EUR 61 million. In 2021, we managed our cost base carefully, kept our total operating expenses below EUR 350 million. Our cost to income ratios stood at 60% flat on the prior year. Our capital position has strengthened during the year. As of 31st of December 2021, our capital ratios on a traditional basis were 20.8% for total capital and 15.8% for CET1, both pro forma for trade. We successfully refinanced our Tier 2 at a significantly lower coupon rate and initiated MREL issuance with a inaugural issuance of EUR 300 million senior preferred notes that allowed us to achieve our interim MREL requirement as of 1st January 2022. Balance sheet de-risking is now largely complete. During the year, we reduced our pro forma NPE ratio to 7.5% and up 3.1% on a net basis. Overall, in 2021, we have reduced NPEs by 75%. Our positive performance during the year and the solid growth outlook for the Cyprus economy has allowed us to update and upgrade our targets for the medium term. We now expect to reduce our NPE ratio to 5% by the end of 2022 and to less than 3% by the end of 2025. We retained our focus on creating shareholder value and increased our medium term return on equity liquidity target to over 10%, providing the foundations for intent of dividend distributions from 2023 onwards subject to performance and relevant approvals. Sustainability will continue to be embedded in our culture as we lead the transition of the local economy to sustainable future. We commit to becoming carbon neutral ourselves by 2030 and to have net 0 emissions by 2050. Whilst at the same time, we'll support our customers and communities in this transition. I will now hand over to Eliza to take you through our financial results for the year. Eliza?

