Revised targets for revenue, NPLs and equity make prospects favourable for Bank of Cyprus

The outlook is favorable for the Bank of Cyprus, which, after strong financial results for the first half of the year, has proceeded to review its financial goals for both 2024 and 2025.

According to the Bank's Interim Financial Report, the target for net interest income for 2024 is upgraded from more than €670 million to around €800 million. As for 2025, net interest income is expected to be below the levels of 2024, but to remain strong at the same time, exceeding €700 million.

At the same time, disciplined expense management remains an important priority for the Group, while in terms of loan portfolio quality, Bank of Cyprus aims for a NPL to loan ratio below 3% by 31 December 2024 and below 2.5% by 31 December 2025.

Strategy and prospects

More specifically, and as mentioned in the "Strategy and Prospects" section, the Group's vision is to create lifelong partnerships with its customers, guiding and supporting them in an evolving global economy.

The main pillars of the Group's strategy, it is added, remain the following:

• Enhancing revenue with optimal capital management, through revenue generation from an increase in quality new lending, diversification into banking and financial activities with lower capital requirements (such as the insurance sector and digital economy), as well as prudent management of the Group's liquidity,
• Achieving a streamlined operating model, with a continuous focus on efficiency through automations underpinned by digital transformation,
• Maintaining strong loan portfolio quality by maintaining quality new lending through rigorous practices, reducing cost of risk to normal levels and reducing other impairments, and
• Enhancing organizational resilience and policy on Environmental, Social and Governance (ESG) issues, by leading Cyprus' transition to a sustainable future and working to create an organization with vision for the future, including PCD issues in all sectors.

Based on the interim report, during the six months ended 30 June 2024, the Group continued to record strong financial and operational results, demonstrating the viability of its business model.

It is therefore noted that, taking into account this strong performance in the first half of 2024, the Group has upgraded its financial targets for 2024 and 2025.

Key drivers of upgraded financial goals

Regarding net interest income, it is reported that the target for 2024 is upgraded from more than €670 million to around €800 million.

This upgrade, the Bank underlines, is mainly due to the fact that the interest rate environment proved to be more resilient than initially expected, with the pace of interest rate cuts being prolonged.

"According to estimated market rates in July 2024, the ECB deposit facility rate and the 6-month Euribor rate are expected to average 3.8% and 3.6% respectively in 2024, against the deposit facility rate of the ECB of 3.4% and the 6-month Euribor of 3.2% expected in February 2024,” he further explains.

It is noted that other factors that led to the upgrade of the target for net interest income include:

• The cost of deposits is expected to rise to around 35 basis points on average in 2024, supported by the high liquidity that characterizes the Cyprus banking sector,
• Gradual shift in deposit mix towards term and notice deposits to approximately 43% by 31 December 2024;
• Low single-digit annual loan growth for 2024-2025, supported by the pace of economic growth. The growth of the loan portfolio is limited by repayments.
• Hedging actions will continue during 2024, in order to comply with the target set by the Group of €4-€5 billion. By June 30, 2024, hedging actions amounting to €3.4 billion have already taken place.
• Continued growth in the bond portfolio, depending on market conditions, to represent approximately 17% of total assets at 31 December 2024 (compared to the previous target of 16%), also benefiting from the replacement of maturing bonds at higher interest rates, and
• Higher funding costs, reflecting the overall impact of the 2023 senior bond issue, as well as the April 2024 senior green bond issue.

For 2025, however, net interest income is expected to be lower than 2024 levels, but remain strong, exceeding €700m, based on an ECB deposit facility rate and 6-month Euribor rate at 3.0% on average, mainly reflecting projected lower interest rates and higher deposit costs compared to 2024.

Increase revenue through a number of initiatives

In addition to the above and according to the interim report, the Group aims to continuously increase revenue through various revenue initiatives with lower capital requirements, with an emphasis on net fee and commission income, insurance and non-banking services, further strengthening the diversified business model of the Group.

As it is typically stated, "non-interest income contributes significantly to the Group's profitability and in the past covered on average approximately 80% of its total operating expenses," while "it is expected that they will continue to cover approximately 70-80% of the Group's total operating expenses, supported by growth in net fee and commission income at a rate roughly in line with expected economic growth for the years 2024-2025."

At the same time, disciplined cost management remains an important priority for the Group, so the target for the cost-to-income ratio adjusted for the special tax on deposits and other fees/levies for 2024 is reduced to below 35% (compared to previous target of around 40%), mainly reflecting higher revenues as a result of the improved interest rate environment.

