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

Ladies and gentlemen, thank you for standing by. I am Gaily, your Chorus Call operator. Welcome, and thank you for joining the Bank of Cyprus conference call to present and discuss the group preliminary full year 2022 financial results. [Operator Instructions] 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.

Good morning, everyone. Thank you for joining our financial results conference call for the year ended 31st December, 2022. 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 lookback at Q4 and 2022 as a whole, I'm pleased to outline our upgraded financial target for 2023 and 2024. Let's start with some of the key messages for the year on Slide #5. I am pleased with the group's strong performance in 2022, which exceeded expectations and delivered an 11.3% recurring ROTE confirming the strength and diversification of our business model. Our fourth quarter had especially strong delivery a recurring ROTE of just over 19%. The year was marked by the recovery of revenues driven mainly by the expansion of net interest cut up 25% in the year where noninterest income remain a significant contributor to total income. The proactive efficiency actions implemented earlier in the year are delivering tangible results. Our total operating expenses reduced by 2% despite the inflationary environment supporting a cost-to-income ratio, excluding special levies and other contributions of below 50%. Our NPE ratio up 4% as of the end of the year is a proof that our balance sheet derisking is likely complete. The bank is in a strong position, and we look forward to the future with confidence. Moving now to Slide #6. The bank successfully surpassed its 2022 financial targets across all of the financial metrics we set ourselves in November 2022, including net interest income, recurring profitability, efficiency and asset quality. This resulted in a recurring ROTE of 11.3% for the year, above our circa 10% target with the capital position remains robust throughout the year. Turning now to Slide #7. We expect to continue our profitability path and [indiscernible] upgrading our ROTE target for over 13% from more than 10% for 2023. It's important to note that our new order target is based on reported profits. The main building blocks for these upgrades are the following: Firstly, on the net interest income. The group benefited from the steep and fast increase of interest rates in 2022. This positive performance is expected to continue in 2023 factoring in the current expectations for the evolution of interest rates. Our net interest income is now expected to grow by 40% to 50% year-on-year, equivalent to net interest income in the range of EUR 520 million to EUR 550 million for 2023. Secondly, on efficiency. The cost-to-income ratio excluding special levy on deposits and other contributions for 2023 is revised target to mid-40 to reflect the investor revenue outlook and also continuing cost focus as the efficiency actions undertaken during 2022 will partially absorb inflationary pressures. Lastly, on asset quality. Our [indiscernible] and NPE ratio target remain unchanged at 50 to 80 basis points and circa 5%, respectively. Both these targets reflect our conservative assumption, but also our belief in being able to successfully navigate the ongoing macroeconomic uncertainty, given our prudent lending criteria and the current performance of our performing book and demonstrates no signs of asset quality deterioration to-date. With our current view of the macroeconomic backdrop and the underlying fundamentals, we see this level of profitability be sustained in 2024 with ROTE target being sustained above 13% as well. With the upgrade of our targets, we are laying the foundation for a meaningful return to dividend distributions from 2023 onwards, subject to a gradual approval and market conditions. Based on the final SREP decision received in December '22, effective from 1st of January 2023, the equity dividend distribution prohibition have now been lifted. Any dividend distribution remains subject to the usual regulatory approval. Slide 8 provides more assumptions on the evolution of net interest income. As this is an important driver of our ROTE target upgrade, I will go through this slide in detail. We expect that net interest income will expand by 40% to 50% year-on-year, equating to a range of $520 million to $550 million for 2023. Our margin is expected to improve to 2.5% in 2023, a level we do expect to be sustainable in 2024. The group's balance sheet is highly geared towards higher interest rates. Our sizable liquid balances see an immediate benefit in net interest income, while the full benefit on our monthly variable loans will continue to feel fully during the year. Our 2023 guidance is based on the following assumptions: An average ECB deposit rate of 2.8% for 2023; further expansion of