Ladies and gentlemen, thank you for standing by. I'm Myrtle, your Chorus Call operator. Welcome, and thank you for joining the Bank of Cyprus conference call to present and discuss the group financial results for the nine months ending 13th September 2021. All participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a question and answer session. Should anyone need assistance during the conference call, you may signal an operator by pressing star and zero on your telephone. At this time, I would like to turn the conference over to Mr. Panicos Nicolaou, Chief Executive Officer, Ms. Eliza Livadiotou, Executive Director Finance, and Mr. Demetris Demetriou, Chief Risk Officer. Mr. Nicolaou, you may now proceed.
Thank you. Good morning, everyone. Thank you for joining our nine-month financial results conference call. I'm joined by Eliza Livadiotou, Executive Director of Finance, Demetris Demetriou, Chief Risk Officer, and Annita Pavlou, Manager, Investor Relations. After my introductory remarks, Eliza will go into more detail on our financial performance, and then we will turn to Q&A. Slide four summarize the key highlights of the third quarter. I will briefly go over this. I will start with the macro. The strong recovery in economic activity continues, and GDP has recovered to pre-pandemic levels. GDP grew by 5.3% in the third quarter and is expected to grow by around 5.5% for the full year 2021.
We continue to support the domestic economy and extended EUR 1.3 billion of new loans in the first nine months of the year, an increase of 35% compared to the same period last year. We continue to execute on our strategic priorities, demonstrated by the improvement in our performance. During the first nine months of the year, we recorded a profit after tax of EUR 20 million, impacted by anticipated regulatory expenses. Recurring profit, a more indicative measure of our performance, totaled EUR 64 million year to date, of which EUR 13 million in the third quarter. More specifically, in the third quarter, we generated total income of EUR 139 million, down 8% quarter-on-quarter, impacted mainly by Helix 2 completion in June 2021.
Net fees and commissions remained strong in the quarter and amounted to EUR 44 million, representing 32% of our total income. Following the quarterly decrease in our total income, our cost income ratio increased to 64% for the quarter, while operating expenses remained flat at EUR 89 million in the quarter. Our capital position remains strong and comfortably in excess of regulatory requirements. As of 30 September 2021, our capital ratios on a traditional basis were 20.4% for the total capital ratio and 15.3% for CET1 ratio, both pro forma for Helix 3. Deposits increased in the quarter by 2% to EUR 17.1 billion, and we continue to operate with a significant liquidity surplus of almost EUR 6 billion and an LCR of 294%.
The third quarter of 2021 is an important milestone for Bank of Cyprus. Following the agreement for the sale of around EUR 600 million NPE in project Helix 3, we achieved a single-digit NPE ratio for the first time since the financial crisis of 2013, achieving it a year early compared to our 2022 target. Pro forma for Helix 3, our total NPE are now less than EUR 900 million and EUR 400 million on a net basis. Overall, pro forma for Helix 3, our NPE ratios are now reduced to 8.6% and 3.6% on a net basis. The performance of the loans under experimental accounting remained solid. 96% of performing loans whose payment deferrals have expired presented no arrears. This is a better performance than expected now, nearly 11 months after deferral expiry, and bodes well for future trends.
Overall, we are pleased with the progress we have achieved to date, and we are well on track with achieving our medium-term targets. Reflecting on how we manage the bank over this very challenging pandemic period, we are pleased about the progress achieved in delivering against our strategic goals, but also acknowledge where the challenges have been. Now, slide five. Firstly, asset quality has been much better than some had feared. We reduced the NPE ratio to single digit from just over 30% two years ago. We saw the cost of risk normalize in line with our medium-term expectations. Capital ratios have been preserved and modestly increased. Activity has bounced back from the pandemic lows, with new lending this year at over 80% of pre-COVID levels, and we are confident about the continuing momentum in volume growth.
