Bank of Cyprus Holdings Public Limited Company ($BOCH)

Ladies and gentlemen, thank you for standing by. I am Yota, your Chorus Call operator. Welcome, and thank you for joining the Bank of Cyprus conference call to present and discuss the first quarter 2026 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. 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 2026. As always, I am joined by Eliza Livadiotou, Executive Director of Finance; and Annita Pavlou, Manager Strategy, IR and ESG. After my introductory remarks, Eliza will go into more detail on our financial performance for the quarter, and then we will be happy to take your questions both during this conference call and afterwards. I would like to start with Slide #5 and our investment case. Today, the bank is in a very good shape with a strong domestic franchise, demonstrated by our diversified and efficient business model, holding leading positions in banking, insurance and payment solutions. And we operate in an economy that is expected to grow faster than the Eurozone average in 2026, notwithstanding geopolitical tensions, an economy that is flexible and resilient to external shocks. We are one of the most well-capitalized banks in the Euro area, strong capital generation, which enable us to build up an attractive distribution track record, supporting a payout ratio of up to 90% for 2026 profitability and up to 100% annually for 2027 and '28. Slide 6 and 7 give a brief overview of the macroeconomic environment. Since we last spoke to you in March 2026, the macroeconomic landscape has evolved as a result of the conflict in the Middle East, resulting in a heightened uncertainty and volatility. We entered 2026 with strong economic tailwinds that characterize the credit environment in 2025. when the economy grew by 3.8%. Inflationary pressures were contained and the government's fiscal position stood out in the European content. While the global backdrop has led to modest economic downgrades, recent official forecast suggest GDP growth for 2026 in the range of 2.7% to 2.9%, level which is expected to continue to significantly outpace the forecast growth for the Eurozone average. Despite the current ceasefire agreement, geopolitical tensions continue to pose risk for the European and global economies. Clearly, we are not immune to this. The Cypriot economy will be impacted through weaker tourist activity and elevated energy prices. At this stage, the full impact of the conflict on the Cypriot economy remains uncertain and depends largely on its duration. We have faced many periods of macro and geopolitical volatility in the past. Cyprus is a more open, flexible economy that has shown it is resilient and quickly recovered from crisis. Additionally, the Cypriot government robust fiscal position enable it to support affected segments and government has already introduced a package of over EUR 200 million financial support to both households and businesses. Let's now turn to Slide #8, which shows a snapshot for the first quarter performance. For another quarter, we delivered a strong profitability at EUR 121 million. This performance was the outcome of stabilizing NII at EUR 181 million, low cost-income ratio of 37% and a positive cost of risk, reflecting a customer specific and strong underlying asset quality, partly offset by some IFRS 9 driven overlays. Slide 9 shows our performance and long-term shareholder value creation. Our ROTE for Q1 stood at 18%, corresponding to 26.5% ROE based on 15% CET1. And we delivered yet another quarter of strong organic capital generation of over 100 basis points, while our tangible book value per share is up around 5% year-to-date. Let's now turn to Slide 10. At our investor update in March 2026, we outlined our strategic priorities to continue to generate sustainable and resilient profitability as well as attractive and sustainable shareholder returns. Our financial targets for 2026 to 2028 for ROTE in the mid-teens translating into a ROTE of over 20% based on 15% CET1 ratio and capital generation in the range of 350 to 400 basis points per annum. These targets are supported by remaining focus on cost and underwriting discipline. And we remain committed to a meaningful distribution with a total payout ratio reaching up to 90% for 2026 and up to 100% annually for 2027 and 2028. These distributions are, of course, subject to market conditions as well as the outcome of the group's ongoing capital liquidity planning strategy at the time. And as you can see, our current performance is tracking well against our 2026 targets, giving us confidence that we will deliver on each metric. Clearly, the world has evolved since we shared our guidance and many key variables such as oil prices, interest rates and global growth remain uncertain and volatile. Our guidance is built on robust internal assumptions. And given the information we have today, we are confident on delivering on our targets. I will now hand over to Eliza, who will run through our full year results in more detail.