Thank you, Panicos, and Good morning from me too. So starting from Slide 6. Here we summarize the key highlights of the fourth quarter. I will briefly go over this. I'll start with the economic context. Year 2021 saw a strong recovery in the fixed economy after a period of pandemic-related disruption, providing an improved backdrop against which the bank performed well. GDP grew by 6% in the fourth quarter, well above the eurozone average of 4.6%. During Q4, we continued to support the country's return to growth and extended a further EUR 471 million in new lending. Overall, we accounted EUR 1.8 billion new loans for the year 2021, an increase of 1/3 compared to the previous year, recovering towards pre-pandemic levels. The strong recovery in new lending lays down the foundations of our growing confidence that loan growth will accelerate over the next few years, which we will discuss in more detail later. During the fourth quarter, we have generated total income of EUR 154 million, up 11% on the previous quarter, driven mainly by higher non-NII, which resulted in a positive operating result of EUR 55 million. Total operating expenses remained broadly flat Q-on-Q at EUR 87 million. And with rising income, this resulted in a cost to income ratio of 57% for the quarter, down 7 percentage points on the previous quarter. The underlying result for the quarter was a profit after tax before restructuring charges of EUR 27 million. In December 2021, the group completed a small targeted voluntary staff exit plan at a one-off cost of EUR 16 million. The gross annual savings are estimated at around 3% of total staff costs. Despite this charge, overall, the fourth quarter was profitable with profit after tax at EUR 10 million. Our capital position is robust. As mentioned earlier, our capital ratios were 20.8% for total capital and 15.8% for CET1 as of December, both pro forma for held for sale loans. Deposits increased in the quarter by 2% to EUR 17.5 billion, and we continue to operate with a significant liquidity surplus that now totals almost EUR 6.4 billion. Turning now to balance sheet de-risking. As a reminder, in the fourth quarter, we signed an agreement for the sale of EUR 600 million NPEs in Project Helix 3, a profitable and capital accretive transaction. Additionally, we are currently reduced NPEs by a further EUR 400 million during the year. Overall, in 2021, we have reduced NPEs by 75% on a pro forma basis. The performance of the loans under expired moratoria remains solid. 96% of performing loans with payment deference have expired, presented no arrears. This continues to be a better performance than expected now more than a year after deferral expiry and bodes well for future trends. Moving now to Slide 7, where we'll provide an overview of the macroeconomic conditions. Economy continued to grow in the fourth quarter by 6%, facilitated by a rebound mainly in tourism, trade and professional services. Cyprus economy has quickly recovered to pre-pandemic levels demonstrating its open small and dynamic characteristics. For 2022, GDP is expected to grow by around 4%. And with the additional implementation of the Cyprus' Recovery and Resilience Plan, growth is expected to be sustained at pre-pandemic levels. 2021 tourist activity recovered significantly year-on-year and the tourist season was extended until late October. Overall, arrivals in the second half of 2021 reached around 70% of 2019 levels. Tourism is expected to recover fully by 2023 to 2024. As Panicos already mentioned, the majority of the forecast today will be on our medium-term guidance. And as a result, I will not speak -- follow the slides that I normally would. They're all available for you to review. But instead, I wanted to pick up a few important trends. So moving to Slide 12, income statement. Net interest income increased to EUR 73 million from the fourth quarter, driven mainly by larger volumes of loans and interest collections. NII for the full year '21 amounted to EUR 296 million compared to EUR 330 million the year before, down by 10% year-on-year, impacted mainly by the continuing pressure from the low interest rate environment and the completion of Helix 2. Noninterest income for the fourth quarter was at EUR 81 million compared to EUR 68 million in the prior quarter. The quarterly increase is mainly due to higher net insurance income and revaluation gains in financial instruments. For the full year, noninterest income increased to EUR 285 million, supported mainly by higher fees and commissions. Overall, noninterest income was up 20% year-on-year, more than offsetting the negative NII impact from derivative and continuing pressure from low interest rate environment. Total operating expenses stood at EUR 87 million for the fourth quarter and EUR 347 million for the full year, broadly flat both on the prior quarter and the prior year. Provisions for impairment for the fourth quarter of EUR 24 million comprise loan credit losses of EUR 9 million, impairment of EUR 23 million, mainly relating to large illiquid REMU assets and reversal litigation of around EUR 8 million due to revised estimates for cases provided for. Profit after tax and before non-recurring items was at EUR 27 million for the fourth quarter and EUR 91 million for the year. Restructuring and other costs of EUR 13 million in Q4 relate mainly to the EUR 16 million cost of a small targeted voluntary staff exit plan that took place in the fourth quarter. For the full year, restructuring and other costs remained broadly flat year-on-year at EUR 32 million. We achieved a return on tangible equity before non-recurring items of 6.6% for the fourth quarter and 5.5% for the full year. The overall result was a profit after tax of EUR 10 million for Q4 or EUR 30 million for the full year. Moving now to Slide 13. There are various factors here that drive NII. Whilst volume trends are encouraging, margins will likely remain under pressure in the near term. Slide 16, I'd like to mention that noninterest income grew strongly in the fourth quarter, reflecting mainly higher net insurance income and increased revaluation gains from financial instruments. Net fee and commission income amounted to EUR 172 million for the year, up 19% on a year-on-year basis. Again, Panicos will discuss later our future plans in this space, including expanding our insurance revenues. Moving now to costs on Slide 18. Total operating expenses in Q4 were EUR 87 million, broadly flat over the previous quarter. OpEx for the year remained below $350 million, and we have managed to keep our cost to income ratio flat at 60%. We remain responsive on costs, as evidenced by the small staff exit plan we executed in December. Now turning to capital on Slide 21. Our CET1 and total capital ratios as of 31st December stood at 15.8% and 20.8%, respectively, both from pro forma for assets held for sale. During the fourth quarter, we have generated around 50 basis points of organic capital through operating profit and 30 basis points from the reduction in RWAs. These were partially offset by expected loan credit losses and impairments of around 30 basis points. Our CET1 on a fully loaded basis was at 13.7% as of December 21 and 14.3% pro forma. The minimum requirement for 2022 for CET1 and total capital is set at 10.08% and 15.01%, respectively, following a 26 basis points add-on on P2R due to ECB's prudential provisioning expectation and 25 basis point phasing in of the O-SII buffer. It's important to note that the P2G reduction more than offset the increase in P2R for the CET1 ratio. The group continues to monitor opportunities for the optimization of its capital provision, including AT1 capital. And finally, turning to cost of risk on Slide 26. The cost of risk for the year was at 57 basis points compared to 118 basis points in the previous year, reflecting mainly lower COVID-19 related charges and normalization of cost of risk as balance sheet de-risking is largely completed. For the fourth quarter, cost of risk was at 35 basis points of gross loans and included a reversal of loan impairment, mainly driven by improved cash collections and updated financial information. And with that, I'd like to hand back to Panicos to go through the medium-term strategy and targets.