fixed income portfolio; and gradual increase in deposit mix with an increase in the sale of in deposits from 30% to 40% to 45% on December 2023, and a gradual increase in the time double rate pass-through from 7% currently to around 50% by December 2023, and increased wholesale funding costs. Finally, reflecting high interest rate rises as slow economic growth, we expect the net performing loan book to remain stable to slightly up for 2023. Additionally, there are some headwinds materializing in net interest income. Following the completion of Project Helix 3 and then of TLTRO favorable terms in Q4, EUR 28 million that benefited 2022 will not be repeated in 2023. We expect that 2023 net interest income level will be sustainable into 2024 on the back of market stabilization to 2.5% and modest loan book growth. Moving now to Slide 9, which focuses on efficiency. The cost income rate excluding special levy on deposits and other levies and contributions for 2023 is expected to decrease to mid-40s as we continue to manage our cost base carefully and in disciplined manner despite elevated inflation. This target included commitment of making our development expenses in a range between $350 million and $360 million reflecting some upward pressure due to ongoing digital transformation, investment in business as the renewal of the collective wage agreement in 2023. On the same basis, we expect the cost-to-income ratio to remain around similar levels in 2024. Let's now turn to Slide #10. As mentioned earlier, we have maintained a conservative approach in terms of our asset quality assumptions. Therefore, despite the improved credit metrics in 2022, we have kept unchanged our targets for an NPE ratio of sub-5% in 2023. It is important to note that there are no signs of asset quality deterioration from our ongoing monitoring of customer behavior. Additionally, we have maintained the range of cost of risk between 50 to 80 basis points for 2023, reflected the ongoing macroeconomic assessment. Although we expect cost of risk to start normalizing from 2024 onwards to around 40 to 50 basis points. Slide 11 provides an overview of macroeconomic conditions. The effects from the war in Ukraine, the energy crisis, high inflation and global monetary tightening are weighing on the global economy. Against this backdrop, the Cypriot economy has shown its usual resilience. The economies at a different stage of the economic cycle, with GDP continue to grow by 4.4% in the fourth quarter. Recent projections by the Minister of Finance point to a growth rate of around 3% in 2023, outperforming Eurozone average. Growth in 2022 was underpinned by strong recoveries of productivity despite sizeable loss of tourists from Russia. Revenue generated by tourist activities reached 90% of the corresponding revenue in 2019, which was a record year. The unemployment rate remained at a low level in Q3 2022 and is expected to reach 6.7% for 2022. As in many other countries, consumer inflation accelerated significantly impacted by supply chain disruptions, high energy and other commodity prices. These factors peaked in July 2022 as prices started to decelerate. The annual average inflation was 8.1% in Cypriot and is expected to drop to 4% for 2023. Let's now move to Slide #12. This slide highlights our unique equity story. Firstly, we hold a leading market position in a liquid and consolidated market. Secondly, we benefit from a well-capitalized diversified business model with a focus on improving efficiency. This model is delivering sustainable double-digit terms on tangible equity. And thirdly, we are focused on delivering sustainable shareholder returns. And all that with Cypriot being a small economy with positive prospects of outperforming Eurozone. Taking each in turn, the market sector is liquid, consolidated with the top 2 players having 65% market share across most business lines. We, at Bank of Cyprus, have a sustainable and diversified business model with meaningful capital-light noninterest income contribution. The bank is one of the most liquid bank in Eurozone with strong net interest income benefiting from rising interest rates and limited funding pressure. We have been and continue to be focused on disciplined cost management, achieving a sub 50% cost-to-income ratio which we will further improve to mid-40s in 2023 placing as attractively within the European market sector. We have a healthy loan portfolio and our NPE ratio is below 5%. Today, we are on track to achieve a ROTE of over 30% for 2023, which we believe is sustainable in 2024 as well. We continue to focus on delivering sustainable shareholder returns through strong capital generation and intend to commence meaningful dividend distributions from 2023 onwards, subject to the regulatory approval and market conditions. I will now hand over to Eliza to take you through our financial results for the period.

