Ladies and gentlemen, thank you for standing by. I'm connected to your call's call operator. Welcome, and thank you for joining the Bank of Cyprus conference call to present and discuss the group's financial results for the six months ended 30th June 2021. At this time, I would like to turn the conference over to Mr. Panicos Nicolaou, Chief Executive Officer, Ms. Eliza Livadiotou, Executive Director of Finance, and Mr. Demetris Demetriou, Chief Risk Officer. Mr. Nicolaou, you may now proceed.
Thank you. Good morning, everyone. Thank you for joining our First Half 2021 Financial Results Conference Call. I'm joined by Eliza Livadiotou, Executive Director Finance, Demetris Demetriou, Chief Risk Officer, and Annita Pavlou, Manager, IR. After my introductory remarks, Eliza will go into more detail on our financial performance, and then we will turn to Q&A. Slide four summarizes the key highlights of the second quarter. I will briefly go over these. During the second quarter, Cyprus experienced strong recovery in economic activity against the backdrop of increased vaccination coverage and the relaxation of restrictions. Around 80% of the adult population in Cyprus has been vaccinated with the first dose, and 34% have completed their vaccination regime, on track with the government target. GDP grew by 12.9% in the second quarter, significantly better than expected earlier in the year.
Underscoring our commitment to continue to support the country's return to growth, we extended a further EUR 407 million of new loans in the quarter, reaching EUR 894 million of new loans in the first half of the year, an increase of 30% compared to the same period last year. Turning to our performance this quarter. Leveraging on the stronger economic environment in the quarter, our strategies begin to deliver results, demonstrated by the improvement in our performance before non-recurring items, which nearly doubled on the prior quarter. During the quarter, we generated total income of EUR 152 million, up 11% quarter on quarter, and a positive operating result of EUR 57 million, up by 28% versus the previous quarter. Our cost of risk reduced by a further 14 basis points to 52 basis points.
We delivered a profit after tax and before non-recurring items of EUR 34 million, which is double the EUR 17 million of the first quarter. After recognizing non-recurring items, the overall result for the quarter was a loss after tax of EUR 7 million and a profit of EUR 1 million for the first six months. This strong quarterly increase in total income helped drive a two percentage point reduction in our cost-to-income ratio, despite the 7% increase in total operating expenses. The bank's capital position remains good and comfortably exceeds regulatory requirements. As of the end of June, our capital ratios on a transitional basis were 19.2% for the Total Capital ratio and 14.2% for CET1.
Following the successful refinancing of our Tier 2 capital notes in April 2021, we proceeded with the inaugural issuance of $300 million MREL-compliant senior preferred notes in June 2021, thereby early achieving our enhanced regulatory MREL requirements. Deposits around the balance sheet increased in the quarter by 3% to EUR 16.8 billion. The process of balance sheet repair continues. In June 2021, we completed Helix 2 and rerecognized EUR 1.3 billion of NPEs from our balance sheet. We also organically reduced NPEs by EUR 117 million in the first half of the year. The stock of NPEs amounted to EUR 1.6 billion, and the NPEs ratio stood at 14.6% and 6.4% on a net basis.
Overall, since the peak in 2014, we have now reduced the stock of NPEs by EUR 13.4 billion or 89%, and the NPEs ratio by 48 percentage points. We continue to work towards further accelerating NPEs reduction through additional sales and remain on track with achieving a single-digit NPEs ratio. At the same time, we continue to closely monitor the performance of loans which had been granted payment deferrals in the previous year. As of mid-August 2021, 96% of performing loans whose payment deferrals had expired presented no arrears. This is a better performance than expected now, nearly eight months after payment deferrals and bodes well for future trends.
Slide five provides an overview of macroeconomic conditions. As I mentioned in my opening remarks, the economy recorded a strong rebound in the second quarter, with GDP growing by 12.9%. The strong consumption and business activity in the first five months of the year, as evident by the upward trend of several leading economic indicators, paved the way for a strong economic recovery in 2021. Another encouraging sign is the strong pickup in tourism activity starting from late June and continuing today. The July tourist arrivals recorded a significant year-on-year increase and reached 64% of 2019 levels.