Thank you, Eliza. I will start with our investment highlights on Slide 30. The bank operates in a more open and dynamic economy that has fully recovered to pre-pandemic levels. We are a diversified leading financial and technology hub in Cyprus with strong franchise and customer base. Our team has an excellent track record and is fully committed to deliver shareholder value while maintaining best in class governance. Our strategic priorities are clear. We are committed on delivering sustainable profitable growth and shareholder value creation. And as I will come on to, for the first time in many years, we are in a position to outline prospect for the reduction of dividend payments. Moving now to Slide 31. We have the leading bank factors with around 3 quarters of the population being customers of the bank. We have a leading market position in both loans and deposits with market shares of 39% and 35% respectively, as of then on December 2021. We have profitable life and non-life subsidiaries with high market shares. Finally, we are a strong technology hub with well over 300,000 active users of internet and mobile banking. Currently 90% of transactions are performed through digital channels. We are the 75% majority shareholder in the last processing company in the country, and soon, we will be launching an ecosystem expected to drive the transition to the digital economy, leveraging on our digital capabilities and market footprint. Let's now turn to Slide 32. In November 2020, we communicated our strategic vision for the bank, setting the path to normalizing the balance sheet and achieving that with sustainable returns. We are pleased to have made significant progress against our targets, including achieving some [ formal of those ] early, covering single-digit NPEs 1 year ahead of plan and have achieved this with a better capital outcome with 51 of 15.8% being well above our guided minimum threshold. Furthermore [indiscernible] performance has exceeded our expectations, allowing a shift to normalization in cost of risk. We have delivered on our cost target and our cost to income ratio, while remaining under pressure in the near term has performed better than expected. We are, as a result, updating our outlook and our medium-term targets on Slide 33. To take into account the projects achieved so far as well as increased confidence in the growth and sustainable profitability of the normalized Bank of Cyprus Group. Back in November 2020, we set a path of 7% ROTE for the normalized business over the medium term, where today updating a range and the target over 10% ROTE profitability in 2025, supported by a normalized cost of risk of 40 to 150 basis points, reflecting a less than 3% NPE ratio and improved efficiency of 50% to 55%, underpinned by a capital ratio between 13.5% and 14.5%. It is important to note that 2022 is expected to still be a year of transition when we will continue to replace the building blocks of our future growth. We expect solid mid-single-digit profitability to be already visible in 2023, when we expect to be in a strong trade in terms of capital, asset quality and profitability for management to recommend the payment of dividends of core subject to regulatory approval. This will be a significant milestone in the recovery of the bank, and we reorganize the importance to our shareholders of dividend payments. Moving now to Slide 34. Our first strategic pillar remain unchanged. Firstly, enhancing revenues in a more efficient way; secondly, driving towards a linear cooperative model via further improving efficiency. Also at the same time, funding digitization and investing in the business. Thirdly, normalizing cost of risk and reduce other impairments as de-risking is largely complete. And finally, embedding ESG in our culture to drive a sustainable future. Our transformation plan presented on Slide 35. We support the delivery on these strategic pillars with leveraging on our country wide customer database. The plan will allow us to tailor our operating model in line with the needs and cash derivatives of our customers and to develop our internal operation and streamline our processes. Over the near term, we are targeting 65% of wholesale customers to have a positive economic value added. We are aiming for other 30% of the sales to be through digital channels, another 70% of deposits to migrate to self-service channels. At the same time, we are targeting over 40% of decisions for consumer lending to be fully automated. All the above will allow us to reduce by over 30% via administrative activities in the branches. Slide 36 presents a way we see the build up to our greater than 10% return on tangible equity for 2025, partly from the current level of 1.8%. Firstly, we expect NII to gradually recover and towards 1% to ROTE for 2025 as the loan expansion and margin stabilization is expected to more than offset the forgone NII from the de-risking. Secondly, we expect to improve significantly our non-net interest income, driven mainly by fees and commission that are expected to grow by 4% per annum, building on the strong performance in 2021. We are looking to also improve the income from our insurance operations, leveraging the bank's strong market share. At the same time, we are also at an advanced stage in development of a digital platform that will allow us to serve our customers beyond banking and create new revenue streams. These 3 initiatives are expected to add between 