Thank you, Panicos, and good morning from me, too. Let's now turn to Slide 11 and the summary of our key highlights. These include strong volume growth with EUR 829 million of new lending, translating into a 2% increase in the loan book since the beginning of the year, flat deposits -- our asset quality remains solid with an NPE ratio declining further to nearly 1% and the net release of 17 basis points in cost of risk, driven by a customer-specific reversal, and we had a very healthy organic capital generation of 114 basis points and ended the quarter with a CET1 ratio of 20.7% and a total capital ratio of 25.5%. As a reminder, in March 26, we announced 2 targeted bolt-on acquisitions to diversify further our business model and accelerate our balance sheet growth, a minority stake in Wealthyhood, a pan-European tech company, which allows us to provide retail customers with digital access to stocks and ETFs and the agreement to acquire the performing loans along with the deposits from the Cyprus Development Bank amounting to EUR 150 million and EUR 500 million, respectively. Let's quickly turn to Slide 12. This is our detailed income statement. I will not go through each line as we will discuss them later, but you can see that our operating profit on a quarterly basis remained flat at EUR 159 million. And this was despite the fact that we had some notable positive items in the fourth quarter affecting largely our noninterest income line. In a nutshell, these were a EUR 5 million release on premium tax of life insurance, a EUR 2 million insurance reimbursement and EUR 10 million coming from elevated revenue sales. When disregarding these items, our recurring noninterest income amounted to EUR 65 million, higher by 8% year-on-year on strong insurance income, whilst the Q-on-Q reduction reflects seasonality in the fee and commission income. Additionally, effective from 1st January 2026, the corporate tax in cycle has increased to 15% from 12.5% previously, and this is now reflected in the Q1 results. Now moving to Slide 13. The structure of our balance sheet is simple and is characterized by high liquidity. Our deposit base is nearly twice the size of our loan book with liquidity gradually being deployed to loan growth and investment in the fixed income portfolio. And as a reminder, on the lending side, over 40% of loans are linked to Euribor. Slide 14 and net interest income. Our NII in the first quarter has stabilized as expected at EUR 181 million, corresponding to a net interest margin of 281 basis points, broadly flat Q-on-Q. Against the prior quarter, net interest income was affected by fewer calendar days in the quarter, while the contributors of NII stayed strong. Loans grew by 2% Q-on-Q. Our fixed income portfolio rose by 5%, and both deposit balances and pricing remained stable compared to Q4. Our 2026 NII outlook remains unchanged. We continue to expect NII to stabilize at approximately EUR 720 million with a net interest margin above 270 basis points based on the underlying assumption of a 2% ECB deposit rate. Moving on now to our hedging activity on Slide 15. Our significant hedging efforts undertaken over the last couple of years have reduced our NII sensitivity to a 25 basis point parallel shift in interest rates to EUR 15 million, half the level it was in December '22. Our hedging level increased by EUR 0.5 billion in the first quarter, taking the total to EUR 12.6 billion, covering almost half of the group's interest-earning assets. And we improved the yield of our new interest rate swaps to 2.44% in Q1 from 2.25% in the previous quarter. We will continue the dynamic management of our balance sheet, subject, of course, to market conditions. On Slide 16, you can see more details of our deposit trends. Total deposits of EUR 22.3 billion were flat Q-on-Q, supported by strong inflows at the end of the period. We have seen deposit costs stabilizing at 27 basis points in the first quarter, whilst the share of term deposits remains broadly unchanged from the prior quarter at 31%. The well-managed deposit cost and mix mainly reflect the very liquid Cypriot banking sector as well as our strong franchise and market position. And the breakdown of our deposit base at the bottom left chart shows that more than 80% of our deposits are from Cypriot residents. Let's now turn to Slide 17 and new lending. During the first quarter, we granted new loans of EUR 829 million, close to the historical high levels of Q1 2025. Of course, we have and we will continue to ensure prudent underwriting standards, and we will not sacrifice the quality of our loan book for growth. As a reminder, 99% of new exposures in Cyprus since 2016 remain performing. Looking now to Slide 18. We are pleased to see our loan book grow by 2% since the beginning of the year to EUR 11.1 billion, with growth observed across all business lines. Yields on loans remained broadly flat Q-on-Q at 431 basis points. And we remain confident that we will be able to deliver loan growth of over 5% in the