Thank you, Panicos, and Good morning from me, too. So I'll start by highlighting some of the key highlights for the full year 2022 on Slide 14. As the largest financial group in Cypriot, we have extended a record EUR 2.1 billion of new loans in the year, an increase of 17% on the prior year, whilst maintaining robust underwriting. Our net performing loan book of EUR 9.6 billion grew by 3% year-on-year and demonstrates strong fundamentals to withstand uncertainty in the macro group. During 2022, we delivered a profit after tax before nonrecurring items of EUR 188 million, more than double the prior year, corresponding to return on tangible equity of 11.3%. An important driver of this performance was our net interest income that amounted to EUR 370 million for the year, up 25% year-on-year, of which EUR 136 million was generated in the fourth quarter. Operating expenses decreased by 1% as the efficiency actions undertaken during the year more than offset inflationary pressures. As a result, our cost-to-income ratio for 2022 stood at 49%, 11 percentage points down on a yearly basis. The reported result was a profit of EUR 71 million for the year, of which EUR 80 million was recorded in the fourth quarter, reflecting the strong NII performance offset by the one-off restructuring charge of EUR 101 million we took earlier in the year where our Voluntary Staff Exit Plan as part of our proactive step to optimize our staff and branch cost base. The bank's capital position remains robust and comfortably in excess of our regulatory requirements. As of 31st December 2022, our total capital ratio was at 20.6% and our CET1 ratio at 15.4%, both on a transitional basis. Our liquidity position also remained strong with our cash balances with ECB amounting to EUR 7.6 billion, excluding EUR 2 billion of TLTRO funding, leaving the bank well positioned to benefit from further interest rate increases. Deposits on our balance sheet remained roughly flat in the quarter but increased by 8% year-on-year to EUR 19 billion. In November 2022, we also completed Project Helix 3 and have recognized around EUR 550 million of NPEs from our balance sheet. Together with the additional organic NPE reduction of EUR 360 million in the year, our NPE ratio stood at 4% as of 31st December, achieving our 2022 NPE ratio target of sub 5%. Our cost of risk of 44 basis points for the year was well within our target range, reflecting healthy asset quality performance. Now moving to Slide 16. Net interest income accelerated in the fourth quarter totaling EUR 136 million, driven by immediate liquid asset repricing, including the fixed income portfolio and the Euribor repricing benefits reflected into our loan book. As a reminder, the vast majority of our loan book is variable rate with around half of it linked to Euribor. As a result, net interest margin increased by 83 basis points to 236 basis points in Q4, and we expect that it will continue to rise to around 250 basis points in 2023, reflecting the full benefit of the fourth quarter and subsequent rate hikes. Our cost of funding modestly increased to 25 basis points in 4Q, reflecting small increases in the cost of time deposits and the increased cost of interbank funding. Our TLTRO borrowing stood at EUR 2 billion as of December, after EUR 1 billion was repaid during December '22. Panicos mentioned earlier, in 2023, we forego NII of EUR 28 million as a result of the end of the TLTRO favorable terms as well as the NPE sale completed in the year. Moving to new lending now on Slide 18. New lending granted in Cyprus reached a record of EUR 2.1 billion in the year, up 17% on the prior year, driven by increased activity across all sectors with corporate being the main driver. As a result, net performing loan book as of December amounted to EUR 9.6 billion, up 3% since 2021. However, there were some signs of increased repayments observed in Q4 following these rate hikes. We have high-quality loan originations, supported by prudent underwriting standards and meticulous assessment of the repayment capability of our customers, evidenced by the fact that 99% of new loans extended in Cyprus since 2016 continue to be performing. Due to the continuing rate hikes, demand for new loans is expected to be relatively slow in 2023. Despite that, net interest income is expected to be supported primarily by asset repricing and higher levels of investment in securities. On Slide 19, we highlight the strongest liquidity surplus of the bank, which makes us one of the most significant beneficiaries to rising ECB rates. Just as a reminder, the repricing of our liquidity takes place immediately while there is a modest delay in the repricing of our mostly Euribor-linked variable loans. The Cyprus banking system has one of the lowest loan-to-deposit ratio amongst the new countries below 55%, which should support moderate pricing pressures on deposits. Cost of deposits remained low in the fourth quarter at 7 basis point, although we observed a modest increase in time deposits to 20 basis points. Despite this, the contribution of time deposits to total deposits remained