A similar trend is expected for August and September, and in addition, we do expect that the tourist season is likely to be extended further into the year. The Ministry of Finance currently expects a GDP growth of around 5.5% for 2021, significantly higher than the 3.6% growth that was previously forecast, but recently escalated. Going forward, the launch of projects under the Recovery and Resilience Plan of up to EUR 1.2 billion over the next year is expected to further support domestic activity and employment through higher investment and to enhance growth potential via reforms. Finally, the EUR 1 billion governmental equity scheme recently approved by the European Commission is expected to further support the economic recovery. Slide six, new lending.
New lending remained strong in the second quarter and amounted to EUR 407 million, making a total of EUR 894 million of new loans in the first half of the year, up 30% year-on-year. The demand for housing loans remained strong in the context of the Government Interest Subsidy Scheme. We have already approved EUR 220 million loans under the scheme and will continue to have a strong pipeline of over EUR 100 million as of mid-August.
New lending to corporates amounted to EUR 152 million for the quarter, up 64% year-on-year as economic activity continues to improve. New lending, of course, continues to be carefully considered against robust assessment criteria, with a high-quality origination via prudent underwriting standards, and we make strong assessments of the repayment capability of our customers. Turning now to slides seven to 10, where we provide an update of the performance of loans that were under expired payment deferrals. The performance of the moratorium portfolio remains strong and significantly better than expected, nearly eight months after the deferral expiry. It bodes well for future trends.
As shown on slide, EUR 4.9 billion loans, that is more than 95% of the performing loans, are under expired moratorium, had installment due by mid-August. 96% of these performing loans present no arrears, of which around EUR 500 million have been restructured, mostly concentrated in the tourism sector. Restructurings have always been a very important part of how we manage credit risk. We offer targeted restructuring solutions following thorough assessment of repayment ability, aiming to alleviate pandemic-related short-term cash flow deficits. Our track record here is outstanding. Over recent years, more than 90% of corporate restructure loans presented no arrears, we expect that to be the case as we go forward.
Arrears remain low at 4%, and about 95% of these are in arrears of less than 30 days. It is important to note that the inflows from the moratorium portfolio in the first half of 2021 amounted to only EUR 16 million. Slide eight provides an overview of the non-legacy loans to private individuals. As of the end of June, non-legacy loans to private individuals amounted to EUR 4.2 billion, of which over 83% relates to housing loans. This segment is well collateralized, with two-thirds of customers having a loan-to-value ratio below 50%, and only 7% of the portfolio has an LTV more than 100%. Other loans to private individuals amounted to EUR 700 million as at the end of June, the majority of which is secured. We are very encouraged by the trends within our performing gross loans to private individuals under expired payment deferrals.
Nearly the entire book had installments due by mid-August, and 92% continue to present no arrears. Moving now to non-legacy business loans on slide nine. The non-legacy business loan book as of the end of June amounted to EUR 5.2 billion and is well diversified with high-quality collateral. Following the outbreak of COVID-19, the sector most adversely affected is tourism, and to a lesser extent, trade, transport, manufacturing, and construction. The portfolio has a low loans-to-value ratio, with almost three-quarters of the portfolio having a loan-to-value ratio of less than 80%. 95% of the performing business loans that were under expired moratorium had installment due by mid-August, and 99% presented no arrears, of which EUR 470 million have been restructured, relating mainly to tourism sector. Slide 10 provides an update of our exposure to the sectors that were mostly impacted by COVID-19: tourism and trade.
As at the end of June, our total exposure to tourism and trade amounted to EUR 1.14 billion and EUR 0.91 billion respectively. The utilized liquidity of the tourism sector remained broadly unchanged and amounted to EUR 0.34 billion at quarter-end. The majority of these loans entered the crisis with significant liquidity, which has been maintained. 96% of tourism loans are secured by cover. Hence, 93% of these loans have a loan-to-value ratio of below 80%. EUR 950 million of tourism related loans were under the expired payment deferral scheme, of which 94% have an installment due by mid-October.
