Ladies and gentlemen, thank you for standing by. I'm Myrto, your conference 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 nine months ended 30th September, 2020. All participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by 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 of Finance, and Mr. Demetris Demetriou, Chief Risk Officer. Mr. Nicolaou, you may now proceed.
Thank you, Myrto. Good morning, everyone. Thank you for joining us. As well as our regular quarterly results, importantly, today, we are also updating our medium-term strategy, and the majority of our presentation will focus on that. As a result, our Executive Director of Finance, Mrs. Eliza Livadiotou, will give a briefer than normal update on our nine-month financial results.
After which, I will update you on the medium-term strategy and targets. These are comments on the results will be briefer than normal, while disclosures are unchanged, and you will find all the usual information in our presentation pack and associated material. I will now hand over to Eliza to take you through our performance for the first three months of 2020. Eliza?
Thank you, Panicos. Good morning from me, too. I'll start from page five, slide five, which summarizes the key highlights for the quarter. I will briefly go over these. Signs of economic recovery to pre-pandemic levels marked the third quarter of the year, with the Cypriot economy showing more resilience than initially anticipated, demonstrating its open, small, and flexible characteristics.
As we all know, a second wave of the pandemic is impacting all European countries, including Cyprus, resulting in partial lockdowns, which is likely to cause some loss of momentum in economic recovery in the fourth quarter. During the third quarter, we continued to support the recovery of the Cypriot economy and extended a further EUR 288 million in new loans, up by 20% compared to the previous quarter, as new demand increased post-lockdown, driven by retail housing.
Overall, we have granted EUR 1 billion of new lending in the first nine months of the year. At the same time, we've continued to monitor the credit quality of loans under moratorium. In the third quarter, we have generated total income of EUR 137 million and a positive operating result of EUR 44 million. Cost of risk was maintained at below 100 basis points for Q3.
Overall, the third quarter was profitable, and the profit after tax was at EUR 4 million. In the nine months of the year, we reduced our total operating expenses by around EUR 40 million or 13% on a yearly basis, reflecting our ongoing efforts to contain costs. The 4% increase from the Q2 levels reflects the lower cost base in the second quarter as a result of the restrictive measures for COVID-19. The bank's capital position remains good and comfortably in excess of our regulatory requirements.
As at 30th September, our capital ratios on a transitional basis were 18.2% for the total capital ratio and 14.7% for CET1, both pro forma for Helix 2. Deposits remained broadly flat in the quarter at EUR 16.4 billion, and we continue to operate with significant liquidity surplus of EUR 4.1 billion. During the third quarter of the year, we maintained our focus on dealing with legacy issues.
The pace of organic NPE reduction returned to pre-lockdown levels as we reduced NPEs by a further EUR 230 million. Together with the phase of loans achieved earlier this year, that is Helix 2 and Velocity 2, we have substantially reduced NPEs by EUR 1.5 billion in the first nine months. Overall, we have now reduced the stock of delinquent loans to EUR 2.4 billion and our NPE ratio to 21%, both on a pro forma basis.
NPE coverage was maintained at 59%, reducing the residual risk on our balance sheet to EUR 1 billion. As Panicos mentioned, today, we will update you on our medium-term strategy and targets. In summary, we have a clear path to reduce the NPE ratio to single-digit by end of 2022 and to 5% in the medium term. We will return to revenue growth in a more capital-efficient way, capitalizing on our strong market position.
We are planning to improve our operating efficiency through digitization and automation, navigating a clear path to sustainable profitability, delivering shareholder returns. We are committed to generating a return on tangible equity of around 7% in the medium term. Now focusing on the macro conditions, I'll take you to slide six.
The pace of economic contraction has slowed considerably post-lockdown to a -4.4% in the third quarter, compared to a -12.3% in the previous quarter, proving that the Cypriot economy is more resilient than anticipated earlier in the year. The comprehensive measures introduced by the Cypriot government and the EU have played a vital role in mitigating the impact of the pandemic.
As the number of new COVID-19 cases has increased in recent weeks and local restrictions have been re-imposed to contain the spread. This is likely to lead to some loss of momentum in economic recovery in Q4. The contraction in Cyprus is now expected to be less severe than in the Euro area, which is currently expected to be at -7.8%. Economic activity is expected to rebound during 2021, and GDP growth is estimated to range between 3.7% and 4.7%.
Unemployment, which stood at 7.4% in Q3, was contained by the government job protection schemes and business subsidies. As expected, the international tourism arrivals over December were also impacted by the lockdown. Turning to slide nine, here we provide an update on loan moratorium. As at 30th September, EUR 5.9 billion worth of gross loans were under the moratorium, out of which around EUR 5.6 billion are performing loans.