full year '26, supported both by domestic demand and careful expansion of the international loan book. Slide 19 shows our progress on the fixed income portfolio. Our portfolio stood at EUR 5.4 billion, representing 19% of the group's total assets. The fixed income portfolio comprises of high-quality assets with average maturity of 3 to 4 years and is highly diversified. The majority of the portfolio is measured at amortized cost and is held to maturity, hence, no mark-to-market impact is recognized in the income statement or equity. The mark-to-market of this portfolio as of 31st March was around EUR 48 million loss or 45 basis points of CET1, reflecting interest rate rises as a result of market volatility. Slide 20 shows that noninterest income of EUR 69 million was flat on an annual basis. Let me try to unpack and share how we look at this important source of revenue that underlines our diversified business model. We have what we consider high-quality revenues, which is our area of focus. This includes the fee and commission income, the net insurance result and the FX customer-related fees. Altogether, this grew by 8% year-on-year, primarily driven by higher net insurance income, reflecting the acquisition of Ethniki Insurance Cyprus and better claims experience. Other non-NII items include revenue gains, gains losses on financial instruments and other income, and these are volatile profit contributors. In Q1, this line was impacted by a lower mark-to-market on equity financial income. Overall, non-NII remains an important contributor to profitability and covers 76% of Q1 operating expenses. Our insurance businesses are a valuable and recurring revenue stream for the group as presented on Slide 21. In summary, our net insurance result amounted to EUR 17 million in Q1, up 41% year-on-year, mainly reflecting the contribution of the Ethniki Insurance Cyprus, better claims experience, lower losses in contracts in life insurance as well as higher new business in non-life. Overall, the net insurance results contributed 24% of total noninterest income and insurance remains highly profitable, contributing 11% of the group's total profitability. Slide 24 provides an overview of operating expenses. Our cost-to-income ratio in Q1 stood at 37%, reflecting continued cost discipline. On an annual basis, total OpEx increased by 4%, reflecting mainly the accrual on the variable pay. Overall, staff costs remained flat year-on-year as the salary increment and the cost of living adjustment of around 4%, which typically take place at the beginning of the year were offset by the completion of the voluntary staff exit plan in the fourth quarter, where around 110 employees left the group. Other operating expenses were also flat year-on-year. On a quarterly basis, other OpEx was reduced, reflecting mainly quarterly seasonality. Turning now to Slide 25 and asset quality. Our underlying credit quality is strong, and we are not seeing any signs of deterioration, evidenced by the low NPE ratio at 1.1% and the coverage ratio exceeding 100%. The cost of risk saw a net release of 17 basis points for Q1, driven by customer-specific reversal. We took overlay of 21 basis points in the quarter on the back of revised macro assumptions, which assume lower GDP growth and higher inflation compared to the Q4 assumptions, reflecting the ongoing geopolitical environment, while underlying provisions continue to reflect the benign credit trends from 2025. Given the current geopolitical volatility, we are regularly monitoring the loan portfolio, and we are not seeing any signs of concern. The tourist sector has seen 2 consecutive record years, remain cash rich and is coming from a position of strength to withstand this headwind. The REMU repossessed stock decreased further to EUR 362 million as of 31st March. We continue to manage our REMU stock prudently as it's carried on the balance sheet at below 70% of the current open market value. Now let's move to Slide 26 and capital. The bank's capital position remains strong. We continue to build organic capital generating 114 basis points this quarter. Our CET1 ratio and total capital ratio stood at 20.7% and 25.5%, respectively, reflecting the accrual for the ordinary dividend at a 70% payout ratio as well as modest RWA growth. Our 70% dividend accrual represents the top end of our distribution policy for ordinary dividends. I would draw your attention to our intended payout, which is unchanged, 70% ordinary dividend and up to 20% top-up to be decided with the final 2026 results. Consequently, we plan to accrue a 70% payout during the quarter and any top-up will be accrued at the time it's announced. Also in March 26, we announced the agreement to acquire the performing loans and deposits of the Cyprus Development Bank amounting to EUR 150 million and EUR 500 million, respectively. The consideration was nearly at par and the capital impact is expected to be modest at around 35 basis points. I would now like to hand back to Panicos for closing remarks.