Nearly the entire book presented no arrears, of which EUR 281 million have been distressed. Our exposure to trade as of the end of June amounted to EUR 910 million, of which EUR 320 million were under [inaudible] 94% of these have an installment due by mid-October, with 97% presented in our arrears, of which only EUR 10 million have been distressed. I will now hand over to Eliza to take you through the financial performance for the second quarter of the year.
Thank you. I'll start with slide 13 on the income statement. Net interest income amounted to EUR 76 million for the second quarter, flat Qo Q, of which EUR 8 million relates to NII from Helix 2, which will fall away next quarter. This Helix 2 lost income will be partially offset by the interest income of the deferred consideration. Moving now to NIM. During the second quarter, the margin was impacted by the following: the increase in the TLTRO borrowing by EUR 300 million to EUR 3 billion, the increase in customer deposits by EUR 470 million to EUR 16.8 billion, and the increase in wholesale funding by EUR 400 million. The percentage of average interest earning assets that are held in liquid form has increased to 50%, which has had a dilutive impact on the net interest margin, reducing it to 1.49 for the second quarter.
When adjusting for the impact of the EUR 3 billion TLTRO funding, the NIM amounts to 1.66% for the second quarter. Non-interest income for Q2 increased to EUR 76 million compared to EUR 60 million in the prior quarter. The increase is driven mainly by the higher net fees and commissions, higher net insurance income, and higher valuation gains on financial instruments, which are discussed further on slide 15. Total operating expenses increased to EUR 9 million for Q2, up 7% on a QoQ basis, mainly due to seasonally lower operating expenses in the previous quarter. Total loan credit losses, provisions, and impairments amounted to EUR 24 million in Q2, compared to EUR 26 million in Q1, and our cost of risk improved by 14 basis points in the quarter to 52 basis points.
Profit after tax and before non-recurring items was at EUR 34 million in the quarter and EUR 51 million for the six months. We achieved a return on tangible equity before non-recurring items of 8.1% for Q2 and 6.1% for the half year. Advisory and other organic restructuring costs amounted to EUR 15 million for Q2, including EUR 12 million relating to the tender offer for the existing Tier 2 capital notes. After recognizing exceptional costs of EUR 26 million relating to NPE, of which EUR 14 million related to the completion mechanics of Helix 2 and is expected to unwind over time to NII, the overall result was a loss after tax of EUR 7 million for Q2 and a profit after tax of EUR 1 million for the first six months of the year. Moving to the drivers of NIM on slide 14.
As I mentioned before, our NIM in the quarter decreased to 149 basis points and was negatively impacted by the increase in liquids. It's important to understand the impact of the TLTRO funding, of course, on NII and margin. In June, we increased our TLTRO III borrowings by EUR 300 million, bringing it to a total of EUR 3 billion. The bank has exceeded the benchmark net lending threshold and hence we recorded our NII benefit of EUR 7 million for the 12 months to June 2021 over the respective period in the income statement. The potential NII for the period after that, being June 2021 to June 2022, has now increased to EUR 15 million based on current ECB rates and provided that the bank meets the new net lending threshold.
The benefit of the TLTRO borrowing is reflected in the four basis point improvement of the yield of the liquids shown on the top right graph. Performing book yields reduced to 287 basis points QoQ, mainly due to a non-recurring cut of adjustment of seven basis points. Performing book yields remain under pressure, mainly due to the sustained low interest rate environment and competition pressure. We believe that the reference rate repricing is reaching its end, we are aiming for higher credit spreads in the post-COVID environment. Finally, the cost of funding could decrease as we price down the cost of deposits. Our funding cost is also positively impacted by the significantly lower coupon of the Tier 2 note issued in April and the MREL debt issuance in June, with the full impact as of Q3. Moving to slide 15 on non-interest income.