As you probably know, the moratorium launched in March 2020 was very generous, and for many customers was considered as a benefit with no cost. Business loans under moratorium amounted to EUR 3.8 billion or 76% of the non-legacy loan book, and private individual loans amounted to EUR 2.1 billion or 52% of the non-legacy book. As you know, the sectors mostly impacted by COVID are tourism and trade. Our total exposure to these sectors was at EUR 1.1 billion and EUR 1 billion respectively.
Both sectors continue to operate with considerable surplus liquidity that has increased in the third quarter and amounted to EUR 340 million and EUR 930 million respectively. More information about the sectors is provided on slide 57. As shown on the bottom graph, around 31% of loans to private individuals under moratorium have paid at least one installment as of October, giving us confidence that the generous moratorium hasn't negatively impacted the payment culture.
We note that the payment of installments during 2020 are accounted for as prepayments towards 2021 installments. In May, we have initiated a review campaign of all loans under moratorium, and by mid-November, approximately 80% of the reviews had been completed with no significant change in the unlikely to pay status.
However, given the increase in the number of COVID-19 cases in the last few weeks, along with the stricter measures being imposed, the monitoring and review of the credit quality of loans under moratorium remains ongoing and dynamic. Finally, we have now in place prepackaged solutions for the customers that may continue to face difficulties after the end of the moratorium. Now let's move to the income statement on slide 12.
Net interest income remained broadly flat on the prior quarter at EUR 82 million. Margins decreased to 1.79%, reflecting the increase in liquid assets resulting from the EUR 1 billion participation in the TLTRO in June. Non-interest income reduced to EUR 55 million, negatively impacted by lower insurance income and revaluation loss on financial instruments, partly offset by higher net gain commission income as the transactional volumes gradually recover post-lockdown.
Total expenses were at EUR 273 million for the nine months, down 11% year-on-year, reflecting our ongoing efforts to maintain costs. Total expenses for Q3 were at EUR 93 million, up 7% quarter-on-quarter , were in line with our Q1 costs. The quarter-on-quarter increase reflects the second semester contribution to the Deposit Guarantee Fund of EUR 3 million and the normalization of staff costs post-lockdown.
Total loan credit losses, provisions, and impairments were at EUR 38 million for the quarter compared to EUR 50 million in Q2, driven mainly by lower impairment on properties. Loan credit losses for Q3 were at EUR 31 million, reflecting a cost of risk of 97 basis points. The overall result was a profit after tax of EUR 4 million for the quarter, a loss after tax of EUR 122 million for the nine months. Now, let's also turn to slide 18.
During the third quarter, we generated around 40 basis points of organic capital through operating profits and around 10 basis points from the decrease of risk-weighted assets. The recent amendments in capital regulations resulted in a benefit of around 10 basis points in the third quarter, and a further 10 basis points benefit is expected to be recognized in the fourth quarter of the year.
These were offset by loan credit losses and impairment of around 30 basis points. That completes my brief review on nine months performance, and as Panicos said, all our usual disclosures are there, and we would be happy to deal with any questions, either at the end of this call or afterwards on separate calls. With that, I hand back to Panicos Nicolaou on medium-term strategy and targets.
Thank you, Eliza. I will today outline the position of Bank of Cyprus, the progress that we have made, and what we think you can expect from us over the next few years. I will start with some key remarks on slide 28. The bank operates in a small, open, and flexible economy, which has proven in the past that we can quickly recover from economic crisis. We are the leading financial hub in Cyprus with strong franchise and customer base.
Around 3/4 of the population are customers of the bank. We have a leading market position in both loans and deposits with market shares of 42% and 35% respectively as at the end of September 2020. Our team, led by proactive and strategically-minded board, has an excellent track record and is fully committed to deliver shareholder value.
Our strategic priorities are clear: complete the restructuring and de-risking of the bank as soon as possible, set the bank on the path for sustainable profitability, and of course, deliver on shareholder value. Slide 29 provides an overview of the journey the bank has been on the past few years and where we want to be in the medium term. We have been through a period of considerable change. We are now laying the foundations for delivering greater shareholder value.
Today, our near-term priorities include the completion of our balance sheet de-risking, as before, through organic NP reduction and potential disposal, as well as ensuring our cost base remains appropriate while further investing in our digital capabilities. Over the middle term, our priorities will evolve. We will be increasingly focused on capitalizing on our strong market position across both banking and financial service products to enhance our revenue.