We have taken pricing actions which, alongside the recovery in activity, have seen strong growth in fees, now 15% higher than in 2019. We must, however, acknowledge the challenges. Our net interest income has declined, mostly due to the NPE reduction, but also reflecting the interest rate environment. We have managed costs tightly. While expenses were 10% lower in absolute terms, the efficiency ratio has been negatively impacted by revenue pressures. Slide six provides another view of the macroeconomic conditions. As I mentioned in my opening remarks, the economy continued to grow in the third quarter by 5.3%, facilitated by rebound in tourism, trade, and manufacturing sectors. GDP is expected to grow by 5.5% this year, recovering to pre-pandemic levels by the end of the year. This strong growth is expected to continue in 2022.
Leading economic indicators show continuing upward trend, giving confidence about healthy consumption and business activity into the next year. With the additional implementation of the Cyprus Recovery and Resilience Plan, growth is expected to be sustained at pre-pandemic levels. 2021 tourist activity has recovered significantly year-on-year, and the tourist season was extended until late October. Tourist arrivals saw steady monthly recovery, and October arrivals reached 90% of October 2019 levels. We remain cautiously optimistic for next year. Slide seven, new lending. Loan demand remains strong across all business lines, with EUR 1.3 billion of new lending in the first nine months of the year, up 35% year-on-year. New lending continues to be carefully considered against robust assessment criteria.
We have high quality origination via prudent underwriting standards, and we make meticulous assessment of the repayment capability of our customers. Slides eight to 10 present a short summary of Helix 3 and the progress on our de-risking strategy to date. Earlier this month, we reached an agreement for the sale of a portfolio of NPEs with gross value of EUR 568 million, as well as real estate properties with book value of EUR 170 million. This is a profitable and capital accretive transaction, allowing us to reduce NPE stock by 40% and the RWA stock by 10%. Overall, by completion, Helix 3 is expected to add 67 basis points of capital and EUR 21 million on the group's income statement. We are reaching the end of a long journey that started in 2014. Our track record is excellent.
Overall, since the peak, we have now reduced the stock of NPEs by EUR 14.1 billion or 94% to less than EUR 1 billion, and the NPE ratio by 54 percentage points from 63% to less than 9%, vastly through organic reductions of over EUR 9 billion. We remain on track to deliver an NPE ratio of 5% in the medium term by continuing to deliver recurring organic NPE reduction and managing the post-pandemic NPE inflow. Turning now to slide 11, where we provide an update on the performance of loans that were under expired payment deferrals. The performance of the moratorium portfolio remains strong and significantly better than expected nearly 11 months after the deferral expiry. It bodes well for the future trends. As shown on the slide, EUR 4 billion loans of the performing loans under expired moratorium had installment due by 22nd November.
96% of these performing loans present no arrears, and roughly EUR 590 million have been restructured. Arrears remained low at EUR 186 million or 4%, out of which EUR 178 million of these are in arrears of less than 30 days. The trends remain strong for both the portfolio of loans under expired payment deferral to individuals and businesses. We, of course, acknowledge that the uncertainty in the market remain, particularly following the emergence of the new variant, and we'll continue to closely monitor the sectors vulnerable to pandemic, as we always do. I will now hand over to Eliza Livadiotou to take you through our financial performance in the third quarter before opening to Q&A. Eliza Livadiotou?
Thank you, Panicos. Good morning from me, too. I'll start with slide 13 on the income statement. Net interest income was at EUR 71 million for the third quarter, down 6% Q- on- Q, reflecting the completion of Helix 2 in June. The net interest margin for the quarter fell to 134 basis points, impacted by the reduction in NII following Helix 2 completion and the 3 percentage points increase in the average interest earning assets that is held in liquid asset form. Non-interest income for the third quarter amounted to EUR 68 million compared to 76 in the previous quarter. The Q- on- Q decrease is mainly due to lower insurance income, which I'll discuss further on slide 17.
Total operating expenses remained flat at EUR 89 million for Q3, and total loan credit losses, provisions, and impairment were at EUR 26 million for the third quarter as compared to EUR 24 million in Q2, and as our cost of risk stood at 78 basis points. Profit after tax and before non-recurring items amounted to EUR 13 million in Q3 and EUR 64 million for the nine months. We achieved a return on tangible equity before non-recurring items of 3.3% for Q3 and 5% for the nine months of 2021. The overall result was a profit after tax of EUR 19 million for the quarter and EUR 20 million for the nine months of the year. Moving now on, slide 14, the driver of NIM.