broadly flat year-on-year at around 30%. Turning now to Slide 20, fixed income portfolio. As of 31st December, the bond portfolio of the group amounted to EUR 2.5 billion, up 30% year-on-year, representing a total of 10% of assets. The completion of the balance sheet derisking and the group's comfortable liquidity position allow it to further grow the bond portfolio in 2023, subject to market conditions. The portfolio comprises highly rated fixed income assets with low average ratio, giving the group the flexibility to take advantage of rising rates. Now moving to noninterest income on Slide 21. Net fee and commission income for the fourth quarter was up 4% Q-on-Q due to higher nontransactional fees. Net insurance income was up 53% Q-on-Q driven by exceptionally strong new business and positive changes in valuation assumptions and lower insurance claims. Noninterest income for '22 increased by 16% on the prior year to EUR 329 million, driven by higher net fee and commission income, net foreign exchange gains and net gains on financial instruments and insurance income, net of claims and commissions. Net foreign exchange gains and net gains on financial instruments increased by 35% on the prior year due to higher ForEx gains through FX swap. We would remind you that the FX gains are volatile contributors to total income. We have a well-diversified business model with steady noninterest income contributing significantly to total income. Please bear in mind that in 2023, noninterest income will face some headwinds. Net fee and commission income for 2022 included EUR 16 million from the liquidity fees, which was fully abolished in December and around EUR 6 million of servicing fee relating to the NPE sale that will be paid out in Q1 2023. Additionally, the adoption of IFRS 17 is expected to result in a modest annual negative impact on the group's net insurance income. Let's review now operating expenses on Slide 25. Total tax amounted to EUR 89 million in 4Q, up 8% Q-on-Q as inflationary pressures kick in and seasonally higher other OpEx and total EUR 343 million for the full year, down 1% on a year-on-year basis. Overall, our cost-to-income ratio, excluding the special levy on deposits and other levies for 2022 stood at 49%, 11 percentage points down on a yearly basis. On the same basis, the cost-to-income ratio for 4Q was up 38%, down 9 percentage points, mainly driven by the higher total income. Looking ahead, we will not lose sight of our cost discipline as revenue expands. We have already shared that we expect a modest increase in cost this year to EUR 350 million to EUR 360 million, leading to mid-40 income ratio, excluding levy, a ratio which we expect to deliver in 2024 as well. Now turning to capital on Slide 29. Our CET1 and total capital ratios in December stood at 15.4% and 20.6%, respectively, including organic capital generation of 120 basis points in the fourth quarter. With the phasing in of the IFRS 9 impact of 65 basis points on the 1st of January 2023, the CET1 ratio will convert to the fully loaded CET1, which was at 14.7% at year-end. The benefit from IFRS 17 on 1st of January 2023 from our insurance business equity is estimated to be around EUR 50 million to EUR 60 million, of which EUR 50 million was distributed to the bank as dividend in February '23. When offset by the impact of IFRS 9, our pro forma for January CET1 is estimated at 15.2%. In December 22, we also received the final SREP decision and our minimum requirement for CET1 and total capital ratio effective January '23 is set at 10.25% and 15.10%, respectively. The minimum requirements reflect a decrease by 25 basis points of the Pillar II requirement and the final phasing in of the O-SII Buffer. The SREP decision effective from the 1st of January also included the lifting of the equity dividend distribution prohibition. Any dividend distribution remains, of course, subject to regulatory approvals. Now moving to Slide 31 on asset quality. The NPE ratio was reduced to 4% or 1.3% on a net basis, delivering our 2022 NPE ratio target of sub 5%. The bank coverage ratio has improved to 69% and when including tangible collateral, NPEs are fully covered. With the legacy asset quality issues firmly behind us, our stock has remained on monitoring and limiting NPE inflows. Despite macro uncertainties, there are no signs of asset quality deterioration to date as evidenced by the modest gross inflows during 2022. Now linking to that, let's move to Slide 34 on cost of risk. The cost of risk for the full year was at 44 basis points as compared to 57 basis points in the previous year, down 13 basis points, reflecting strong asset quality performance in 2022. The cost of risk for the fourth quarter was at 42 basis points, broadly flat Q-on-Q. For 2023, we confirm our guidance of sub-5% NPE ratio and a cost of risk of 50 to 80 basis points, which reflect frugal assumptions on NPE inflows and macroeconomic uncertainties. Our cost of risk is expected to steadily normalize from 2024 onwards to around 40 to 50 basis points level. With that, I will hand back to Panicos for his closing remarks.