At the same time, we are very focused on improving our operating efficiency and driving down costs. Combined with the expected normalization of the cost of risk, we have a clear path to generating sustainable profitability. Slides 30 to 33 contain information that you already know. In order to address people that look at the bank for the first time, I will not spend much time on this.
Slide 30, the Cypriot economy has outperformed the European Union over the past five years, and growing market confidence can be seen in the sharp fall in sovereign spreads. Despite the negative impact from the pandemic, Cyprus maintains an investment-grade rating. Turning now to slide 31 very briefly. Our market presence in Cyprus remains very strong with large market shares across all key products. Moving to slide 32. As noted, we have been on a transformative journey since 2014.
Today, we have a smaller, healthier balance sheet. We are well-funded and enjoy capitalization considerably in excess of regulatory minimums. As shown on slide 33, the balance sheet de-risk has come at the expense of operating performance. Our loan book and revenues are down sharply over the past few years, and although we have managed to reduce our cost base to some extent, it hasn't been enough to protect profit.
I will now outline how we expect this trend to reverse direction over the next few years. Moving to slide 34, here's the starting point of our middle-term strategy. We are the leading bank in Cyprus with 655,000 private individual customers, with 50% market share in households and corporate loans. We are a diversified financial group with profitable subsidiaries in affiliated business, with high market shares in operations like insurance and credit card services.
We are the leading digital bank in Cyprus, with 285,000 users of internet and mobile banking, and the widest range of Internet and mobile functionalities. Finally, we have an excellent track record on delivering against strategic objectives. As a reminder, we have reduced our NPE by more than 84% in the last six years. Moving now to slide 35. We have four key strategic pillars, all important building blocks for helping us deliver shareholder value.
Firstly, we will complete our balance sheet de-risk. Secondly, we will return to revenue growth. That growth will be in a more capital-efficient way. Specifically, we will aim to enhance revenue generation via growth in less capital-intensive banking and financial services businesses. Thirdly, we are planning to improve our operating efficiency through digitization and automation.
Finally, we are building a forward-looking organization with a clear strategy supported by effective corporate governance aligned with ESG priorities. Starting with de-risking on slide 36. We have a clear path to reduce NPE ratio to single digits by 2022, to 5% over the middle term. Our track record here has been excellent, achieving an 84% reduction over the past six years, the vast majority organically.
We have a highly experienced and highly effective team in place. We expect NPE reduction to continue in 2021 through both organic and inorganic actions. We expect to have a high coverage of over 50% in the middle term, excluding any collateral. Moving now to revenue growth, I will start with net interest income on slide 37.
The net interest income challenges are clear to us, and we have a plan of action in place to mitigate the pressure we face. Firstly, over the middle term, the performing book is expected to grow by 10% and broadly offset the forgone net interest income from the decline in legacy book as we successfully exit NP. We will address challenges from low rates and surplus liquidity. We will intensify our efforts to price our way or price correctly deposits through liquidity fees and improve credit spreads.
Finally, the funding cost for MREL compliance is expected to reduce as we successfully complete de-risking. We are looking to build a bank with better quality net interest income, and overall, we expect revenues over total assets to improve from 260 basis points to 280 basis points over the medium term. Turning now to slide 38.
Our fee and commission income is expected to grow, driven by cross-selling and pricing initiatives. I realize that we may well have heard before banks promising to improve cross-selling metrics. Let me explain why we are confident that Bank of Cyprus can deliver. Firstly, as you know, we have spent the past half decade focusing on de-risking. Understandably, improving revenues from existing customers, which most of them were NPEs, was not a major strategic focus, until now.
Secondly, we have, for the first time, the systems in place to deliver on our plans. In particular, having made, and continuing to make considerable investment in our digital infrastructure and analytical capabilities. We have some clear practical measures to help us deliver. For example, starting early next year, we will extend the liquidity fees to a wider group of customers and introduce a new price lift.
Both actions are expected to increase our fees. We will also aim to increase the average product holding through cross-selling to the under-penetrated customer base. More widely, we are working to generate new revenue sources through the introduction of a digital economy platform, leveraging the bank's market position, knowledge, and digital infrastructure.
These initiatives are expected to improve our fee and commission income over total assets by 30 basis points in the medium term, and revenues per RWA are expected to increase to around 6% from near at 5% currently, as many of the initiatives improve revenues in a more capital efficient way. Turning now to slides 39 and 40. Slide 39. One of the important sources of increased revenues will come from our insurance businesses. In the past, we haven't spoken about them in much detail.