As I previously mentioned, our NIM in the quarter decreased to 134 basis points and was negatively impacted by the reduction in NII following the direct recognition of NPEs, as well as the increase in liquid assets. Our NII reduced by EUR 5 million or 6% Q-on-Q, reflecting the EUR 8 million NII lost on the deconsolidation of Helix 2. We are encouraged by the non-legacy loans income evolution, which was up EUR 2 million, reflecting stable yields of 277 basis points. Our interest expense decreased due to higher wholesale funding costs, following the issuance of EUR 300 million senior notes in June 2021. Our TLTRO III borrowing stands at EUR 3 billion.
We have already recorded an NII benefit of EUR 7 million for the 12 months to June 2021, and the potential NII benefit for the 12 months from June 2021 to June 2022 is currently estimated at around EUR 15 million, provided that the bank meets the net lending thresholds and these accrue to NII over the respective period. While as you can see, individual category spreads were relatively stable, the largest driver of the overall decline in the net interest margin was the changing mix of our balance sheet towards liquid assets. On slide 15, you see that over one-third of our balance sheet is balanced with central banks and over half of our average interest earning assets are in liquid form.
The increase in liquid assets reflects the continuing de-risking, which replaces NPEs with liquid assets, our participation in the TLTRO program, and the strong deposit trends. On slide 16, you can see our deposit balances rose again in the quarter and now represent almost 76% of our total liabilities. Our loan to deposit ratio is down to 57%. While these are welcome trends from a central perspective, they did have a dilutive impact on our reported margin. Now moving to slide 17 on non-interest income. In the third quarter, non-interest income amounted to EUR 68 million, down 10% Q-on-Q, mostly impacted by lower net insurance income. Net fee and commission income remained strong at EUR 44 million in the third quarter.
Net fees and commissions for the nine months increased to EUR 128 million, above pre-pandemic levels, supported by the introduction of liquidity fees to a wider customer group and the introduction of a revised price list in February 2021. Net insurance income stood at EUR 12 million, down by 36% on the previous quarter, impacted by seasonality and higher claims, as well as the discount rate volatility. Net and other income increased to EUR 10 million, up 15% Q-on-Q, mainly due to the increase in dividend income. Moving now to insurance on slide 18. The underlying operating performance of our insurance companies continued growing into Q3.
Net insurance income for our life insurance, Eurolife, amounted to EUR 23.6 million for the first nine months of the year, probably flat year-over-year, as it was positively impacted by higher gross written premiums offset by a discount rate volatility. Net insurance income for Eurolife contributes 12% to total non-interest income. For our general insurance business, net insurance income amounted to EUR 19 million for the first nine months of the year and remained broadly flat year-over-year, contributing 9% to total non-interest income. Looking now at expenses on slide 19. Total operating costs for the third quarter were EUR 89 million. Despite the fact that operating expenses remained flat Q-on-Q, our cost-to-income ratio for the quarter increased to 64%, reflecting lower total income, mainly impacted by Helix Two completion.
Beyond this year, we expect our cost-to-income ratio to decline through specific initiatives, including exit solutions to leave FTEs and further branch rationalization. Over the medium term, this is expected to increase to mid-50s. The group's medium-term guidance of total operating expenses below EUR 350 million remains unchanged. Now let's turn to capital on slide 22. CET1 ratio and total capital ratios as at 30th September stood at 15.3% and 20.4% respectively. During the third quarter, we generated around 40 basis points of organic capital through operating profits, 10 basis points from the reduction in RWAs, and around 10 basis points from Helix 3. These were partially offset by expected credit losses and impairment of around 30 basis points.
Our CET1 ratio on a fully loaded basis was at 13.3%, and as at December, 13.9% pro forma for Helix 3. I'll now give you an update regarding the changes in our capital requirements. Minimum capital requirement for 2022 for CET1 and total capital ratio is expected to increase to 10.09% and 15.02% respectively, following a 27 basis point add-on in P2R due to ECB calendar provisioning expectations and 25 basis points phasing in of the O-SII buffer. Taking it in turn, the P2R add-on is dynamic and can be reduced during 2022 on the basis of in-scope NPEs and the level of provisioning. It is important to also note that the P2G reduction more than offsets the increase in P2R for the CET1 ratio.