Thank you, Eliza. While global geopolitical uncertainty is ongoing and the associated economic impact is unclear, we at Bank of Cyprus are well positioned to navigate this period, leveraging on our core strengths. Our efficient business model and strong credit underwriting culture means we have strong lines of defense for this uncertain environment, combined with our proven ability to successfully execute our strategy, give us confidence today in our ability to deliver on our targets.

[Operator Instructions]The first question comes from the line of Ben Maher with KBW.

I've got 3 questions, please. The first one is just on the impact of the CDB acquisition on NII this year and in 2027. Second question is just any volume trends that you've observed in April across both loan deposits and also fees. And then finally, the cost of risk guidance for this year in light of the IFRS model update and the reversal you mentioned as well in the slides.

Okay. Thank you, Ben. On CDB, I will say that we expect the transaction to be completed by year-end. So any impact will be probably shown on the 2027 results onwards. And just to remind you that we have not included CDB in our guidance that we have given out to the market in early March. On the second question about April, I will say that the trends either on fees or pipeline are as usual. We have not seen any slowdown so far. So all things are on track how we expect them to be. On the cost of risk, I think the cost of risk -- okay, the cost of risk is, I would say -- I will start by saying that the underlying performance of the portfolio continues to be very strong. We are not seeing any change in the underlying credit metrics. So I would like to remind you that the 10 to 15 basis points is fundamentally the cost of risk throughout the Cyprus. Having said that, this quarter was kind of unique. We have the release coming from a cash reversal of a legacy client plus a charge because we updated macros and took more conservative stance on the weight on each scenario. So as things stand today, if you simply do the math, the cost of risk for the year are expected to be a little lower than the lower end of the 14 to 15 basis points. However, given that situation, we all understand and be it, we will not change our guidance. We'll review as we move towards the next quarters. And anyway, the numbers are really small.

And if I may just add to your first question on CBD, I think you asked the impact. We expect NII impact to be around -- to be nearly EUR 10 million on an annual basis based on current rates.

Sorry, how much of that miss...

EUR 10 million.

The next question comes from the line of Alexandros Boulougouris with Euroxx Securities.

A quick question on NII regarding the first quarter. If you could tell us a bit the impact of the calendar days that you mentioned. And also given the first quarter trend and the strong loan growth, and we're seeing Euribor also adding upwards, I think it's 2.2% now. Do you think that there is an upside risk also on NII? You mentioned a bit on provisions as well given the reversal. That's my first question. And the second regarding the loan growth pipeline, how do you see the trends in, let's say, April, early May? I mean, do you see any slowdown or you're confident with this more than 5% that you already mentioned growth rate...

Alex. I'll start with the NII question. So the number of days impact in Q1 to be around EUR 2.5 million on a daily basis. On Euribor, there was an increase in the later days of March after the war started. But the impact is modest. Anyway, the -- I remind you that our guidance back in March, early March was on the back of 2.2% average Euribor for the year and 2% GDP rate. So the impact in the quarter of Euribor was modest. The sensitivity, we are very transparent in disclosing it at EUR 15 million for every 25 basis points. And just preempting the next question, we're not reguiding at this point on NII exactly because the situation remains fluid. So we chose to be transparent on giving you the sensibility on rates on loan growth...

On loan growth, I think that our pipeline remains strong. We have not seen so far any slowdown. So the 2% growth in the first quarter give us the comfort for achieving our target for this year, which, as a reminder, is more than 5%. So of course, we remain vigilant and monitor the development. But so far, I have not seen any slowdown in our pipeline.

The next question comes from the line of Daniel David with Autonomous Research.

Congratulations on the results. I've just got a couple on asset quality and on capital. The EUR 6 million related to change in macro assumptions, can you just maybe talk about how many -- how much you have in reserve in total, so the EUR 6 million plus whatever you have? And then could you provide a bit more information on the release you mentioned related to a specific client, anything you can say there would be interesting. And then finally, on capital, I guess you can see that you're accruing and you flagged that payouts might be increased. Is there -- your capital position is very strong and your earnings are great. Is there any reason why you wouldn't increase that payout? And anything we should be watching out for anything you'd flag specifically?

David, on the EUR 6 million or the 21 basis points equivalent of macro impact, that's actually not an overlay. It's a model impact. So there is no pause, let's say, which is a bigger number. It's just how the PD and LGD models are calibrated and this is the impact of the recalibration because, a, the GDP growth was lower modestly this quarter and we increased the relative weight of the adverse scenario given the geopolitical risk. And it's on Slide 61, the scenarios and the analysis.