Thank you, Eliza. Let's turn to Slide 38. We've had a strong performance in 2022, completing our efficiency and restructuring actions and delivering a transformed bank with a sustainable business model and well-diversified revenues that are showing strong growth. We are pleased to have exceeded our 2022 financial targets across all key metrics, including net interest income, recurring profitability, efficiency and asset quality. Capitalizing on this strong performance, we're today upgrading our ROTE 17% from over 10%, laying the foundation to commence meaningful distributions from 2023 onwards, subject to the regulatory approval and market conditions. Furthermore, we see this level of profitability as sustainable for 2024, and we are maintaining our ROTE of over 13% for 2024 as well. This concludes our presentation. I will now open the floor for your questions.

[Operator Instructions] The first question is from the line of Bergoe Kim with Numis Securities.

It's Kim Bergoe from Numis. Just one question from me. You're saying that you expect loan growth to be modest in the year ahead. But I just wanted to ask and to sort of give a bit more guidance on that and a bit more of your thinking around that. How should we be thinking about that loan growth where might it come from? Where might it not come? But where do you see the opportunities given market conditions and the competition out there?

Kim, as we said, given the macro uncertainty, we want to be more cautious on approve new lending. So that's why we have -- in our assumptions for 2023, we say modest loan growth. This will come mostly through Cyprus, but also through our non-Cypriot portfolio which you see is gradually expanding and has been contributed 8% in the new loan origination in 2022. So it's -- these are our, let's say, assumptions for our ROTE guidance of more than 2020 -- or more than 13% in 2023. The focus in the short term remains on executing the NII growth, which is in the term will be coming from [indiscernible] to growth in the medium term. We are expecting low growth prospects to remain good, given strong growth expected in the economic Cyprus.

The next question is from the line of Alevizakos Alevizos with Axia Ventures.

Congratulations for these results, very good. A couple of questions, especially regarding your targets, primarily. I will start with the NII. So you gave a range of EUR 520 million to EUR 550 million and I realize that the upper end in the range, if you multiply the fourth quarter of this year NII, you hit to about the same number. So the question is, is the fourth quarter as good as we're going to get in terms of the NII or give you forecast something in the interest expense would assuming the deposit better is actually would be pushing the number lower? And if so, you say that the deposit beta will be about 50% for term deposits, -- sorry, 50% for the overall deposit base, but I was wondering whether you can squeeze that between time and current deposits? And the second question is regarding the NPE ratio. You are already below the 5% target, and we're still guiding for less than 5% for the next year. Is there something there in terms of the NPE flows that you expect or you want to be kind of cautious about?