The second component is the total O-SII buffer. This is the other systemically important institution buffer, which is now reduced by 50 basis points to 1.5%. Here, hence, there will be a 25 basis point phasing in each January of 2021, 2022 and 2023, instead of 50 basis points after the previous level. Now, moving to asset quality, on slide 24. During the first 9 months of 2021, gross NPEs were reduced by EUR 2.2 billion to less than EUR 1 billion and to EUR 0.4 billion on a net basis pro forma for Helix 3. The reduction comprised of Helix 2 relating to EUR 1.3 billion gross loans, Helix 3 covering EUR 0.6 billion of gross loans, and organic reduction of around EUR 300 million.
Pro forma for Helix 3, the gross NPE ratio is reduced to 8.6% and 3.6% on a net basis. The balanced NPE coverage ratio was maintained at 60% pro forma for Helix, and when taking into account tangible collateral at fair value, NPEs are fully covered. The coverage of risk performing NPEs is relatively lower at 22%, reflecting the lower risk associated with risk performing NPEs, whereas coverage of the core NPEs increased to 69%. Moving to slide 26. As shown on the left graph, 71% of our loan book is classified in stage one, 20% in stage two. The coverage of these two stages amounted to 1.2% and 2.9% respectively, while the coverage of stage three loans stood at 43.1% pro forma for Helix 3.
We're pleased with the performance of the moratorium book, as only EUR 8 million of loans have migrated to stage three during the quarter. In addition, during Q3, there was an overall net transfer of around EUR 150 million of loans from stage two to stage one, reflecting the improved macro assumption. Now moving to cost of risk on slide 27. The cost of risk for the nine months was at 56 basis points, and for the third quarter, cost of risk was at 78 basis points of gross loans. The stronger than expected economic performance allowed us to reverse part of our COVID-19 overlay amounting to 62 basis points. This reversal partly offset the impact of model recalibration affected in the first quarter to address modeling improvement relating to the new default definition and updated curing and default experience.
Overall, we currently expect the cost of risk for the full year to be in line with cost of risk for the first nine months of the year. We will, of course, continue to closely monitor the sectors that are vulnerable to COVID-19. Now, let's have a quick look at our asset disposal engine, REMU, on slide 28. For the first time since the beginning of 2017, the value of REMU sales have exceeded the value of properties onboarded. Pro forma for Helix 3, we completed disposals of EUR 212 million for the nine months, up 280% year-on-year, reducing the REMU stock by 14%. With that, I hand back to Panicos for his closing remarks.
Thank you, Eliza. Moving to slide 31 and 32. Slide 31 provides a summary of our journey and our priorities going forward. I will not spend too much time on these since these priorities, of course, haven't changed and are previously discussed in detail. I am encouraged that we are delivering on this commitment this year and are well positioned to deliver on them over the medium term. Slide 32 shows the medium term strategic targets we set this time last year. I would like to remind you that the previous medium term guidance was communicated in November 2020, when there was a great uncertainty about the impact of the pandemic. Since then, a lot has been achieved.
We are currently working to update our business plan, and we expect to be in a position to update you on our targets after the publication of our full year financial results. This concludes our presentation. I will now open the floor for your questions. Thank you.
Ladies and gentlemen, at this time, we'll begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their telephone. If you wish to remove yourself from question queue, then you may press star and two. Please use your handset when asking your question for better quality. Anyone who has a question may press star and one at this time. One moment for the first question, please. The first question comes from the line of Boulougouris Alexandros from WOOD & Company. Please go ahead.
Hello. Thank you for the presentation. My first question is regarding NII. Could you please explain a bit better to understand the effective yield of liquids, which you mentioned increased by 13 bps to under EUR 2.7 million. You mean that in your NII in Q3, it includes EUR 2.7 million from Helix 2 still, which will be gone in Q4, I would assume? That's my first question. My second question is regarding costs, which excluding the deposit guarantee fund are stable Q-on-Q, but including they're higher. So could you please explain why is that? I mean, was there a higher deposit cost for the deposit.