In the second quarter, non-interest income increased to EUR 76 million, up 26% QoQ, reflecting higher net fee and commission income, higher net insurance income, and higher revaluation gains on financial instruments. Net fee and commission income increased to EUR 45 million in the second quarter, up by 18% QoQ, mainly due to the extension of liquidity fees to a wider customer group, the introduction of a revised price list in February 2021, as well as higher volumes of transactions in 2Q. Fees in the quarter also include a EUR 2 million fee relating to a specific client transaction. Net fee and commission income for the first six months increased to EUR 24 million, up 18% year-on-year, includes an amount of EUR 5 million relating to NPE sales related servicing fees for a transitional period, currently expected to end in early fourth quarter.
Net insurance income increased to EUR 18 million, up by 36% on the previous quarter, driven by a EUR 2 million better quarterly performance of investments, notably lower claims and improved pricing in the life insurance business, as well as growth in premiums, lower claims and seasonality in the general business. I will provide more info about the insurance businesses in the following slide. Net FX and other income increased to EUR 9 million, up 40% QoQ, driven by higher valuation gains on financial instruments. REO gains increased to EUR 4 million in 2Q compared to EUR 2 million in the previous quarter. I remind you that REO sales remain volatile.
Moving now to insurance on slide 16. Net insurance income for our life business, Eurolife, amounted to EUR 18.3 million for the six months, compared to EUR 16.3 for the same period last year, contributing 14% to total non-interest income. Eurolife remains market leader in the life insurance business, with a market share of 25%. However, we believe it can do more. We are making good progress on the various initiatives we have undertaken, aiming to grow Eurolife's total regular income by over 13% in the medium term compared to 2019 levels. Moving now to the next insurance slide 17.
Net insurance income of our general business amounted to EUR 12.8 million for the six months and remained broadly flat year-on-year, contributing 9% to total non-interest income. General Insurance is also making good progress on the various initiatives, aiming to grow the gross written premium by more than 50% in the medium term. Looking now at expenses on slide 18. Total operating expenses in the second quarter were up 14% compared to Q1 at EUR 89 million, mainly reflecting seasonality in the previous quarter.
Despite the QoQ increase, our cost-to-income ratio for 2Q fell by two percentage points to 58%, reflecting a higher QoQ increase in total income compared to the QoQ increase in total operating expenses. Staff costs were EUR 51 million in the quarter, nearly flat QoQ, while operating expenses increased to EUR 38 million compared to EUR 32 million in Q1, again due to seasonally lower marketing, consultancy, and professional fees in the prior quarter. Note, however, that the cost-to-income ratio, adjusted for the lost income from Helix 2, was at 61% in the second quarter. As a reminder, our cost-to-income ratio is expected to be in the mid-60s in 2021, as revenues remain under pressure and operating expenses increase due to higher IT and digitalization costs. Beyond this year, however, we expect our cost income to decline through specific initiatives, including exit solutions to reduce IT, and optimization.
Over the medium term, we are expected to reduce the cost-to-income ratio we discussed, expected to reduce to mid-50s%. During the quarter, we renewed the collective agreement with the staff union for years 2021 and 2022, by which a new pay grading structure linked to the value of each position of employment is introduced, as well as a performance-related pay component as part of the annual salary increase. This renewal is expected to increase staff costs for 2021 and 2022 by 3% to 4% per annum. This is in fact in line with the impact of renewals in previous years. When taking into consideration the impact from the various efficiency initiatives, the group's medium-term guidance, which includes maintaining annual total operating expenses below EUR 350 million, remains unchanged. Turning to capital on slide 22.
Our CET1 ratio and Total Capital ratio as of June stood at 14.2% and 19.2%, respectively. During the second quarter, we have generated 50 basis points of organic capital to operating profit, around 20 basis points from the reduction of risk-weighted assets, and 10 basis points from Helix 2 completion. These were offset by [inaudible] and impairments of around 10 basis points, and the previously flagged [inaudible] of 40 basis points, and fee sales-related losses of another 10 basis points, and 30 basis points from other capital actions to cover the cost of the tender offer of the existing Tier 2 and the AT1 coupon payment. Our CET1 ratio on a fully loaded basis was at 12.9% as of June.
