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

Ladies and gentlemen, thank you for standing by. I am Yiota, your Chorus Call operator. Welcome, and thank you for joining the Bank of Cyprus conference call to present and discuss the first quarter 2024 Financial Results Conference Call. [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. Mr. Nicolaou, you may now proceed.

Good morning, everyone. Thank you for joining our financial results conference call for the quarter ended 31st of March 2024. I am joined by Eliza Livadiotou, Executive Director of Finance; and Annita Pavlou, Manager, IR and ESG. After my introductory remarks, Eliza will go into more detail on our financial performance. And then we will be happy to take your questions, both during this conference call and afterwards. I would like to start by briefly reminding you of our powerful equity story and our core strengths on Slide #4. We are the leading financial group across banking and other financial services in Cyprus, which is a highly liquid and concentrated banking sector. And we operate in a supportive macroeconomic environment. The Cypriot economy remains strong, delivering good growth, proving once again its flexible and resilient characteristics. We are one of the most liquid banks in Europe, and hence, enjoying the benefits of continued high interest rates. At the same time, we have been undertaking proactive actions to position ourselves against a more normalized rate environment in the years to come. We have strong levers under our control, our diversified business model, our ongoing focus on cost control, our robust asset quality and our strong capital position, all support us for continuing to deliver shareholder value, supported by sustainable mid-teens ROTE over the medium term and attractive shareholder restitution. Turning now to Slide #5. Our particularly strong performance in 2023 enabled us to obtain approval from the ECB in March 2024 to significantly increase the shareholder distribution from full-year 2023 earnings to EUR 137 million, comprising a proposed cash dividend of EUR 112 million, EUR 0.25 per ordinary share and an inaugural share buyback of up to EUR 25 million. This proposed cash dividend is 5x higher than that paid in 2023 and is equivalent to a distribution yield of 8% based on share price as at 8th of May 2024. We have more than doubled the payout ratio to 30% compared to last year, meeting the target payout range of 30% to 50% specified in our Distribution Policy 1 year after it was established. Slide #6 shows an overview of the macroeconomic environment. Against the backdrop of geopolitical uncertainty, the Cypriot economy continues to displace traction and resilience. Based on the latest projection of the Ministry of Finance, economic growth is expected to be around 2.9% in 2024, outperforming Eurozone average. Tourist activity continued to improve with arrivals for the first quarter 5% higher compared to the corresponding period in 2023. The unemployment rate decreased to 6% in the fourth quarter 2023, and is expected to drop further to 5.8% for 2024. As in many other countries, consumer inflation continued to be impacted by energy prices, but has now come under control. In Cyprus, inflation stood at 2.2% in April 2024, which is expected to average around 2.5% in 2024. Slide 7 demonstrates the group's continued strong financial performance for the first quarter of 2024. Net interest income for the first quarter remained strong on the back of high rates and ample liquidity, declining only modestly after reaching its peak in the fourth quarter of 2023. Our continuous focus on cost management kept the cost-to-income ratio low to 29%. As a result, we delivered yet another quarter of a ROTE over 20% and an organic capital generation of almost 130 basis points, feeding through into a strong growth in our tangible book value. Let's now provide more details for the first quarter highlights with Slide #8. During the first quarter of 2024, we recorded a profit after tax of EUR 133 million, corresponding to an earnings per share of EUR 0.30, underpinned by strong revenues, cost containment and good asset quality trends. Our liquidity profile remains robust, positive payment of EUR 1.7 billion of TLTRO. Around 30% of our assets are cash balances, with central banks benefiting from high rates while our deposit base remained broadly stable. In April 2024, we successfully issued EUR 300 million MREL eligible Green Senior Preferred Notes, thereby finalizing our MREL requirements and included a comfortable buffer. This issuance was the first ever green bond issuance for Bank of Cyprus, representing an important step to lead the transition of Cyprus to sustainable future. On asset quality, our NPE ratio reduced to 3.4% and our coverage improved to 77% for the quarter. Focus now on capital metrics, our regulatory CET1 ratio and total capital ratio as at 31st of March 2024 stood at 17.1% and 22%, respectively, which, as a reminder, exclude the current period profits, including recurring profitability, net of distribution accrual at the top end of our distribution policy. Our CET1 ratio and total capital ratio increases to 17.6% and 22.5%, respectively. You can see on Slide #9, how our quarterly performance is tracking against the 2024 guidance we set back in February 2024. It is clear that on all metrics, we are running ahead of our 2024 targets. In summary, net interest income was supported by higher-than-expected interest rates and positive deposit trends, both on mix of deposit and pass-through. And our cost of risk was low, reflecting strong underlying performance, but was helped by some large one-off reversals in the first quarter. We tend to review our financial targets alongside our first half financial results. Longer-term, we remain committed to generating a mid-teens ROTE on normalized rates. I will now hand over to Eliza to take you through our Q1 earnings in more detail.

