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

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 half 2026 financial results. 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 6 months ended 30th of June 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 first half. 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, bank is in a very good shape, demonstrated by our diversified and efficient business model. We have a strong domestic franchise and hold leading positions across banking, insurance and payment solutions. And we operate in an economy that has shown once again that it is resilient and can deliver robust growth despite ongoing global uncertainty. We are one of the best capitalized banks in the euro area, have strong capital generation, which enable us to build up an attractive distribution track record, supporting a payout ratio of up to 90% out of 2026 and up to 100% in both 2027 and 2028. Today, we are pleased to announce an interim dividend of EUR 0.24 per ordinary share, an increase of 20% year-on-year, representing a payout ratio of 44% out of the first half 2026 earnings. Slides 6 and 7 give a brief overview of the macroeconomic environment. The ongoing conflict in the Middle East and Iran continues to shape the macroeconomic landscape through elevated global volatility, uncertainty and intensified inflationary pressure. Despite this, the Cyprus economy continues to exhibit resilience to these challenges. We are seeing an all-time low unemployment rate alongside a sharp recovery in the tourist sector. Following a setback in tour arrivals in March and April 2026, where many tourists canceled or temporarily put bookings on hold, May and June have shown strong signs of recovery with tour arrivals gradually returning to 2025 record levels. Note that Cyprus stands on strong fiscal ground with continued budget surpluses and decreasing public debt to GDP to 50% by May 2026, comparing favorably with other European peers. Inflation is rising, mainly due to higher energy prices and is expected to reach around 3% in 2026, broadly in line with the Eurozone average. While GDP growth is forecast to moderate to around 2.5% for 2026 based on recent projections from the Central Bank of Cyprus, this remains a solid level of economic growth and significantly higher than the Eurozone average. Let's turn to Slide 8, which shows a snapshot of our Q2 performance. For another quarter, we delivered strong performance across all key metrics. Our net interest income increased to EUR 188 million on the back of strong volume growth. Our cost-to-income ratio remained low at 36%, supported by continued cost discipline and high revenues and cost of risk was a net release of 6 basis points. All in all, our profitability for the second quarter increased to EUR 131 million. Moving on to Slide 9 and our distribution track record. Today, we are pleased to announce an interim dividend of EUR 0.24 per ordinary share, equivalent to 44% payout ratio. This interim dividend represents a 20% year-on-year increase and will be paid in October 2026. Slide 10 shows the key drivers of shareholder value creation. We continue to generate high teens reported ROTE notwithstanding a highly capitalized balance sheet. Our ROTE increased to over 19% in Q2 corresponding to 27.9% ROTE based on 15% CET1 ratio. And we continue to deliver strong capital generation of over 100 basis points in Q2, totaling 225 basis points for the first half, while our total shareholder returns is up 10% since the beginning of the year. Looking at Slide 11, you can see how our first half 2026 performance compares to the 2026 target set in March 2026 at the investor update. On each metric, we exceed our expectations. Capitalizing on this strong performance as well as the higher interest rate expectations, we are confident in achieving a ROTE towards the upper end of the mid-teens target range in 2026, and we remain committed to a meaningful distribution with the total payout ratio reaching up to 90% for 2026 and up to 100% annually for 2027 and 2028. The distribution, of course, subject to market conditions as well as the outcome of the group's ongoing capital liquidity planning strategy at the time. Our guidance is built on robust internal assumptions. 