1.5% and 2% to ROTE of 2025. Thirdly, we are revamping our operating model, driven by our transformation plan and digital focus. As you have seen for 2021, we have demonstrated our ability to manage costs. We are today committed to keeping total operating expenses below EUR 350 million in 2025 despite inflationary pressures, whilst at the same time funding digitization and investment in business. We expect to effectively eliminate restructuring costs as de-risking now largely completed. Overall, this building block is expected to add between 2.5% and 3% to the 2025 ROTE. Lastly, our balance sheet risk is now largely complete. This will allow us to further normalize our cost of risk, reduce the other impairments adding between 2.5% and 3% to the ROTE for 2025. Last thing with NII growth on Slide 37 and 38. Over the medium term, high quality lending is expected to reach EUR 9 billion. We have already seen a sharp recovery in volumes as the economy recovers from COVID, and we are confident that we can achieve this given the economy is expected to continue to grow on an average by over 3% over the period. The significant deleveraging of the Cyprus economy over the past 7 years is coming to an end. The group aims to benefit from its strong market position and help deploy the Cyprus Recovery and Resilient Funds as we allows to grow shipping and international corporate lending with prudency and explore market opportunities in performing portfolio trades in cycles. At the same time, we aim to support our customers in the transition to a sustainable future through, for example, the provision of environmentally friendly products. As a result, our performing book is expected to grow by 6% per annum, a sharp acceleration in the pace over the past few years. The growth of net interest income over the medium term is further supported by margin stabilization. As shown on Slide 38, our plan is based on conservative interest rate assumptions that we believe that the group is well positioned for faster rising rates. We also use conservative assumptions for fixed income investment, and we factor in increased funding cost from further MREL issuance and the fact of the favorable TLTRO borrowing items will not be extended post June 2022. As a result of the huge transaction in 2021 and the ending of TLTRO favorable terms with net interest income to be under pressure in the near term before more closely matching volume trends. Turning now to Slide 39. Building on the strong performance in 2021, over the medium term, net fee and commission income from banking activity is expected to increase by 4% per annum, supported by price adjustments and increased activity as the economy recover. We will amend the universe of deposits of which we charge liquidity fees, and we will recycle deposits to products with higher return mainly through our wealth services. Additionally, we will also aim to increase the average product holding through cross selling to those part of our customer base that remain underpenetrated via operational model re-design and client segmentation in order to cater for different customer groups. Moving now to our insurance business on Slide 40 and 41. One of the important sources of increased revenues will come from our insurance business as we have consistently delivered sustainable safety profitability. Our life insurance business has a leading market share in Cyprus, whilst our general insurance business is a key player in a highly concentrated market. We believe both life and nonlife insurance business can deliver more by further leverage of the bank's strong market share. The result of the insurance business for the year are promised. Overall, the net insurance income in 2021 increased by 9% year-on-year to EUR 61 million, contributed to over 20% of our noninterest income. Moving now specifically to Slide 40. In the life insurance business, further growth will be driven through the pursue of new market segments with higher margin potential for the business insurance or income protection, exploring opportunities in the occupational pension market and the launch of new products and investment funds. At the same time, EuroLife is expected to widen its target market, leveraging on its revamped bancassurance model. Internally utilize aims to strengthen its agency force organically and improve productivity through digitization and campaigns. Leveraging on the group's digital capabilities, the customer experience is expected to be upgraded via enhanced self-service capabilities such as the myeurolife portal. Overall, we expect our regular premium income to increase by 35% over the next 4 years. Moving now to Slide 41. In the general insurance business, further growth is expected through widening the target market, leveraging on our revamped bancassurance model, exploit the synergies with the life insurance agency force and focusing on profitable business segments such as fire and liability. General insurance also aims to strengthen its penetration in the profitable motor sector. Centralization, automation of the claims handling process as well as further digital growth will be enabled by further digitization. Overall, we expect our market share to rise and our gross written premiums to increase by more than 50% over the next 4 years. Let's now turn to Slide 42 to 43. As I mentioned earlier, we expect to soon launch our digital current plant. Bank of Cyprus has been the trusted provider of financial