Thank you, Panicos, and good morning from me too. Slide 10 shows a detailed income statement of the group. I will not go through every line since I will be discussing the drivers of our profitability in the following slides. Let's start with the main drivers of NII on Slide 12. Our net interest income for Q1 stood at EUR 213 million, corresponding to a net interest margin adjusted for TLTRO of 3.9%, down 10 basis points on the prior quarter. This modest reduction Q-on-Q is mainly due to a small decrease in Euribor rates, hedging activity as well as marginally higher cost of deposits. Overall, our net interest income is declining less than anticipated, reflecting a more favorable interest rate outlook, and at the same time, our deposit trends are behaving better than expected and pass-through remains resiliently low. Let me now remind you of some of the key drivers of NII as I look forward to the rest of this year. On the positive side, the favorable interest rate outlook, expansion in fixed income portfolio as well as modest loan growth will all benefit NII. On the other hand, hedging has a cost, as we forego NII in order to reduce sensitivity. Additionally, the ECB MRO rate spread is expected to decrease by 35 basis points from September 2024. And finally, the recent issuance of EUR 300 million senior preferred notes in April will result in an annual interest rate expense of EUR 15 million per annum. On Slide 13, I want to give some more details on some of these factors and the assumptions and sensitivities behind our net interest income expectations. The top table provides a summary of the forward curve we used in February in guiding to our NII target of over EUR 670 million for '24 and how they have evolved since. We know that the recent developments in rates have been more positive than we had expected. Clearly, we are still at the beginning of the year, and we will not mark to market our guidance with the changes in forward curves. However, it's clear that solely based on a delayed interest rate normalization, there is upside to the 2024 guidance. Using current forward curves, we have indicated that approximately EUR 40 million higher NII might be expected based on the interest rate trends we are seeing. But as Panicos mentioned, we intend to review our guidance with half 1 financial results. Let's now turn to Slide 14 to provide you an update of our hedging strategy. In Q1, we continued with our hedging activity and carried out an additional EUR 2.1 billion worth of hedging. We are on track to meet our '24 target of EUR 4 billion to EUR 5 billion. A large element was through hedging of non-rate-sensitive deposits to receive fixed interest rate swaps, whilst we continued our investment in fixed rate bonds as well as the use of reverse repos. These actions had a small cost on the Q1 NII. We believe that the hedging we carry out today will support future revenues, and most importantly, will result in lower rate sensitivity. Simultaneously, about 1/4 of the group's loan portfolio is linked with the bank's base rate, which provides a natural hedge against the cost of deposits. Overall, these actions have led to a reduction in NII sensitivity to a 100 basis points parallel shift in rates by EUR 20 million compared to the prior quarter. On Slide 15, you can see that deposits remained flat on the prior quarter, but increased by 2% year-on-year to EUR 19.3 billion. We're encouraged that the shift in deposit mix towards time and notice deposits is progressing more slowly than we expected. In Q1, it was around 33% of the total. And if you look at the breakdown of our EUR 19.3 billion deposit base, you can see on the bottom left chart that almost 80% of our deposits are from Cypriot residents. Additionally, deposit pass-through levels were well managed, facilitated by the very liquid Cypriot banking sector. This is evidenced by the evolution of our cost of deposits, which remained low at 29 basis points, corresponding to a pass-through of 22% on time and notice deposits in Q1, up from 18% on the prior quarter. We expect the cost of term deposits to continue to increase further as deposit balances reprice to the higher fund book rates. As a reminder, we assumed an average pass-through around 40% in '24, and the sensitivity breached 10 basis points change in the cost of deposits results to a change in NII by around EUR 20 million, while the percentage point change in the deposit mix towards term impact NII by EUR 1.5 million. Moving to Slide 17 on new lending. The group extended EUR 676 million of new loans in the first quarter, which is usually a strong quarter, representing an increase of 46% on the prior quarter whilst maintaining strict lending criteria. As a result, the gross performing loan book grew by 2% Q-on-Q to EUR 10 billion, driven by new lending exceeding