Over the last few years, our life and non-life insurance subsidiaries have delivered sustainable healthy profitability. Our life insurance business operating under the Eurolife brand has a leading market share in Cyprus. We believe it can be even more. We are aiming to grow total regular income by over 35% in the medium term by expanding its products and customer base and further leveraging on the bank's strong franchise.
On slide 40, our general insurance business, known as General Insurance of Cyprus, similarly, has a strong market position and has delivered rising profits. Here, we are making some important improvements. We are revamping our bank insurance channel. We are extracting more synergies with our life insurance selling network, and we are expecting to enhance digital sales.
Overall, we expect our market share in general insurance to rise considerably over the next few years, and our gross written premiums to grow by more than 50% in the medium term. Let's now move to slide 41. A significant enabler for our revenue growth strategy is our digital transformation program, which continues to progress well. We are aiming to leverage on our leading digital capabilities to serve customers and the future of the economy, creating shareholder value.
We have around 285,000 active users of Internet and mobile banking, and currently, 74% of our customers are digitally engaged, and 84% of the total transactions are performed through digital channels. These statistics will allow us to further improve our operating efficiency through further automation and branch rationalization. Of course, will support our efforts to improve cross-selling through modeling customer needs and offering tailored products and services. Turning to slide 42.
We are revamping our operating model to further improve efficiency through specific initiatives, including exit solutions to release full-time employees and further branch footprint rationalization. These initiatives are expected to deliver a reduction of operating expenses by approximately 10% over the medium term. In addition, restructuring expenses are expected to reduce to single digits following the successful completion of our balance sheet de-risking.
Our cost-to-income ratio is expected to rise in the near term as revenues remain under near-term pressure and operating expenses increase due to higher IT and digitalization investment costs. However, we then expect our cost-to-income to decline, and over the medium term, it is expected to reduce to mid-50s. Let's move on slide 43 and slide 44. Of course, the dividend for our shareholders is important, but it's only one part of our responsibility to a wider group of stakeholders.
We are working to build a forward-looking organization with a clear strategy supported by effective corporate governance aligned with ESG priorities. We will continue to evolve our ESG strategy and embed ESG priorities in our business strategy. You can see on slide 44 some of the areas where we're already delivering. Turning now to capital, slide number 45.
Maintaining a strong capital base has been a key tenet over the past few years, and that remains a non-negotiable for the bank going forward. Our business plan is based on us maintaining a CET1 of at least 13% over the entire period of our plan. Our capital will be supported by organic capital generation, supported by focus on less capital-intensive business, the further reduction of high risk-weighted assets, and the Project Helix 2 risk-weighted asset benefit upon full repayment of the deferred consideration.
At the same time, factors that could potentially impact our capital ratios include the IFRS 9 phasing in, and any potential regulatory impacts and one-off cost optimization charges. As a reminder, as of 30 September, 2020, our CET1 ratio fully loaded pro forma for Helix 2 stood at 12.9%. Until the completion of the de-risking and the restructuring of the business, there may be volatility in our capital ratios due to timing of potential future impacts from regulatory changes and run-off restructuring costs.
Slide 46. Bringing all of this together, we are pleased to share with you our medium-term financial targets. We are in a strong position to take advantage of our many strengths over the next few years. However, we, of course, recognize that there are near-term challenges posed by COVID-19.
Like all other banks, we have to manage through a hostile interest rate environment and a constantly changing regulatory environment. We recognize that our shareholders have suffered over the past few years as a result of the considerable cost and effort necessary to delever the bank. Now is the time for us to raise our sights, and therefore we felt it was very important to introduce a return on tangible equity target for the first time.
The board and the executive management team are committed to generating return on tangible equity of around 7% over the medium term. The building blocks behind that include a commitment to reduce total operating expenses and to completing de-risking of the business, demonstrated with an NPE ratio into single digits by the end of 2022, and to around 5% over the medium term.
We expect our normalized cost of risk to reduce between 70 and 80 basis points appropriate for a bank with our mix of businesses. As I mentioned earlier, maintaining a strong capital base has been a key tenet for the past few years, and that remains a non-negotiable for the bank going forward. Our business plan is based on us maintaining a CET1 ratio of at least 13% over the entire period of our plan.
Turning now to the last slide 47. This is a new phase for Bank of Cyprus, a bank that will complete the de-risking, become smaller and safer, but also a bank that will return to revenue growth as we take advantage of our market-leading position in most of our product areas. We have relationships with three-quarters of the Cyprus population. We have strong customer trust. We are developing powerful digital knowledge and infrastructure.
We have a clear strategy in place to complete the turnaround and set the bank on a path for profitability and delivering value for our shareholders. This concludes our presentation, and we now open the floor for your questions. Thank you very much.