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 13 and the summary of our key highlights. This includes strong volume growth translating into a 5% increase in our loan book and 3% growth in deposits since December '25. On an annual basis, our loan book and deposits increased by 8% and 9%, respectively. Our asset quality continues to improve with an NPE ratio declining to 1% and a net release of 12 basis points in cost of risk, driven by customer-specific reversals. We've had healthy organic capital generation of 225 basis points and ended the quarter with a CET1 ratio of 20.9% and a total capital ratio of 25.8%. Let's quickly turn to Slide 14 now. This is our detailed income statement. I will not go through each line and as we will discuss them later, but you can see that our operating profit was flat year-on-year at EUR 329 million despite the lower average reference rate, while our profit after tax increased by 7% year-on-year to EUR 252 million. Now moving to Slide 15. The structure of our balance sheet is simple and is characterized by high liquidity. Our deposit base is 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 16. Our NII has grown by 4% in the second quarter to EUR 188 million. This growth reflects higher volumes in both loans and deposits, along with an improvement in margins, which rose by 4 basis points to 285 bps, reflecting the shift in the asset mix. Year-on-year, our NII is flat despite, as I mentioned above, the lower average reference rate. Strong volume growth, effective hedging and controlled deposit costs supported these results. We've also seen an increase in average interest-earning assets, driven primarily by a 3% year-to-date rise in deposits. The asset mix is gradually improving with loans and the fixed income portfolio both increasing by 3% and 4% Q-on-Q, respectively. Today, we are upgrading our NII outlook for '26, and we expect to deliver around EUR 750 million compared to the previous guidance of around EUR 720 million that we shared back in March '26, reflecting the strong volume performance and the current rate outlook. Let me unpack the main assumptions driving this upgrade. Firstly, we expect the average ECB deposit rate for 2026 to be at 2.2%, up from our initial expectation of 2.0%. We now incorporate the 25 basis point rate hike in June '26. And based on the current forward curves shown on Slide 42, another 25 basis point rate hike is expected to come in Q4. Given our rate sensitivity, every additional 25 basis points increase benefits NII by EUR 15 million annually. On the funding side, we've seen a 3% increase year-to-date in deposits and broadly stable pricing, both stronger than we had originally planned for. Although we are pleased with this performance, and we will continue to manage both volumes and costs, our business plan assumption is that deposit volumes will remain at current levels and pricing will be at around 30 basis points. Finally, while we remain very comfortable with our overall lending volume guidance with strong growth in the first half of 5%, we will benefit from better lending balance averages in the second half. Moving on now to our hedging activity on Slide 17. Our significant hedging efforts undertaken over the last couple of years have reduced our NII sensitivity to a 25 bps parallel shift in rate to EUR 15 million, half the level it was in December '22 or from 8% of NII back then to around 2% at present. We increased our hedging by around EUR 400 million in the first half, taking the total to EUR 12.5 billion, covering 47% of the group's interest-earning assets. The yield on new interest rate swaps increased to 2.7% in the second quarter from 2.4% in the previous quarter. We will continue the dynamic management of our balance sheet, subject, of course, to market conditions. On Slide 18, you can see more details of our deposit trends. Total deposits of EUR 22.8 billion were up 3% year-to-date and 9% year-on-year. We have seen deposit costs remaining broadly flat at 28 bps Q-on-Q, and the share of term deposits remains broadly unchanged from the prior quarter at 30%. The well-managed deposit cost and mix mainly reflect a very liquid secured banking sector as well as our strong franchise and market position. And our deposit base is mainly retail funded with the average ticket size being at around EUR 31,000. Now let's turn to Slide 19 and new lending. During Q2, we granted new loans of EUR 812 million, above the historical Q2 levels and totaled EUR 1.6 billion for the first half. New lending was supported by housing and international corporate demand. 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 written since 2016 remain performing. Looking now to Slide 20. We're pleased to see our loan book grow by 5% since the beginning of the year to EUR 11.4 billion with growth observed across all business lines. Domestic corporate loans were up 4%. Cypriot retail lending was up 3% with good momentum in both housing and consumer lending, whilst the build-up in international loan book added 1.5% to the period growth. Lending yields have been stable for a while, and we note a small increase in Q2 to 436 basis points as interest rates begin to increase, and we remain confident that we will comfortably meet the loan growth guidance of over 5% in 2026, supported both by domestic demand and careful expansion of the international loan book. Slide 21 shows our progress on the fixed income portfolio. Our portfolio stood at EUR 5.6 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. Again, no mark-to-market impact is recognized in the income statement or equity. The mark-to-market of this portfolio as of June was around EUR 5 million gain. Slide 22 shows noninterest income of EUR 146 million for the first half, up 3% year-on-year and comprising recurring non-NII of EUR 132 million and other non-NII of EUR 14 million. 