With regard to our MREL requirement, following the successful refinancing of our Tier 2 in April this year, we proceeded in June with the issuance of EUR 300 million of senior secured notes, thereby early achieving our January 2022 in-paying MREL requirement. Moving to asset quality, starting from slide 25. Following the completion of Helix 2 in June, we derecognized EUR 1.3 billion of loans from our balance sheet, reducing our NPE ratio by around 10 percentage points to 14.6%. On completion, we received EUR 165 million in cash, with the remaining amount of the total consideration of EUR 560 million being payable in four installments up to December 2025 and without any conditions attached. Overall, Helix 2 is capital accretive. The capital impact up to and including legal completion, including the impact in full year 2020, is a negative 48 basis points.
Upon the full payment of the deferred consideration and without accounting for any positive impact from the earn-out, the sale is expected to have a positive capital impact of 64 basis points on the group CET1 ratio on the basis of 30 June figures. Moving now to slide 26. During the second quarter, gross NPEs were reduced by EUR 1.4 billion to EUR 1.6 billion and EUR 0.6 billion on a net basis. The reduction was driven by the completion of Helix 2 relating to EUR 1.3 billion gross loans, with the remaining reduction of EUR 112 million achieved organically. Following the completion of Helix 2, the gross NPE ratio dropped to 14.6% and 6.4% on a net basis. The bank's NPE coverage ratio increased to 60% and when taking into account tangible collateral at fair value, NPEs are fully covered.
The coverage of risk-performing NPEs is relatively low at 19%, reflecting the lower risk associated with this type of NPE, where coverage of core NPEs increased to 66%. As a reminder, slide 28 gives a longer-term perspective on our NPE journey and targets. We have a clear path to reduce our NPE ratio to single digits by 2022 and to around 5% in the medium term. Our track record here has been excellent, reducing NPEs by almost 90% over the past six and a half years, the vast majority organically. We have a highly experienced and highly effective team in place, and we expect NPE reductions to continue in 2021 through both organic and inorganic actions. In fact, we continue to work with our advisors towards further accelerating the NPE reduction through additional NPE sales.
We expect to have a higher coverage of over 60% in the medium term, excluding end collateral. Moving to slide 29. As shown on the left graph, almost two-thirds of our loan book is classified in Stage 1 and 20% in Stage 2. The coverage ratio of these two stages was at 1.3% and 2.6% respectively, whilst the coverage of Stage 3 loans was maintained at 50% post completion of Helix. Panicos mentioned earlier we are pleased with the performance of the moratorium book, as only EUR 16 million has migrated to Stage 3 during this quarter. During the second quarter, there was an overall net transfer of EUR 23 million loans from Stage 2 to Stage 1, arising as follows. EUR 480 million from Stage 2 to Stage 1, of which EUR 190 million relates to moratorium loans.
Secondly, a transfer of EUR 457 million loans from Stage 1 to Stage 2, mainly due to forbearance and applied overlays. Now moving to slide 30 on cost of risk. The annualized cost of risk for the second quarter was further reduced to 52 basis points of gross loans and included a reversal of 25 basis points, driven mainly by the migration to Stage 1 of around EUR 300 million non-moratorium exposures that were previously in Stage 2 due to specific overlays previously applied. We are encouraged by the trend in the first six months of the year and remain committed to our indication that the expected cost of risk for 2021 will be significantly lower than the 2020 levels.
Finally, as a reminder, interest on net NPEs not received in cash is fully provided for, which in the second quarter represented 17 basis points out of the 52 basis points cost of risk. Let's have a look now at our asset disposal and gain revenue on slide 31. REO gains are recovering following the relaxation of restrictive measures. Asset disposals continue across all product classes. As shown on the slide, loan gains for the first six months were at EUR 85 million, compared to EUR 27 million in the same period last year. In addition, there is a strong sales pipeline of EUR 85 million at the end of the quarter, of which more than half relate to signed SPAs. Now moving to slide 32.
