Founded in 1899, the Bank of Cyprus Group is the leading Cypriot banking and financial services group. In addition to retail and commercial banking, the Group’s activities include finance, factoring, investment banking, brokerage, fund management, life and general insurance. The Group currently operates through a total of 567 branches, of which 201 operate in Russia, 174 in Greece,
141 in Cyprus, 23 in Ukraine, 12 in Romania, 11 in Australia, 4 in the United Kingdom and 1 in the Channel Islands. Bank of Cyprus also has 8 representative offices in Russia, Romania, Ukraine, Canada and South Africa. The Bank of Cyprus Group employs 11.929 staff worldwide.
At 30 September 2010, the Group’s Total Assets amounted to 41,96 bn euro and the Shareholders’ Funds were 2,39 bn euro. The Bank of Cyprus shares are listed on the Cyprus and Athens Stock Exchanges. Additional information can be found on the Group’s website www.bankofcyprus.com.
A. Summary of Results
The financial results for the nine months of 2010 highlight that the Group is in a strong position to face the continuing challenges in its main markets having achieved selected business growth, increasing recurring profitability and strengthening further its balance sheet, in line with the 2010 business and financial targets.
The Group’s net interest income recorded a significant increase of 25% reaching 768 mn euro for the nine months 2010, demonstrating the Group’s ability to achieve increased recurring income even in adverse economic conditions. The Group’s profit before provisions for the nine months 2010 reached 512 mn euro and recorded a significant increase of 13% compared to the same period the year before. The profit after tax for the nine months 2010 reached 248 mn euro, with the Group being profitable in all the markets in which it operates.
The Group enjoys strong capital adequacy (Tier 1 ratio 9,7%) and healthy liquidity (loans to deposits ratio 87%). The Group’s capital adequacy has been further strengthened with the successful completion of the capital increase, with the pro-forma Tier 1 ratio at 30 September 2010 reaching 11,1%. Though deteriorating, loan quality remains satisfactory (non-performing loans ratio of 6,7%) given the challenging macro environment.
The performance of the nine months 2010 reaffirms the effectiveness of the Group’s chosen business model. Amid the negative economic environment, the Group continues its selective business expansion, by increasing its footings in the main markets in which it operates, strengthening its balance sheet and achieving increased recurring profitability. At the same time, the successful share capital increase offers the Group further strategic flexibility to capitalise on its liquidity by seizing profitable growth opportunities across its various markets.
The main financial highlights for the nine months 2010 are set out in the table below:
B. Prospects
The strategic priorities of the Group for the year 2010 focus on maintaining healthy liquidity and high capital adequacy, improving efficiency and cost containment, with satisfactory profitability and effective risk management. In addition, the Group aims to further enhance its presence in the new markets in which it operates, which have strong growth potential, thereby creating long term diversification of income, profitability and risks.
The Group is monitoring developments in the international markets as well as the macroeconomic environment in Cyprus, Greece and the surrounding regions and takes measures to shield itself effectively from relevant risks. Such measures include the continuous monitoring of risks, especially the control of credit risk, the repricing of selected loan and deposit products and the prudent expansion of the Group’s operations.
Having taken into consideration the results for the nine months 2010, the results to date and the current economic conditions, the Group reaffirms its estimate of achieving satisfactory profitability for the year 2010 within the targets already announced. Specifically, the Group estimates that profit after tax will range between 300 mn euro and 400 mn euro, with positive contribution from all the markets in which it operates.
C. Analysis of Results for the nine months 2010
C.1 Geographical analysis of profitability
The Group achieved satisfactory profitability for the nine months 2010, with increased recurring income and positive contribution to profit from all the markets in which it operates.
Profit before provisions for the nine months 2010 reached 512 mn euro, recording an annual increase of 13% compared to the nine months 2009. Profit after tax for the nine months 2010 reached 248 mn euro compared to 265 mn euro for the nine months 2009.
In Cyprus, profit before provisions for the nine months 2010 reached 304 mn euro. However, the Group, having taken into consideration the worsening of the economic environment, significantly increased the charge for impairment of loans, resulting in profit after tax for the nine months 2010 of 185 mn euro, reduced by 18% compared to the nine months 2009.
In Greece, profit before provisions for the nine months 2010 reached 142 mn euro, recording an increase of 60% compared to the nine months 2009 despite the increased provision charge (101 mn euro for the nine months 2010 compared to 55 mn euro for the nine months 2009). Profit after tax reached 34 mn euro versus 22 mn euro for the nine months 2009 (annual increase of 58%).
In Russia profit before provisions for the nine months 2010 reached 30 mn euro, an increase of 16% compared to the nine months 2009 with profit after tax reaching 8 mn euro compared to a loss of 4 mn euro for the nine months 2009.
Profit after tax for other countries (Australia, United Kingdom, Ukraine and Romania) reached 21 mn euro recording an increase of 5% compared to the nine months 2009.
C.2 Net Interest Income and Net Interest Margin
By adjusting its pricing policy for the new economic environment, the Group increased its net interest income in the nine months of 2010. Net interest income for the nine months 2010 reached 768 mn euro, recording a significant annual increase of 25% compared to the nine months 2009, demonstrating the Group’s ability to achieve increased recurring income despite continuing competition and the adverse economic conditions.
In Cyprus, net interest income reached 387 mn euro for the nine months 2010, an increase of 19% versus the nine months 2009 while in Greece net interest income reached 230 mn euro recording an increase of 29% compared to the nine months 2009. In Russia, net interest income reached 86 mn euro recording an increase of 70% versus the nine months 2009.