I will start with the deposit beta. As we said in our comments in the beginning, currently our deposit beta is 7%, and we see no visible change yet, but we acknowledge that beta arising everywhere. And as a management, we're taking this into our planning assumptions. So we -- for the current book, the assumption is that there will be no change in the 0 percentage of most of the current deposits are enjoying. On the term deposits, the assumption is that the percentage of the term deposit will increase from 30% to 45% by the end of the year and gradually and deposit beta [indiscernible] revenues will increase from 7% to 15%. So this is the assumption in our ROTE guidance. And because of that and rightly so, you made the average of net interest income, it comes -- the net interest income planning for 2023 comes, of course, with higher rates. At the same time, comes with, let's say, some pressure on our deposits, macro repricing and higher [indiscernible] cost. So the NII will peak in Q1 and Q2 because we have a full rate benefit without pressure on our deposits and macro pricing but this will gradually see this coming for the equation as we move in Q3 and Q4. And you know that we are very careful in setting our targets and very calculated on what we say. On the NPE, yes, you are right, we reaffirm that the NPE and the cost upgraded guidance has been unchanged, simply due to macroeconomic uncertainty and not because we are seeing any deterioration in the actual metrics only in the [indiscernible] we have very limited NPE inflows.

Okay. One last question, if I may. So right now, it seems like the core Tier 1 capital ratio is increasing nicely and we will be able to kind of offload the IFRS impact by the insurance dividend as well. So you're going to be ending up the year probably with something significantly higher than your requirements. So I was wondering how this has affected your recent conversation with the regulator and whether it gives you more confidence going into deciding a hefty dividend for the year?

Of course, I mean, without to judge the decision of the regulator, the rate ROTE guidance, the strongest caveat position and under contracted quality, these are all factors that make us cautiously optimistic on our discussion with the regulator.

The next question is from the line of [indiscernible] with Argus Capital Holdings.

Just a quick question from my side as well. The ROE [indiscernible] can you give us a view of the -- how is that calculated I know it contributed [indiscernible] conservative in that. But in the [indiscernible] given that we have just discussed. The second question is on [indiscernible].

So [indiscernible] we found it quite hard to understand your first question, I think Panicos may have. I think the second one was AT1. Am I right? It's not a very good line. Second question was on AT1.

Sorry, on 29, is it better now?

Yes. Thank you.

So 29 about sort [indiscernible] opportunity for us to [indiscernible] addition of -- capital and [indiscernible] equity. And the first one was just a little color on the ROE [indiscernible] questions for ready [indiscernible] low side [indiscernible]

Okay. Okay. On the ROTE side, I would start by saying this is higher -- we said that it's higher than 13% is on a reported basis, it's calculated on an increased tangible equity and is also sustainable in 2024 as well. Of course, you know that we take guidance very seriously. And I want to reiterate that we have multiple [indiscernible] and conservative inputs building the outlook to allow for the [indiscernible] uncertainty in the macros and we will mention a couple of these. First one is cost of risk, which we kept unchanged to 50 to 80 basis points, but have not experienced pressure yet on new NPE flows. Secondly, on the NIM buffers, on the [indiscernible] rate, currently, we have 7% [indiscernible] versus the assumption that we will reach to 15% by the end of 2023. You may know that currently no pressure. And over and above, we have seen a change in the deposit mix. Currently, this is stable at 30% on term deposit versus the assumption that we will shift to 45%. So these are the basis of our calculation, plus the 2.8% of our ECB rate that actually give us this expectation of more than 30%. On that, I want to pass this to Eliza.

Okay. So in [indiscernible] as you know, we have a bonding issue was issued back in 2017. It has a call date in December this year. So we will monitor the market for an opportunity to transact in this, let's say, either by replacing it or another solution depending on market conditions.

The next question is from the line of Cunningham Corinne with Autonomous Research.