This illustrates our achievement and ongoing actions regarding the incorporation of ESG factors into our business. We are looking to be an organization with a clear strategy supported by effective corporate governance aligned with the ESG priorities. We have set up a dedicated executive committee, the Sustainability Committee, to oversee our ESG agenda, review the evolution of our ESG strategy, monitor the development and implementation of our ESG objectives, and embed our ESG priorities in our business partners. With that, I hand back to Panicos for his closing remarks.
Thank you, Eliza. Moving now to slides 34 and 35. Slide 34 provides a summary of our journey and our priorities going forward. I will not spend too much time on this since these priorities, of course, haven't changed, and I previously discussed this in detail. I am very encouraged that we are delivering on this commitment this year, and are well-positioned to deliver on them over the medium term. We remain absolutely committed to the strategic initiatives of completing de-risking, revenue enhancement, and cost optimization in order to deliver our return on tangible equity of around 7% in the medium term. This concludes our presentation, and we will now open the floor for your questions.
The first question comes from the line of Jonas with Axia Ventures. Please go ahead.
Yes. Hi, guys. Good afternoon, and thanks for the presentation. I have a few questions. The 1st one is on new lending volumes. I think the first half numbers are quite good and probably I would guess it's from the high end of the expectations. Just wondering now, what is the outlook for the second half? I see on slide six that you put some bars already for July. Is there any data you can share regarding August? Taking into account there's also tends to be a slower month. But, yeah, your outlook for the second half, also given in mind the GDP estimates that you mentioned in the presentation, that Ministry of Finance going for around 5.5, and looking at your assumptions for the plan, which are below 4%. Just wondering how that links to each other. The second is on the NPE side asset quality.
Just wondering what is the latest on your potential NPE trade. If you can expect something for 2021. If that's the case, I remember in the previous call, we discussed that your base case is always for at least a capital neutral transaction. If you can also confirm that. My third question is in relation to your cost of risk. I think, even if you adjust for the one-offs and for the reversals and COVID-19 charges, it looks like the underlying cost of risk is running below your expectation or even the market expectation. I take your comments that your 2021 cost of risk expectation is significantly lower than 2020. If we're indeed into a good trend here, are you ready to change your guidance lower?
Especially the medium-term guidance that now sits at 70-80, which seems to be out of sync with the last two quarters. Just finally, a question on capital. In the scenario that you go ahead with an NP transaction this year, or you can report a single-digit NP ratio by year-end or even perform a single-digit NP by year-end, this transaction, as we discussed before, it's done in a capital neutral way. Are you already considering any capital returns to shareholders, different distribution, also in light of the prohibition that you've been going through? If there's anything you can share on that, it'll be great. Thanks.
Okay. Thank you. Thank you, Jonas. I will take the questions on the new lending NPE and dividend distribution, then I will hand over to the Chief Risk Officer to answer the cost of risk-related questions. New lending volume, we are very glad of what we see. We are 30% up versus previous year. We previously guided, as you remember, of a materially better than 2020. This continues to be the case, and we do expect a good second half of the year on new lending. Because of the pipeline we have, especially on the retail side. New lending will be strong in 2021, and will be approaching the 2019 level. This is the outlook we have as of today. In terms of NPE, as you know, and as we already mentioned, we have started working on a new trade.
There is a good momentum on the new trade. Timing, of course, is still depending on market conditions, but our target is to complete the trades by year-end. This is the optimum. Seeing the very low new NPE flows because of the very good performance with the moratorium and the continued good performance on the organic NPL flows, we do feel comfortable with what we have guided to the market before. In terms of, as you rightly mentioned, we have done a number of trades in the past, and it has been proven to be broadly, at least capital neutral.