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 to be high-quality revenues, and these are a key area of focus. This includes the fee and commission income, the net insurance results and the FX customer-related fees. Altogether, this grew by 9% year-on-year, primarily driven by higher net insurance results. Additionally, net fee and commission income was up 3% year-on-year, driven both by transactional and nontransactional fees. On a quarterly basis, recurring non-NII was up 3% due to the higher net fee and commission income. Other non-NII items include revenue gains, gains and losses on financial instruments and other income, which are volatile profit contributors. Overall, non-NII remains an important contributor to profitability and covered 78% of half one operating expenses. Our insurance businesses are a valuable and recurring revenue stream for the group as presented on Slide 23. In summary, our net insurance result amounted to EUR 33 million in half one, up 35% year-on-year, mainly reflecting the contribution of Ethniki Insurance Cyprus, better claims experience, lower losses in onerous contracts in life insurance as well as higher new business in non-life. Overall, the net insurance result contributed 23% of total non-NII and insurance remains highly profitable, contributing 10% of the group's total profitability. Slide 26 provides an overview of operating expenses. Our cost-to-income ratio for the first half of the year stood at 36%, reflecting continued cost discipline and higher revenues. On an annual basis, total OpEx increased by 3%, reflecting the increased exit costs, which were mostly recorded in the second quarter. During the first half of '26, the group completed a small-scale targeted voluntary staff exit plan where 51 employees were approved to leave. Staff costs in half one were up 2% year-on-year, reflecting the salary increments and the cost of living adjustment, which typically take place at the beginning of the year. Other operating expenses remained flat year-on-year. For the second half of the year, other OpEx is expected to be broadly similar to the second half of 2025 level. On a quarterly basis, both staff costs and other OpEx were flat. For 2026, we now expect the cost-to-income ratio to remain below 40% versus circa 40% prior guidance on the back of our strong revenue outlook and continuing cost discipline. Turning now to Slide 27 is asset quality. Our underlying credit quality is strong, and we're not seeing any signs of deterioration, evidenced by the low NPE ratio at 1.0% and the coverage ratio exceeding 100%. The cost of risk saw a net release of 12 basis points in the first half of '26, driven by customer-specific reversals of 39 basis points. The underlying cost of risk for the first half is estimated at 28 basis points. For the second half of '26, we expect the underlying cost of risk to remain stable to the first half levels, trending below the normalized range of 40 to 50 basis points. Let me also remind you that these are very small figures. 10 basis points cost of risk is EUR 10 million loan credit losses on an annual basis. The revenue repossessed stock decreased further to EUR 341 million as of 30th June. We continue to manage our revenue stock prudently as it is carried on the balance sheet at below 70% of the current open market value. Let's now move to Slide 28 and capital. The bank's capital position remains strong. We continue to build organic capital generation of over 100 basis points this quarter, totaling 225 basis points in the first half. Our CET1 ratio and total capital ratio stood at 20.9% and 25.8%, 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 dividend and hence, the interim dividend at 44% payout ratio will only affect our equity and not our capital ratios. I will draw your attention to our intended payout, which is unchanged. 70% ordinary dividend and up to 20% top-up will be decided with the full year '26 results. We, therefore, accrued dividend in our capital ratios at 70% during the quarter and any top-up will be accrued at the time it is announced. Also in March '26, we announced the agreement to acquire the performing loans along with the deposits from the Cyprus Development Bank, totaling around 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 with the completion of the agreement expected to take place towards the end of the year. I would now like to hand back to Panicos for his closing remarks.