And on capital payout ratios, I would say that what we said in early March remains unchanged. So what we said is that a dividend payout ratio of 70% plus top-up dividend up to 20% for 2026 and up to 30% for 2027 and 2028 for the reason that we explained in the Investor Day. So what we said early March remains unchanged as of today.

And anything you can say on the corporate release?

On the release, it was a cash repayment of legacy corporate side.

The next question comes from the line of Alexander Kantarovich with Roemer Capital.

Yes. Can you hear me?

Yes.

Looking at your noncore income, which dropped sharply in the quarter. I presume this was due to the trading result. Can you quantify it, please?

You're referring to non-NII, the lines other than fees and commissions, the nonrecurring items.

Yes.

So actually, we don't have any trading book. So you shouldn't consider that there is a hit from that. I will say that year-on-year, actually the recurring NII was 8% up -- so -- and the guidance for the full year to be 4% per year until 2028. So actually, the recurring NII was up 8% year-on-year. Now having said that, the full non-NII, there is some seasonality between quarter and some one-offs. So I think that's why we focus on the recurring NII, which was 8% up year-on-year and was due mainly to the insurance performance. So there is no trading book have a question as well.

Okay. Understood. And also as regards to salary expense, because the separation scheme is done and salary has been -- has moved higher. Shall we expect for the next couple of quarters the same run rate of this salary expense?

Yes. So the way the payroll works is that staff costs go up on the 1st of January, and they stay at that level throughout the year. This year increase when you compare Q4 to Q1 is less than what would have been the case on a mathematical basis because of the exit plan, we did a small one that we did in Q4. So you should assume that Q1 is more or less a run rate for this year.

Right, right. Last question. It was pretty decent -- there was pretty decent loan growth in Q1 2% and for the full year, you expect 5% in the change. Is there upside to the annual number? Or shall we expect a slowdown in the last 3 quarters of the year?

No, I will start by saying that we expect more than 5% for the year, and this guidance was out before the war. So since then, okay, things have changed, but the performance strong for Q1, which is 2% plus the strong pipeline we see, we stand by this more than 5%. And it is too early to reconsider guidance because it's still early in the year and it's still too soon versus the last time we guided in early March. So let's assume the more than 5% that is currently out for the time being. More to come during the second quarter.

The next question comes from the line of Miguel Dias with Wood & Co.

Most of my questions have been answered already. Just one left. If you could please comment on the special levy on deposits and other levies and contributions. You booked EUR 40 million this quarter. Fourth quarter was EUR 30 million. Could you just please confirm that this is not the new run rate?

So on this, you're right actually to ask the question because the charge in the P&L is not linear through the year just because of how the accounting works. So it has 2 main components this line. One is the special levy on deposits that's 15 basis points on the stock of deposits based on 31st March, this would be around EUR 33 million. So assuming -- I mean, depending on when -- where deposits land during the year, you can calculate it. And there's also another component, which is the deposit guarantee scheme fee. This is EUR 5 million every 6 months, and it started in the first half of last year. So you should expect EUR 10 million roughly in the year. So a EUR 5 million increase compared to last year's annual in this year. So last year's annual charge of around EUR 42 million, you should add another EUR 5 million roughly. And that's what we expect this year's charge to be assuming deposits flat because the other -- the deposit levies formulate. Just remember, it's not linear to the quarter. So Q1 is not run rate. It's -- you should work on the annual number.

[Operator Instructions] we have a follow-up question from the line of Ben Maher with KBW.

Just another quick one. On M&A, would the CDB acquisition keep you busy? Or are you still open to -- would you bandwidth do you think to look at other potential bolt-ons this year?

Ben, the CDB acquisition is more transaction and we structure it in a way so that it is easily integrated. I mean, buying a portfolio rather than the bank. So no, the question is that we still have an appetite for small bolt-on acquisition, especially on the non-NII side. CBD is more transaction for us and it's easily integrable. Okay.

Mr. Maher, are you done with your questions?

Yes.

[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 participation. As always, we are available to take your questions and provide more clarifications offline. 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 day.