repayments and also benefiting from the acquisition of a small portfolio of performing and restructured loans with gross book value of EUR 58 million. This transaction was completed in March 2024. Now turning to the fixed income portfolio on Slide 18. As of 31st March, the portfolio amounted to EUR 3.7 billion, up by 36% on the prior year, representing 15% of total assets net of TLTRO. The majority of the portfolio is measured at amortized cost and is held to maturity. Hence, no fair value gains or losses are recognized in the group's income statement or equity. The mark-to-market impact of the amortized cost portfolio amounted to a fair year loss of EUR 14 million as of 31st March, representing an increase in bond yields. Slide 19 provides a summary of noninterest income. On this slide, I'd like to highlight that non-NII remains an important driver to the group's profitability, covering almost 80% of total operating expenses for Q1, albeit a reduction in the prior quarter and year. Net fee and commission income reduced by 10% on the prior quarter, reflecting lower transactional and non-transactional fees. The net insurance result was also down by 37% on the prior quarter, as Q4 has benefited from the improved experience variance in the life business. I would also like to remind you that FX gains are volatile profit contributors. Moving now to Slide 25, which provides an overview of operating expenses. Our cost-to-income ratio of 29% in Q1 was supported by strong revenues and disciplined cost management. Total operating expenses were reduced by 14% on the prior quarter, reflecting mainly quarterly seasonality. On a yearly basis, total operating expenses were broadly flat. Staff costs were slightly up, both on a quarterly and yearly basis, reflecting mainly inflation, salary increments and higher employer contributions. Now turning to cost of risk on Slide 26. The cost of risk for Q1 at 27 basis points was significantly lower than both the prior quarter and the prior year, indicative of the robust performance of our loan portfolio and the stable economic environment. During the quarter, we had a one-off reversal on Stage 1 and Stage 2 loans, driven by enhanced IFRS9 modeling, which facilitated the removal of conservative management overlay. At the same time, the Stage 3 charge was the result of one-off modeling enhancements and charges on a small part of the NPE legacy portfolio. Additionally, we incurred impairment of EUR 8 million in Q1 relating to the REMU properties due to the aging of the stock. Provisions for pending litigation claims and other matters amounted to EUR 10 million in Q1, which mainly relates to the progress of cases and the one-off provision charge on tax-related matters. Let's now move to Slide 28 and capital. The bank's capital position remains robust. Our regulatory CET1 and total capital ratios stood at 17.1% and 22.0%, respectively with including quarterly profitability and post distribution accrual at the top end of our distribution policy. Our CET1 and total capital ratios improved further to 17.6% and 22.5%, respectively. Let me remind you that this level of distribution accrual does not constitute an approval by the regulators for a dividend, nor a decision by the bank with respect to such distribution for year '24. Turning now to Slide 29, which discusses our recent capital market issuance. In April, we successfully issued our inaugural Green Senior Preferred Bond of EUR 300 million. The issuance was met with strong demand, attracting interest from more than 120 institutional investors and was more than 4x oversubscribed, enabling us to price it 50 basis points tighter than the initial pricing indication. This bond completes our MREL build up, allowing us to achieve our MREL requirements with a comfortable buffer well ahead of our end 2024 deadline. This was Bank of Cyprus' first ever green bond and is an important step in our plan to lead the transition of Cyprus to a sustainable future. Now moving to Slide 30 on asset quality. The NPE ratio stood at 3.4% at quarter end or 0.8% on a net basis, in line with our 2024 target. Our NPE coverage improved to 77%. When including tangible collateral, NPEs are fully covered. Moving now to Slide 31 on real estate. As you can see, the Real Estate Management Unit repossessed stock has decreased by overall EUR 26 million in the prior quarter to EUR 836 million as of 31st March. With balance sheet derisking completed, the inflows are expected to remain at extremely low levels, and our focus will be on delivering sales. We remain on track to achieve our 2025 target of reducing the REMU stock to around EUR 500 million. And we will continue to sell on average close to independently assessed open market value and above book value. I would now like to hand back to Panicos for his closing remarks.