Thank you, Eliza. Our diversified and efficient business model, continued strong credit quality, robust capital liquidity positions and our proven ability to successfully execute our strategy means we are well positioned to achieve the medium-term targets we set in March 2026. Our first half performance was strong. The country and bank proved resilient, faced with global volatility, giving us confidence that we will outperform the original target set for ourselves for 2026.

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

Congratulations on the numbers. Two questions on my end. The first regarding loan growth. We've seen 5% year-to-date, which was close to the annual target approximately. So how should we look at the second half of the year given this significant outperformance? And the second question is regarding cost of risk. Should we assume now from the third quarter onwards, 40 bps to be in line with the guidance, which would imply given the reversals in the first half, about 10, 15 bps for the full year. Is that correct way of thinking about it?

Okay. Thank you, Alex. First question on loan growth. I will say that, yes, it's true that we have guided for over 5% for 2026, and we're already at 5%. I do not expect the same performance in the second half, mainly because the second half comes with some higher repayments, seasonal high repayments mainly in Q3. But we have a good pipeline, and we'll comfortably exceed the 5%, which is our guidance. So do not extrapolate 5x2 is equal to 10. But certainly, will be more than 5% for sure. And the level of how far much better than 5% will be mostly dependent on the level of repayment because our clients are cash rich. Depending on cost of risk, I would say that it's better to focus on the underlying cost of risk, which is 28 basis points for the first half, and we expect to remain the same for the second half as well. So -- but generally, the absolute numbers are small. So every 10 basis points is around EUR 10 million. So yes, I think let's focus on the underlying cost of risk, which is around 28 basis points for the second half as well.

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

I would like to check temperature on net interest margin. My logic, in forecasting was that historically you had a rather high sensitivity of NIM to underlying interest rates like Euribor and your asset mix also moves favorably, yet net interest margin moved on my calculation several basis points quarter-on-quarter. So if you can help me understand why or give some ideas how the margin will develop in the second half.

Alex. We didn't understand the question. The line is not very good. You were cut off. But if I understand correctly, you're asking about NIM and how that will evolve? Okay. So on NIM, the second quarter NIM was at 2.85%. This is trending above our guidance for the year given back in March, which was at -- in excess of 2.7%. And there are a few reasons for this. Volumes are better, cost of deposits is better, volumes on both loans and deposits. And of course, the rate curves are positive. And given our low funding cost and low pass-through, this is benefiting NIM. As regards, let's say, outlook on NIM, I would say, to expect it to be broadly at the same levels as in Q2 for the rest of the year, all in our guidance, in our assumption, we use a cost of deposits of around 30 basis points for the year, and this is what's been taken into account into what I said.

The next question is from Alfredo Alonso with Deutsche Bank.

I have a question on capital. We see risk-weighted assets continue growing much less than lending. It's about 3% versus 8% year-on-year growth. It's still mostly due to the removal on asset quality or there is anything that you are doing on mix or density management? And then just a couple of follow-ups. One on the provisions. What are the reasons for the reversals that we are seeing? Could we be expecting more to come in the future? And then looking into your cost-to-income guidance, we see that the below 40% might imply a deterioration versus the current levels. But I think you should not be expecting any kind of deterioration in revenues or costs for what we've been seeing.

Okay. On cost, it's not a matter of deterioration. We just had around 40% for the full year. That was the guidance we had back in March. Now from what we see, we say less than 40%. So usually, Q4 is a little bit more -- we see some pickup in the OpEx, but I don't expect much difference from what we have for the first half on cost. So on provisions, I think that the releases are customer specific and some macro differentiation better than initially projected. As I said before, I think we will focus on the underlying cost of risk, which is 28 basis points for the first half, and this is what we expect to be for the second half of the year as well.

On capital, so this quarter, you're right that the RWA increase, let's say, in the quarter was lower than the loan growth. First of all, let me remind you that half the book roughly 40-something percent of the book is retail lending, retail housing, and that's very low risk weight in any case. So in terms of RWA density, that is helping. That aside, this quarter, we did have some very good credits that were -- that attracted lower risk-weights because of their ratings and their profile. So idiosyncratically, let's say, this quarter was -- the new lending this quarter was exceptionally low in density. I wouldn't call this a trend. I think you should think about our RWA guidance of 3% CAGR as being representative of where on a long-term basis, we will end up. But on a quarter-by-quarter basis, there is some volatility in this just because of the nature of specific credits in the quarter -- granted in the quarter.

Yes. One follow-up. On the exits that we've seen in the quarter, how much savings are you expecting from that?

On the staff cost? On the staff exit plan?