services to the economy with a market share of more than 50% in most customer segments and with the largest active digital user base on the [ IDA ] or more than 335,000 users. At the same time, compared to many other EU countries, business in Cyprus are less automated and digitized. This is now changing and presents an exciting opportunity both for the country and for the bank. With the launch of Jinius, we aim to provide solution to address digitization gap within organizations, a link on large digital user base to lifestyle service and product providers. Jinius will allow us to enhance our existing customer base engagement, attract new customers, optimize the cost of our own processes, create new revenue sources and channel and position the bank next to the customer at the point and time of need. The size of the market, the fastest provider view of the bank, the large digital base, the large market share and the clear and validated need of digital economy end to end services linked to financial services, render this initiatives and necessity and define with part success. While there are clearly tremendous potential development within our medium-term plan, we assume only minor contribution to revenues, while digital platform caused investments will be major focus and included within our cost guidance. Moving now to Slide 44. Controlling costs has become a key feature of how we have managed the bank over the recent past, and we will continue to strive for a linear operating model absorbing inflationary pressures and investments in the business by cost saves from further staff and footprint optimization. The transformation plan in progress will let us and enable it to modern banking by digital transforming customer service, internal operations and automating and centralizing back office activities. In addition, restructuring expenses are expected to reduce to single digits as balance sheet de-risking is largely complete. Our commitment is to ensure costs are well below the current level in 2023 and remain below EUR 350 million in 2025. Our cost to income ratio will decline to the early 50s by 2025, but near term will remain under pressure given the revenue trends noted earlier. In addition, most of their higher IT and digitalization investment will impact the earlier years of the plan. Moving now to de-risking on Slide 45. Our track records here has been excellent, achieving 75% NPE interaction in 2021 and reducing NPE ratio to 7.5%. We have a clear path to reduce our NPE ratio to back to 5% by the end of 2022 and to less than 3% by 2025, which at the same time contain NPE inflows post the pandemic. Our cause of risk is expected to normalize towards 14 to 15 basis points in the medium term and other impairments will be reduced as balance sheet de-risking is largely complete. This is lower than our previous expectations as now we have more visibility on the risk in our books. Moving now to Slide 46. Maintaining a strong capital base has been a key underpinning of the bank this past few years, and that remains nonnegotiable for the bank going forward. We are pleased with our capital position remaining robust in 2021 and gross further [ reduction ] by 100 basis points during the year. Over the period of our plan, we expect to maintain a CET1 ratio between 13.5% and 14.5%. The improved ROTE targets will allow us to organically generate capital, but going forward, we expect to use to organically grow our loan book, invest in our business and absorb any regulatory impacts and one-off optimization cost. And importantly, this strong capital position will pave the way forward from dividend distribution to resume from 2023 onwards after the first regulatory approval. We recognized how important these are for our shareholders and myself and my management team on returning to reward our owners for their faith they have shown in us all these years. Moving now to Slide 47. Of course, delivering for our shareholder is important, but it's only one part of our responsibility to wider group of shareholder. And we are working to build a forward looking organization with a clear value supported by effective corporate governance aligned with ESG priority, setting the foundations to enhance our organization resilience. More information is provided on Slide 48. Moving to sustainable economy is a challenge of our time. As part of our vision to be the leading financial [ bank ] in Cyprus, we are determined to lead the transition of Cyprus to sustainable future. In 2021, we formulated the bank's first ESG strategy acquired by an addition to maintain our leading role in the social and government pillars. There will be a shift of focus to decreasing the bank's positive impact on the environment by transforming not only our own operations, but also of our client chain. The bank has committed to the following ESG -- primary ESG targets, which reflects the [ primitive ] role of ESG in the bank's strategy, become carbon neutral by 2030, become net 0 by 2050, steadily increase green asset ratio, steadily increase green mortgage ratio and at least 30% women in group's management bodies. To conclude, this is a new phase for Bank of Cyprus. I'm encouraged at how we have delivered on the target we made since we have set them out in November 2020, and we are well positioned to deliver our new upgraded target over the middle term. This concludes our presentation. I will now open the floor for your questions. Thank you very much.