We don't have any reason to believe that the Helix 3, I would call it, will not be the same. Yes, you know that our overarching priority is to start delivering returns to our shareholders, and we expect that by reaching a single-digit NPL ratio and prove that we have a sustainable business model able to deliver organic profitability as you have seen in Q2, we do expect that it will be the right time to initiate discussions with the regulator for lifting the dividend prohibition. Demetris, if you want to answer and comment on the cost of risk question, please.
Yes. Thank you, Panicos. Well, Jonas, you're right, that the GDP macro data published is better than expected, I have to say that unemployment data are in line with our expectations, and our provision models are more sensitive to unemployment data. As we previously said, because of the moratorium, and the uncertainty on the line, we are cautious with our cost of risk guidance, and we will remain so, taking also into consideration that there will be the gradual lifting of the government support measures at some point in time.
Now, of course, we are encouraged by the strong performance eight months after the expiry of the moratorium, and we may achieve our cost of risk target earlier than originally expected. For now, what we will do is that we will confirm what we previously said, that 2021 cost of risk is expected to be significantly lower than financial year 2020, which stood at 120 basis points. We will keep you updated.
Thank you.
The next question comes from the line of Quinn Daragh with KBW. Please go ahead.
Hi, good afternoon. Thanks for taking my questions. First question on NPEs, maybe just if you could provide a little more color around the 4% of the payment deferrals that are in arrears and the 10% that are in restructuring. How do those amounts impact, or will impact NPE inflows over the coming quarters? Will it just be absorbed within kind of movements from Stage 1 to Stage 2? A second question on margins on the core loan book, so still seeing pressure there. I wonder just if you could just give an update on your outlook. Do you expect that pressure to continue? Will that be impacted as well by the loan guarantee program? Will that imply a lowering of margins in the future? If you could just give an update on that would be great. Thanks.
Okay. I will start with the NPE question. Then I'll hand over to Eliza for the NIM and margin question. I will just start by saying that the 4% in arrears or the 10% in restructures are not an indicator of future NPEs, and this has been proven to be the case in the first half of the year. We don't have any reason to believe that this will not be the case on the second half of the year. I'll just comment by saying that the 4% that is in arrears, almost 95% relates to early arrears. What do we mean early arrears? It's arrears less than 30 days. So these are arrears that actually are not sticky, and they are getting paid a few days after their installment due date. On the restructuring, Daragh, you know that this bank has been doing restructures for years now.
By having 10% restructuring on the whole book of the moratorium, we consider this to be a huge success. For those of you that follow our story, you should have noticed that more than 90% of the restructures until this year have been proven to be very successful, and are not in arrears as of today. When we do restructures, and the restructures refer to the tourist sector, we offer solutions, we design flexible installment and repayment schedules, and on the assumption that the industry will recover until 2024. If and when this is recovering quicker, then this will be captured through cash repayment. We are comfortable on the restructuring part and on the arrears part because it has been there for eight months, it has not resulted in any new NPE inflows. I will hand over to Eliza to comment on the margin question.
Thank you. On margins, we did see a bit more pressure this quarter. However, the underlying pressure or the reduction in performing loans, including effectively the driver, did include the seven basis points catch-up, which is non-recurring. The underlying through yields on loans is at 294 basis points, which is a level we expect to be continuing into the next quarter. We did suffer in Q1 and Q2 from the continuing drop of the Euribor and the reference rate of a few basis points, which is what's coming through. We also had a negative impact coming from the mixed effect of housing loans, on Green housing loans, which you might remember benefit from a government subsidy on the interest for the first four years. The combination of this is what led us to the 2.94 adjusted yield. We believe that this can be run rate.
This will be run rate based on what we're currently seeing in terms of forward rates. As regards the guarantee, the law has not yet been enacted. It's come through from the European Commission. It's not yet been enacted. Yes, there are pricing caps in the legislation, which are still not yet finalized. However, we don't believe that this will materially impact the yields and the NIM, given the short amount of time that we have in our disposal to actually give out this loan. It's already end of August or 1st of September today. We've only got four months to go. We don't expect a material impact coming from that.