Couple of questions, please. First one on foreclosed assets and then the second one on your liquidity position. The cost of risk guidance does look quite high still. Are you assuming in there that maybe there's some additional provisioning on some of the foreclosed assets to try and accelerate disposal there? And then the second question on liquidity. What sort of timing are you expecting there in terms of deploying some of that ECB liquidity? And in what form -- would you expect it to be sort of broadly similar to the current split or do you have a preference for where you might deploy some of those assets -- some of that cash?

Corinne, so cost of risk guidance refers to simply cost of risk or loan provisions -- loan of provision. So it doesn't include potential impairments. We do have modest amounts every year of potential impairment. But remember, our ROTE set target includes both cost of risk res and everything else in the P&L. So the 15% is annual projection. On liquidity, I mean, obviously, lending and Panicos I think covered this earlier. It's the obvious place to deploy it, but also on the fixed income instruments. As you know, as you saw, you may see on the slide, we have been growing the fixed income book, and we intend to continue growing into this year at similar pace and timing, and we are placing our increases to take advantage of market opportunities.

And mix to be similar to what you already have?

Yes, yes, yes.

Next question is from the line of Cruz Hugo from KBW.

I have quite a few questions. First on the deposit book. I was wondering if you could give a split of your time deposits between retail, SME and others? And also, if you could give us the average balance of your current accounts, where I think you charge or used to pass your interest rate there. So I was just wondering if these are very small accounts where you don't have any pressure to raise rates or not? Then my other question on your operating expenses. Your guidance is very clear. I was just wondering what is the underlying inflation that you assumed for both salaries and other expenses in your guidance for 2023? And the third question on the cost of risk, you assume quite a big increase between 2022-2023 but you don't have any recession in your macro assumptions. You still have over [indiscernible]. So I was wondering if you could end up at the lower end of your guidance or even lower below 50 basis points in 2023? And then the final question on capital return. I know you are discussing with the regulators, and they can be conservative. But what kind of payout do you have in mind in the moment? And also, will you consider buybacks given your strong capital position? That's it.

Okay. Starting from the last question on [indiscernible] on the dividend side, on the [indiscernible]. You know that we said many times that I said before that we are in ongoing discussions, we are feeling good because -- and more optimistic because of the results that we just disclosed to you on the guidance and the [indiscernible] buffers. We cannot -- unfortunately, we cannot be more specific at this kind of time, but if I dare to say something when we say meaningful means that we cannot quantify any ratio, but it won't be a dividend as I have [indiscernible] meaningful. On the buyback, on the way of capital return, at this point of time, the focus is on getting approval to resume the capital returns to resume distributions. The exact next -- is something that the board will examine and consider at the right time. On the cost of risk, again, I will reaffirm that we left the guidance unchanged not because we see any deterioration, but because we want to remain prudent and conservative and to cover any macroeconomic uncertainties. On the operating expenses, yes, there are knowledge that there are some wage pressures. If I'm not -- probably I am [indiscernible] we pay for 2023, which is around 4.3% and this comes with several increases because of the collective agreement of around 2% to 3%. These are the major, let's say, impact coming from the inflation to the overall staff cost of the bank. And of course, I won't [indiscernible] this again managing costs and managing costs carefully and not just cost to income. It was and will remain our #1 priority. This is not changing because it happens to have some higher [indiscernible] of time. So this is the short term measures that we would like to convey to the market. Cost and efficiency remains #1 priority. On the deposit book, I think Eliza has the numbers.

So on deposits of our time deposits, 3/4 are retail deposits, actually 77% so -- which obviously are leverage sensitive. I don't have the average balance on the current account, but what I think is maybe useful here is that 60% of our other deposits [indiscernible] which is EUR 100,000 per deposit or level. So yes, the average balance of our deposits is small. We can give you the exact numbers later. This, together with the low deposit ratio of both the bank and the banking system, which is in the presentation is what gives us the confidence on deposit rate and what has been allowing relatively low deposit betas 7%.