The contribution to the fund in Q3 compared to the second quarter, and maybe understand a bit how this works because I thought it was more stable on a quarterly basis. That's my question on cost. Maybe on the cost side, if you could, I know you will update us on the business plan after the full year results, but if there is any clarity or if you plan to proceed with any new voluntary retirement plan that would help reduce costs, any color on that would be helpful as well.
Also maybe a final question on, given that you are now on an NPE ratio post completion of Helix 3 below 10% and your capital is above 20%, when do you think would be the time to start a conversation with regulators regarding dividends? Thank you.
Okay. Thank you, Alexandros. I will start with the last question, and then I hand over to Eliza to provide some clarifications on the NII and the cost. I would say we are very well aware that the shareholder return important for our shareholders, and it's extremely important for us as well. That is why all of our efforts have been to speed up the de-risking of the bank, achieving this a year earlier than what we have previously signaled to the market. Having entered into the single digit ratio and having the capital ratio that you previously mentioned, we are currently finalizing our three-year plan.
We plan to go and initiate the supervisory dialogue immediately after the publication of our full year results. This is our plan of action. Complete our three-year plan, announce our full year results, and immediately initiate the supervisory dialogue for this subject. Eliza, back to you on the-
Okay. On NII, Alex, if I understand correctly, your question is on the Helix 2 component of NII. As we had said in previous quarters, as you might remember, in Helix 2 had a deferred payment component of the consideration, and that DPP is interest-bearing. The EUR 2.7 million that we indicate on the slide for the third quarter is the NII coming from this deferred consideration effectively. There will be similar numbers in the following quarters as it amortizes. You might remember the expiry, let's say, the final amortization is in 2025. That's the NII point. On the DTC, it is the way the mechanics work in the law do create some volatility on a Q- on- Q P&L basis.
It's a technicality. I think it's too much detail for this call. The average for the year remains at the level that we've previously been guiding. It's just that the way the mechanics work, because the government covers our contribution to the Single Resolution Fund, the European Fund, mean that Q-on-Q there is some volatility which should be neutralized for kind of a on an annualized basis, let's say. On staff costs, our previous commentary, I mean, previous quarters commentary, I think it's fair to say still remain. We haven't updated the EUR 360 million up to EUR 60 million guidance that we have from November 2020 when we issued the guidance. We do look to update our guidance on the back of full year numbers.
Having said that, we are currently running an in-staff exit plan as we did in Q4 2020. The rest we will provide more color on together with our guidance next year.
Thank you. Very clear.
The next question comes from a line of Corinne Cunningham with Autonomous Research. Please go ahead.
Hi, everyone. Couple of quick ones for me, please. Can you just elaborate why the Pillar 2 Requirement went up? Given that your non-performing loans are coming down, I'm a little bit surprised to see that, so perhaps a bit more color there. The other one, the Ministry of Finance in Cyprus the other day did a presentation on their debt issuance plans, and they talked about an asset management company plan to produce EUR 1 billion-EUR 1.5 billion capacity to remove non-performing assets from your balance sheets in the whole of Cyprus, obviously. Do you have any information as to the timeline on that, and your expectations as to whether you might participate in it? Thank you.
Okay. Thank you. Thank you, Corinne. I will again start with the last question. I know that the government through the Ministry of Finance are working on a plan. I wouldn't call it asset management company. I would call it from what we know out in the market an effort to support the vulnerable or a sector that we call vulnerable to retain their PPR, permanent residence. In that respect, they are thinking of a structure like that. You know, that is, it's the AMC that handles, you know, the previous NPEs of Cyprus Cooperative Bank.
In that respect, they are planning to use this as a vehicle so that they offer to the banks to buy their, let's say NPEs that are related with PPRs of less than EUR 350,000 value. I don't know the exact timing. I know that they are planning it within 2022, but it's not, you know, a holistic AMC. It's just an effort to facilitate this, the, let's say, the vulnerable borrowers with PPRs. This is what I know from my information. Of course, this is an extra tool for us as a bank to speed up the resolution of our remaining retail NPE. On the PPR Eliza.