The net interest margin of the Group reached 2,65% for the third quarter 2010 compared to 2,55% for the third quarter 2009 and 2,64% for the second quarter 2010. As a result, the net interest margin for the nine months 2010 reached 2,63% recording a significant increase of 28 basis points compared to the nine months 2009 (2,35%).
The net interest margin in Cyprus for the third quarter 2010 reached 2,10% compared to 2,13% for the second quarter. Thus, the net interest margin of the Group in Cyprus reached 2,10% for the nine months 2010 compared to 2,04% for the nine months 2009.
The net interest margin in Greece improved to 2,22% for the third quarter 2010 versus 2,19% for the second quarter. As a result, the net interest margin of the Group in Greece for the nine months 2010 reached 2,18%, having increased by 37 basis points compared to the nine months 2009 (1,81%).
The net interest margin in Russia reached 6,30% in the third quarter 2010 (compared to 5,05% for the first quarter 2010 and 5,98% for the second quarter), while the net interest margin for the nine months 2010 reached 5,72% recording an increase of 148 basis points compared to the nine months 2009 (4,24%).
C.3 Income from fees and commissions, foreign exchange income and gains from financial instruments
Net fee and commission income amounted to 171 mn euro for the nine months 2010 which is flat compared to the nine months 2009 (172 mn euro).
Foreign exchange income and gains from financial instruments for the nine months 2010 amounted to 54 mn euro versus 105 mn euro for the nine months 2009, while the corresponding income for the third quarter 2010 amounted to 17 mn euro versus 56 mn euro in the third quarter 2009. It is noted that the income in the third quarter 2009 included gains from the sale of bonds of 37 mn euro.
C.4 Expenses
Total expenses for the nine months 2010 amounted to 531 mn euro, recording an annual increase of 7% compared to 495 mn euro for the nine months 2009. Despite the increase in operating expenses, increased income led to the reduction of the cost to income ratio which stood at 51,0%, noting an improvement of 1,2 percentage points compared to the nine months 2009.
The cost to income ratio in Cyprus for the nine months 2010 stood at 45,0%, noting an improvement of 1,4 percentage points versus the nine months 2009 and in Greece the relevant ratio stood at the very satisfactory level of 51,2% compared to 61,7% for the nine months 2009.
D. Credit Risk Management
The quality of the Group’s loan portfolio remains at satisfactory levels taking into consideration the continuing economic crisis. At 30 September 2010, the ratio of loans in arrears for longer than three months which are not fully covered by tangible collateral (“non-performing loans”) over the total loans of the Group (non-performing loans ratio) stood at 6,7%, compared to 6,2% at 30 June 2010 noting an increase of 50 basis points. At 31 December 2009 the relevant ratio stood at 5,6%.
At 30 September 2010, the relevant ratio stood at 6,6% in Cyprus (30 June 2010: 6,1%) and at 7,0% in Greece (30 June 2010: 6,8%).
The Group, taking into consideration the macro-economic environment and the partial deterioration of the loan portfolio, maintained the relatively high charge for impairment of loans, which reached 1,11% of total loans on an annual basis for the nine months of 2010 (year 2009: 0,96%).
Through increased provisions and the satisfactory level of accumulated provisions, the provision coverage ratio (provisions/NPLs) stood at 55% at 30 September 2010. The remaining balance of NPLs is fully covered by tangible collateral. The coverage ratio including tangible collateral amounted to 118% (105% taking into account tangible collateral at forced sale value).
E. Balance Sheet Analysis
E.1 Group Loans
At 30 September 2010 Group loans amounted to 28,3 bn euro recording an annual increase of 11% as well as an increase of 7% from 31 December 2009. Despite the market conditions prevailing in the main markets in which the Group operates and the prudent credit policy applied by the Group, the increase in loans reaffirms that the Group, based on its strong balance sheet footings and primarily on its healthy liquidity, continues its selective expansion by taking advantage of opportunities that arise.
At 30 September 2010, the Group’s total loans in Russia reached 1,8 bn euro recording an increase of 28% for the nine months 2010 and an increase of 50% yoy.
E.1.1 Loans by Customer Sector
The breakdown of the loan portfolio by customer sector for the Group and for the two main markets in which the Group operates, Cyprus and Greece, is shown in the table below:
E.2 Group Deposits
The Group’s total deposits at 30 September 2010 reached 31,4 bn euro recording an annual increase of 10% and 10% since 31 December 2009. The Cyprus operations noted a significant increase of deposits of 23% yoy which is mainly derived from the International Business Sector, where a continuous increase in the number of customers further enhances the Group’s leading market share.
The Group’s healthy liquidity position, with a loans to deposits ratio of 87% and its minimal reliance on wholesale funding (deposits to total assets ratio of 75% at 30 September 2010) provide the Group with a strong competitive advantage particularly in the adverse conditions prevailing in international money markets and in the intense competition on deposits evident in the main markets in which the Group operates.
E.3 Capital Base
At 30 September 2010, the Group’s shareholder funds amounted to 2,39 bn euro. The Group’s total capital adequacy ratio based on Basel II requirements reached 10,8% with the core tier 1 ratio at 6,8% and the tier 1 ratio at 9,7%.
In October 2010, the Group successfully completed the increase of its capital through a rights issue of 345 mn euro, further strengthening its capital base. Taking into account the capital increase, the pro-forma capital ratios as at 30 September 2010 are 12,1% for capital adequacy, 8,1% for Core Tier 1 and 11,1% for Tier 1.