For 2025, the cost-to-income ratio adjusted for the special tax on deposits and other fees/levies is expected to be below 40%, mainly reflecting lower income as a result of the gradual reduction in interest rates.

Regarding the quality of the loan portfolio, the Bank emphasizes that the Group's NPL-to-loans ratio decreased to 2.8% on June 30, 2024, demonstrating that the Group is already aligned with its NPL-to-loans ratio target set for 2024.

In this context, the Group aims for a ratio of NPL to loans lower than 3% until December 31, 2024 and lower than 2.5% until December 31, 2025.

At the same time and taking into account the continued strong performance of the loan portfolio, the cost of risk charge is reduced and is expected to rise to around 40 basis points for 2024 and normalize to 40-50 basis points in 2025.

Equity

In terms of equity, the Group overall expects to achieve a Return on Tangible Equity (ROTE) of over 19%, which translates to over 24% Return on Tangible Equity calculated on a Common Equity Tier 1 (CET1) ratio of 15% for 2024.

For 2025, the Group expects to generate a Return on Tangible Equity (ROTE) at mid-teens levels, corresponding to high-teens levels for a Return on Tangible Equity calculated on Common Equity Tier 1 (CET1) of 15%.

"This strong performance for 2024 and 2025 will contribute to rapid capital formation, with Common Equity Tier 1 capital formation expected to exceed 300 basis points annually, before deducting distributions," the Bank's interim report said.

Distributions

Furthermore, according to the interim report, the Group's objective is to provide a stable return to shareholders. According to the Group's distribution policy, it is underlined, the payout ratio is expected to range between 30%-50% of the Group's adjusted recurring profitability and distributions to include cash dividends and share buybacks, with any distribution subject to regulatory approval.

"Adjusted recurring profitability is determined as profits after tax and before non-recurring items (attributable to the Company's shareholders) taking into account distributions for other equity securities such as the coupon payment to holders of Additional Class 1 Debentures," it is emphasized.

However, in line with its distribution policy, the Group is committed to providing stable and growing distributions, combining cash dividends and share buybacks, while maintaining its strong capital position, thus supporting the Group's increased profitability and prudent preparation regarding upcoming potential regulatory changes.

"Supported by its continued progress towards its strategic objectives, the Group, for 2024, seeks to move towards the higher percentage of the distribution rate range (i.e. 50%), subject to required approvals," it added.

“Any proposed distribution amount, as well as the intended allocation between cash dividend and share repurchases, will take into account market conditions as well as the results of capital and liquidity planning at the time. Given the strong capital formation, the Group's distribution policy is expected to be reviewed with the financial results for the year 2024, in the context of the current market conditions", it is further pointed out.

The importance of the return to the Athens Stock Exchange

Regarding the return of the Bank to the Athens Stock Exchange, it is emphasized that "in the context of the evaluation of the Group's strategy for achieving its long-term strategic goals and creating stable value for shareholders, the board of directors is evaluating the way to enhance the liquidity of the ordinary shares of the Group, which are currently listed on the London Stock Exchange and the Cyprus Stock Exchange."

Following extensive communication with the Group's stakeholders, it is added, the board of directors has concluded that the listing of the ordinary shares on the Athens Stock Exchange, combined with the delisting from the London Stock Exchange, will bring a number of long-term strategic benefits and strengthen the presence of the Group in the markets.

These include enhancing the Group's profile to investors focused on the region, allowing them to directly compare its performance with other banks in the region, thus attracting long-term institutional investors to a more focused market within the Athens Stock Exchange and providing scope for the stock to be included of the Group in stock indices over time.

Taking these benefits into account, the Group's board of directors "believes that the listing of the ordinary shares on the Athens Stock Exchange and their delisting from the London Stock Exchange has the potential to enhance the liquidity of the ordinary shares and may increase the presence of the Group in the markets for the benefit of the shareholders".

It is pointed out that the ordinary shares of the Group will continue to be listed on the Cyprus Stock Exchange, while an extraordinary general meeting will be convened to propose a resolution to the shareholders in order to consider the proposed listing on the Athens Stock Exchange.

Based on the report, the Bank's board of directors expects that the listing on the Athens Stock Exchange and the delisting from the London Stock Exchange will take place in autumn 2024, subject to shareholder approval, necessary regulatory approvals and market conditions.

It is noted that the listing on the Athens Stock Exchange is subject to the relevant approval by the Listing Committee of the Athens Stock Exchange.

(Source: InBusinessNews)