Thank you, Eliza. Moving to Slide 32. Our particularly strong performance in 2023 enabled us to obtain approval from the ECB in the first quarter to significantly increase the shareholder distribution from full year 2023 earnings. We have more than doubled the payout ratio to 30% compared to last year. That corresponds to the distribution yield of 8% based on a share price as of 8th of May 2024. And for the first time, in the first quarter, we launched a share buyback program of up to EUR 25 million. The strong financial performance continued in the first quarter of 2024. We delivered a profit after tax of EUR 133 million, equivalent to a ROTE of 23.6%. This is the fifth consecutive quarter we record a ROTE over 20%. It is clear that our performance in the first quarter of the year is tracking ahead of 2024 targets. We intend to review our financial targets alongside our first half financial results. Longer-term, we remain committed to generating a mid-teens ROTE on normalized rates. This concludes our presentation, and we'll now open the floor for your questions.

[Operator Instructions] The first question comes from the line of Boulougouris, Alexandros with Euroxx Securities.

Many thanks for the presentation. 2 questions on my end, if possible. First, regarding the NII and hedging on the EUR 90 million sensitivity that we mentioned in March, a EUR 20 million reduction compared to December. Is this based on the -- all the hedging you have done up to Q1 with the additional hedging that you mentioned? And is there any additional hedging you plan or you're already in this EUR 4 billion, EUR 5 billion target that you mentioned you're already there, let's say, on the hedging levels? That's my first question. The second is on cost of risk at 27 bps with targets of 40, 50 bps, and you mentioned that you're trending towards 40 to 50, but you're already below. Was there something specific in Q1 that led to a cost of risk well below this target? Or -- that's my second question.

Okay. Thank you, Alexandros. Starting from the cost of risk, I will say that 27 basis points, it's indicative of the robust quality of our credit portfolio. And it's important to say that we do not see any areas of material concern, especially having in mind that the Cypriot economy is performing extremely well. We have yesterday the actual Q1 GDP growth, and it was 3.3%. It was best performing in the Eurozone. So we are very happy about that. Having said that, the 27 basis points versus 40 basis points, it's only -- it's a small amount. We are talking about small numbers. It's only an additional EUR 3 million provision charge. The 40 to 50 basis points is our medium-term guidance and has an element of conservativeness built in. Given geopolitics and the small numbers, we don't consider appropriate to changes in this guidance for this time being. Generally, we don't -- we only guide this quarter. So we'll, of course, consider our assumptions and outlook where we will do a more general guidance. But I want to emphasize, again, that the extremely good performance of our portfolio quality and the robust performance of the Cypriot economy. On hedging, Eliza?

On hedging, the EUR 90 million sensitivity to 100 basis points parallel shift in rates is the sensitivity as of 31st March. So it's using the March balance sheet. On Slide 14, we've deliberately set out how much hedging we've actually done in Q1, so that you can -- I'm sure model the future. So that EUR 2.1 billion of hedging done in Q1 to reduce the sensitivity out of the EUR 4 billion to EUR 5 billion annual target. So we've done just over 1/3. And we also increased the fixed income portfolio by just shy of EUR 0.5 billion in the quarter. So there is more hedging to be done during the year. We are trying to phase it out -- on average, the impact out as well. So the EUR 90 million is only where we go to up to Q1, there's more to come.

Okay. So then the -- yes, to be clear, you've done EUR 2.1 million out of the EUR 4 billion, EUR 5 billion for the target. And the EUR 90 million will be reduced further going forward as schedule increases gradually.

Yes, exactly. The target is to reduce this EUR 90 million by another EUR 20 million by the end of the year through the incremental hedging and action planning we do, which are broader. It's not just hedging. It's the whole balance sheet evolution that drives this, obviously, fixed income, I mean; portfolio loans; everything.

The next question comes from the line of Cruz, Hugo with KBW.