[Operator Instructions] The next question is from the line of Hamilton James with Numis Securities.

Three, if I may. Firstly, on the insurance business, it looks like both the main business there took market share in '22. Could you pass comment on sort of growth prospects heading into '23 for those businesses? Secondly, I mean, obviously, within the parameters of regulatory permissions, do you have in mind like a ceiling CET1 ratio you would consider because clearly, whether returns on equity are and likely loan growth, if you started with modest dividends, obviously, the capital builds quite quickly. And finally, and apologies for returning to your cost of risk guidance again, but given the reduction in Stage 2 and Stage 3 assets in Q4 and your [indiscernible], you can see no signs of any deterioration at the moment. Would it be right to assume that you're not expecting a return to the annualized 50 to 80 basis points in -- for the year in Q1, and it will be skewed towards the later past part of the year?

Maybe I'll start with the dividend -- with the ceiling of CET1 question, and then I hand to Panicos for insurance. So at this point, it's a luxury to be talking about CET1 ceilings, but given that we still haven't started giving dividend, our priority is to successfully complete the dialogue with the regulator and start paying dividends at sensible payout ratio eventually. And of course, it's not our job to have crazily high CET1 ratio, we do want -- we do need to think of ways to optimize them either through dividend or potentially down the road through buybacks if we are in that high-quality problem of very high ratios. So we don't have an absolute cut, but this is a discussion we may need to have into the next few quarters. Actually on cost of risk and the timing, we don't expect a big shoot based on what we currently see and we are mid-like February, a big increase in our cost of risk in Q1. But that -- I mean, the guidance remains in the 50 to 80 basis points that we discussed earlier. So we have -- we continue not to see any deceleration on asset quality and any reason for a bit increase. Of course, cost of risk is a calculation, which always has a certain level of uncertainty built into it.

It's a mathematical model rather than actual forecast. We have our -- because myself and Eliza, we mention this many times, we also have our Chief Risk Officer to reconfirm this. So Demetris, you want to say something on the cost of risk?

Well, James, as it was already mentioned a couple of times, there is a sizeable element of conservativeness in the guidance for 2023. And overall, yes, we do expect steady normalization to our medium term target. So I think that's the guidance. And of course, we are carefully monitoring the situation both in our loan book, both in the economy and in the monetary policy. Starting as soon as we get more comfortable, we will, of course, inform the market.

On the last question, in terms of the insurance, this is an area of growth and because they are simply below the actual market share of the group. So we are roughly 40% on banking, we are 27% on life and 40% on insurance, so there is room of growth. And all in all, our insurance subsidiaries have been through the year profitable and sustainable and contributes to profitability for 2022, you see they contribute 22% on our noninterest 90% of our profit before tax. So yes, insurance, this is an area of growth.

The next question is from the line of Giannoulis Dimitris with ResearchGreece.

Yes. And apologies if you have already commented on this, but what kind of deposit levels do you assume for 2023 compared to 2022? What is in your guidance, would you say?

We're assuming conservative -- a slight reduction on the full year 2022 balance. But not to the high -- to the full year 2022 balance, we are assuming a slight reduction on the level of deposit. We assume shift on the mix from 30% to 45% tenor and a pass-through rate on the time deposits from 7% currently to 15% by the end of the year. All these assumptions, Dimitris, are on Slide 8 which we try to give as far as possible how we calculate the NII, and what does it mean for our ROTE guidance in 2023.

It was slightly lower overall.

On the volume, yes, on the balance, yes.

If I may just add to that, if you take into account the macro inflationary conditions, but this may be a conservative assumption because we are seeing a [indiscernible] this is what I meant.

[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 participating in the call. As always, myself and the team, we are ready to take any offline questions and arrange one-to-one meeting to take you through the actual results for 2022 and of course, explain the guidance and the assumptions for 2023 and 2024. Thank you very much.

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