Perfect. Thanks. Sorry, just on the NPEs. The guidance is still for organic net reduction in NPEs in 2021?
Yes. For a net organic reduction in NPEs. You've already seen H1 and H2 being net negative, mean net reduction of NPEs.
I mean, the EUR 170 million is net organic reduction.
Okay.
Yeah.
Okay.
The next question comes from the line of Alexei Lougovtsov with Bank of America. Please go ahead.
Good morning. Thank you very much for the call. Thank you for your very good performance this quarter. Times are challenging. You still managed to deliver profit. My question is on the macro side. You cited some very interesting numbers. One number is about building permits, 35% year-on-year and above 2019. I was curious what's going on in Cyprus, why building activity is so strong? Another question is about tourism arrivals, 54%. Honestly, sounds very low. Of course, it has nothing to do with Bank of Cyprus. What's happening on the macro side? Is the government too restrictive with admitting tourists?
Honestly, I expected that Cyprus would be performing much stronger than other Mediterranean countries because it allows the tourists not only from the EU, but also from Eastern Europe, from Russia. Historically, you've been receiving a lot of tourists from Britain and Russia, the two main sources of tourists. We see in other countries which have independent of the Schengen area, places like Croatia, very strong arrivals. What's going on in Cyprus? Why arrivals are so low in 2021?
I will start by saying that based on our, let's say, as I said before, we are conservative on tourist predictions, we expect to reach the 2019 level in maybe 2023 and 2024. I don't consider the 5th July number, 54%, it comes with no contribution from U.K. because as you know, the lifting from U.K. happened late July. This was mainly tourist arrival, coming from Eastern Europe, mainly Russia, and from continental Europe. As I said, this is something that the tourist season certainly will continue. We do expect this performance and slightly better to continue. I will disagree with you in the sense that this is a poor performance. I do consider this to be a very decent performance, given that this is the first year of gradual recovery of tourism sector.
Our initial estimations were actually worse than the actual numbers that we see today. On the building permits, there has been a building activity in Cyprus. Okay, the 35% up year-over-year, it's sometimes closely related also with the low number of building permits that were issued last year in 2020. There is a huge demand from locals on real estate investment. This is a kind of reflection of the ample liquidity that we are seeing in the market, and especially coming from locals in Cyprus. All in all, the macros, including tourists, in my opinion, point to the right direction of economic recovery of the economy of the island, and better than ourselves and the minister unexpectedly in our previous call, in May.
I see. A quick follow-up. You mentioned arrivals from Britain were halted until July. Was it because of restrictions on the Cyprus side or because of?
No
British side?
We don't have any restrictions in Cyprus. Those that have been vaccinated, two vaccinated, can enter the country. The restrictions were mostly related from Britain. Those that what happened there, I think in late July, there was a kind of lifting of the restriction, meaning that those that were visiting countries like Cyprus, which is on the amber list of Britain.
Yeah
they can go now back to U.K. without the need of self-quarantine for a week or so. This was the reason of, let's say, low numbers of British tourists in July. You have started seeing the numbers going up in August and September.
Okay. Thank you very much.
Sorry, just to add, if I may also, you shouldn't forget that there was a very low percentage of Cypriots traveling abroad. A lot of, when you look at the local tourists, for example, in the summer months, it was higher than the equivalent of the 54% because of the local tourist effectively, which partly compensated for the lost foreign revenue and has assisted GDP, and we saw this pattern last year as well.
If you combine this with the performance of the tourist portfolio, we present no arrears and they maintain EUR 300 million of unutilized liquidity, and only 30% of this have been go through a different repayment schedule as from the pre-pandemic trend indicates that this sector is well-positioned to overcome the pandemic-related shocks. I think it's a portfolio that we're managing at the Bank of Cyprus.
Okay, fantastic. Thank you very much for this.
Thank you.
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 and for taking the time to listen to our presentation and making questions. Myself and the team will be more than happy to take any questions offline and arrange one-to-one calls with any one of you. Thank you very much. Have a nice day.