On PPR, this is formulated calculation by the regulator, which we understand is a horizontal decision, let's say, for all the SSM regulated banks, relating to what we are calling the market calendar provisioning that formulates the calculation of the provision requirements by the regulator, which is formulated and reset with respect to collateral. The level with 27 basis points was set by the regulator and is a mixture of the 2020 December opening provision and some element of dynamic evolution in the nine months. It doesn't fully reflect our de-risking up to nine months, and we look forward to more reductions into next year.
We understand that the regulator is minded to allow this flexibility, this dynamic component, let's say, in PPR. We are fairly confident given our reduction in NPEs, you know, quarter- on- quarter for many years now that we can achieve a reduction in this going forward. Just as a reminder, our Pillar 2 Guidance has come down to more than offset that. This other systemically important institution cover has also been reduced. There was a decision yesterday by the central bank on this, which all goes in the right direction on NPEs.
Okay, thank you.
The next question comes from a line of Daragh Quinn with Keefe Bruyette. Please go ahead.
Hi. Good morning. Thanks for the presentation. A few questions from me, please. First, just on the cost income ratio guidance or medium-term target of mid-50s%. You know, given that you're effectively running at your cost target, you know, to see that level of improvement in the cost income ratio, it would effectively have to come from fairly decent growth in revenues. Maybe if you could provide just a little bit of color about how you plan to achieve that revenue growth mix between NII and fees. A second question on MREL. I mean, I know you're ahead of your short-term target, but just looking at the targets a bit further out, the 23% requirements, just what are your...
What is the planning in terms of debt issuance to meet that target? Then final question on the organic NPE reduction, you know, continues to remain strong, but obviously the stock of NPEs is also falling. Just maybe if you could provide some outlook for what kind of pace of organic reduction you expect to be able to deliver over the coming quarters. Thanks.
Okay. Thank you, Daragh. I'll start again with the last question on the organic NPE reduction. Yes, there was a strong nine-month time reduction, roughly EUR 100 million per quarter. Of course, as the NPE stock, then this number is expected to be reduced as well. We do expect to continue to have a significant organic NPE reduction next year as well. We have a machine that is battle-hardened, and it works and produces results. But the number will be lower. I will roughly say EUR 50 million-EUR 60 million per quarter, but this is a rough estimation. Have in mind that the stock has been reduced as well. That's the organic NPE reduction.
On the cost to income, it's a combination of both increasing the income and of course, reducing the cost. On the cost side, we run a significant cost program, which is for the third year now. Cost is a priority for us. We do expect to deliver in the next two, three years, and based on the cost reduction program, full pre-rationalization for our branches, centralization, automations, and of course, because of this, optimization of the number of our employees. That means a new exit plan for our staff.
It takes some time to see the effect because at the same time you de-leverage and you are losing the income. On the income side, you know that we have previously mentioned that we do have a kind of a different focus of revenue increase. The obvious one is new lending, we have been growing this year for the first time in terms of net new lending. Having in mind that our diversification initially for EUR 1 billion new lending outside Cyprus, and the guidance of 10% increase in the new term, we do believe that this is actually very feasible.
On the lending interest income, our initiatives have actually been producing results, and we see the growth on the fees and commissions even since 2019. If you combine all together, you can see the trend is not pretty obvious. That's why we plan to, for every, let's say, to guide on this with more explanations after the full year results of 2021. That's on the cost income.
Maybe I can answer his question. So first of all, let me say that, as you might remember, our only binding target, interim target is for January 2022, and we have more than met that for the issuance in the summer. Yes, we are aware and focusing on the fact that there is a, you know, a substantial amount of issuance to go. We are monitoring the market and this is something that we look to do into 2022 or 2023, depending on the evolution of our balance sheet, but also market conditions.
Perfect. Thank you.
As a reminder, if you would like to ask a question, please press star and one on your telephone. As a final reminder, to register for a question, please press star and one at this time. 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.
Thank you all for your participation. As always, we'll be glad to take offline any questions or any presentation you may have. Thank you very much.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for calling, and have a pleasant evening.