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

Congratulations on the progress you achieved in 2021. My first question is on the capital returns. I'm just wondering if you could clarify more or less how the process now until we get the approval for the dividends will work. Also, distribution of dividends from 2023 onward, I suspect this is based on 2022 earnings, right? And then also I was wondering if that's the case, when is the initial idea that you'll be able to announce if is it like for together with full year 2021 results. And then still on the topic. When I look at your capital guidance on the new targets, does this already include the distribution of dividends? And if yes, can you share more or less how many basis points of that is the 2022 up until 2024 or 5 delta in your capital ratio? And then secondly, it's on the revenue impairments. I was just wondering if you can clarify more or less what is the -- those assets, those illiquid assets that you take to pay impairments on. And also what is the expectation going forward for your state impairments?

Okay. Thank you, Jonas. I will take the question on the capital return. I will start by saying that -- and let me be clear to that. We recognize that dividend are very important to our shareholders. We are determined to resume dividend as soon as possible. Currently, you know that we have a bank paying dividends. So clearly, this has to be removed because before the Board can consider any payment. As we state, we believe that we can be in good shape in 2023 results with sustainable business model without one-offs and capital buffers to consider dividend distribution or other type of capital shareholder return. So this is something that is important to start the shareholder return. We expect this to gradually build up, and the calculation of ROTE of more than 10% is surely calculated on a CET1 than what you see in the guidance. Don't know, Eliza, do you want to add more on the dividend payment and take the question on the revenue impairments?

Yes. So on capital and what we have included in capital, which was the last part of the question, we have included assumptions on dividend. We are assuming a build -- the gradual buildup of dividend payout ratio. We do believe the conservative assumptions, given that it's been almost a decade or more than a decade since we last paid dividend. So the actual road pace is on the back of capital that's actually slightly higher or higher than the band indicated. Okay. On the revenue impairment point is related to is like, I mean, the largest part in Q4 related to significant to a specific large property that we have on the books, which was also subject to capital deduction from the regulatory inspection a couple of years back. So -- and it's a function of the valuation. It's a very interesting credit valuation issue relating to that piece of property, and it's not pervasive in the book. So therefore, just to your question on the future, we don't expect further material impairment on the revenue stock. In fact, we are selling, as you know, above book value and above -- and close to OMV and there are statistics in maybe front of the deck on not.

The next question comes from the line of Rathod Priya with KBW.

Just 2 for me. So one is in relation to rate. So I was wondering if you could give more color on your sensitivity from Euribor moving back into the positive territory. So more specifically, what impact would that have on loan repricing? And would you start to see remuneration of deposits? Secondly, with regards to TLTRO, what is your current contribution? And what time line do you expect for TLTRO to drop out?

Eliza?

Okay. So on the rates, you will see them on Page 38 in actually of the deck in the results, not really in the guidance part. So just to explain this graph on this slide on the top right-hand graph, you will see the rate assumptions that we had in our financial plan and the guidance. This as you will know from current experience are actually very conservative both on the -- on how [ steep it ] carry on the Euribor and when it crosses 0 -- in the financial plan, it's touching to close 0 sometime in 2025. In reality, the market believe that this will happen a lot earlier, maybe as early as 12 months away from now. So that's what we've assumed in the plan. On the table in the bottom, we've set out the sensitivity of a 50 basis point shift on the P&L. If, for example, the rate increases happen earlier or happen in a steeper way than what we've predicted. So that's the summary of that.

On the TLTRO, Eliza?

On the TLTRO, okay, the -- sorry, the positive carry of the TLTRO will continue until Q2 of this year. So there are 2 more quarters. I remind you, it's an almost EUR 4 million per quarter positive NII for us. Whether we repaid at that point or not is still under discussion. It depends on whether we can have a positive carry or not from the TLTRO definitely only up. But it will definitely not be the 50 basis points benefit we currently have, which is lost and almost automatic. In that, it's not relating to market rates.

Ms. Rathod, are you done with your questions? The next question comes from the line of David Daniel with Autonomous.

Just a couple from me. The first one is just on capital. I'm just interested if you could let us know any capital headwind that's heading into next year. So to hit the NPE target of 5%, if there's any more kind of capital hits that go alongside the disposals that are planned? And then just on capital as well like and sort of comment on AT1. Would you consider an AT1 this year as part of the kind of capital equation? Good to get your thoughts on that. And then just secondly, more broadly on your targets, the lending targets look quite -- well, quite aggressive. And I'm just interested in the phasing of kind of the CAGR that you are forecasting in net performing loans. So I can see the 6% CAGR. Should we think about that as kind of linear? Or is it likely to more happen -- be more back ended or back loaded? And are you seeing any trends in Q4 that would kind of point to anything significant in 2022 or 2023?

Okay. Thank you, David. I will start with capital headwinds coming from therefore to reduce NPE's 5%. I don't think that there will be any negative impact on the capital from the further NPE. That we have proved this through organic reduction and through that rates. I remind you that the latest trade of Helix 3 was significantly capital activities. On the AT1 question, we have -- as you know, our AT1, I think expires in end of 2023. So we are looking all the options, but nothing to announce at this point of time. As well as lending targets volume, I would start by saying that there has been a significant -- and I will explain how we came to this target. It's coming both from gross new lending and including also the repayments. So first, I have to explain that there has been a significant leverage of the Cyprus economy all this year. I remind you that in 2013, we are EUR 62 billion of loans. Now we are roughly a EUR 32 billion. So we expect this to gradually start growing, not growing dramatically, may -- it can grow from 52 maybe, go to 33, 34. [ On new ] lending generated in the economy is expected also to grow modestly in line with the GDP growth, including also the extra push coming from the RRF financing, retransition, digitization and all that goes with the RRF. So Bank of Cyprus is assumed to maintain its market share in the pure new lending that it created in the market. We did it in the past. We believe that we can do it in the future, and we believe that it is stronger now because the management focus will be shift towards value creation, revenue, [ running down ] de-risking. So over and above the leading market position in the country, we are carefully looking outside for an additional EUR 1 billion from new lending. We have already created the setup, the teams and during the pandemic, and we are now starting seeing the results. So over and above, as we made transition, we will consider any other opportunities from a reperforming trades in Cyprus in the years to come. So this is the grow new lending. On the net new lending, you have to take it to consideration the repayment as well. So we expect still to have significant portion of new lending to be repaid. At absolute numbers, it will be probably similar to the previous years, but we had a courage that seeing that our -- the general hard loans are gradually increasing. So we have 12.2 [ years ] in 2019. Now it's almost 13, 12.8. And over and above, the mix of restructured negotiated loans, which most of them have this one-off [ last counting ] payments are actually reducing in our portfolio. So all in all, we have -- are optimistic on this. And in terms of linear, I will say that maybe a little back ended, but it's not -- it's less -- I will describe that the back end is not dramatically higher than what you're going to expect to see in the earlier years.

[Operator Instructions] The next question comes from the line of Boulougouris Alexandros with Wood & Co.

A quick question in my end regarding the -- this interest rate sensitivity that you have on Slide 38. The upward scenario is a 50 bps parallel shift and the downward is a 50 bps reduction. I assume it's -- and this is the EUR 30 million, EUR 40 million that you have there is net profitability or on NII or pretax, if you could clarify that? And a second quick question regarding REMU, maybe a bit clarification on where would you expect REMU portfolio to be in 2025 on your business plan?

Okay. I will start with revenue and then Eliza will provide more clarifications on the interest rate sensitivity. As we said, the 2021 revenue stock had been reduced to EUR 1.2 billion from almost EUR 1.5 billion in 2020, reduction by 70%. We expect this to materially -- this stock to materially reduce in the next 2, 3 years. And of course, significantly lower in 2025 because as you know, [ REO ] still holds a lot of -- holds capital, idle capital, and we'd like to convert this side of capital into income generating assets and, of course, utilizing this capital for these capitals. Eliza, you want to provide clarifications on the interest rate sensitivities?

Okay. So since Alex said, the shock is indeed 50 basis points on euro and 60 on the USD, there is a note below the table. But obviously, most of our loan book is euro denominated. The number 3 are actually revenue numbers. So they include both the NII impact as well as assumptions on the reduction of the liquidity fee, which I remind you go through the fee and commission line and remains discretionary on whether and when we do it. But here, it's mathematically the net impact, the net delta of the 2 numbers, NII and fees.

On the revenue, okay, clear.

On the revenue, yes, pretax effect. The one point just to add is that we do have a portion of the book that -- where the Euribor is flow to 0. And here, the impact of the 50 basis points actually doesn't capture the upside if the Euribor rates to move to positive territory all the way. So there is actually an even bigger benefit if you were to shock the book by 100 basis points, for example, or anything more than 50. But given -- we wanted to be conservative in what we are showing here as a shock. And we'll be updating you as we follow -- as the market evolves.

So in a scenario of 100 bps, it is not 40. For example, it will be more -- it will not be 80. It could be more than 80 in the…

Yes. It's yes. Yes.

You also have a interest rate [indiscernible]

So it's linear up to -- yes, so it's linear up to the 50 basis points, so 10, 20, 30 is a proportional impact wise. When it goes above 50, it's not proportional. It's more than that.

[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.

Okay. Thank you all for your time. As always myself and the team will be available for any one-to-one calls, meetings to clarify, answer any questions and explain in more detail our plans, including our initiatives and, of course, our dividend ambition. 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 evening.