Thank you.
We look forward to hear you.
Thank you. Ladies and gentlemen, at this time, we'll begin the question and answer session. If you wish to ask a question, you may press star followed by one on you telephone. If you wish to remove your self from the question the queue, then you may press star and two. Please use your handset when asking questions for better quality. Who has question may press star and one at this time. One moment for the first question please. The first question comes from the line of Jonas Floriani with Axia Ventures. Please go ahead.
Good morning, team. Thanks for the presentation and thanks for the detail outlook and the targets. My first question is on asset quality and expectation for 2021. I remember you had some comments that out of your exposures on the moratoria, around EUR 1 billion or so would probably come into NPE flows in 2021. Do you still see that as a reasonable number? I also remember that your idea was to offset those inflows with organic outflows to the same amount.
Pretty much keeping up with the EUR 200 million, EUR 250 million per quarter, and then adding to that a transaction as being the main factor of the increase in NPE stock. My second question is on your costs and your cost outlook operating expenses. I was just wondering if there's not more room for further reduction, especially when you talk about your medium-term target.
I acknowledge that you refer to less than EUR 350 million. This could be many, many numbers. The run rate of 2020 is already around that level, right, if you annualize it. If you can just explain a bit more the rationale behind your cost-cutting, and also how that links to your cost income ratio, because at the same time as you're expecting to grow revenues, your cost income ratio doesn't necessarily, at mid-50s, doesn't necessarily strike as a very, let's say, outstanding versus European average. Again, linking to costs, is there any figure you can share in terms of estimated IT or digital investments that you're probably also going to incur in the future. I'll leave it at that. Thanks. Bye.
Okay. Thank you, Jonas. I will take the questions. Starting from asset quality in 2021, what we have disclosed, and this is still in place, is that any new NP inflows will be broadly offset by the organic delivery. We do project to have a reduction around our NP ratio in 2021 through non-organic actions. 2021 will continue to be a year of reduction of our NP ratios.
The big question, and it's about moratorium, because this is the main uncertainty for next year. As you all know, we have a moratorium that expires in December. This is an area of focus for us. We have some cautiously, I would say, positive signs. We have one third of our retail clients start paying their loans. This is important. In business, as Eliza mentioned, we have two major sectors, tourism and trade.
Generally increasing their liquidity, including cut of costs, at the pre-COVID levels, this is something that provides some comfort for next year. We have completed 80% of reviews of our clients in moratorium without triggering UTP. Of course, we all need to be very cautious because on the one hand, we have the risk that increases in COVID-19, on the other hand, we do not know yet the timing and the effect of the vaccine to the health of the economy and also to the people.
We are ready as a bank. We have specific products for our telecompany clients that we are viable, and we help them go through the short-term financial difficulties. Overall, we expect a 2021 reduction in our NPs. Going to the cost question, Jonas.
Okay, I would like to remind you all that cost has been a priority for me from the time I took over. In the first year, 2020, we have achieved great results. This will remain a priority. I do not focus on specific actual cost or income numbers, but I mostly focus on the cost-income ratio, which, as you said, is mid-50s. For this bank, as a first step, I consider this to be positive.
Of course, as you mentioned, as you replied, during this medium term period, we need to continue investing in our IT expenses, which are material, without being able to monetize on all these initiatives within this period of time. This is important for everyone to understand, and this is something that affects the tangible equity as well.
The investment in IT and some other corporate actions are not reflected fully on this medium-term period. This is something that will keep delivering to the Bank ongoing in the years after the outlook. Okay. I don't know, Eliza, anyone from the team, Eliza, you want to add anything on this?
No.
We can go to the next question.
Yeah.
Can I just add a follow-up there back on the asset quality. In terms of your expectation for trading 2021, is there any progress you can share on that? In terms of perimeter, in terms of dates, is this the first half or second half event, something like that?
Jonas, this is something that we are currently looking at it. It depends. We are ready. We are progressing with, let's say, we're finalizing the perimeter. They all depend on market conditions and market readiness, and this is something we are constantly reviewing, so I don't have anything specific to share with you right now.
Clear. Thank you.
The next question comes from the line of Alexandros Boulougouris of Wood & Company. Please go ahead.
Yes, good morning. Thank you for the update on the strategy and the results. Maybe if you could provide a bit more clarity regarding the REMU business unit on the strategy and what is your plan to reduce the REMU portfolio. Also regarding the on-site inspection and the 50 basis points that you mentioned in the presentation as a potential charge in the future. Is there any more clarity on the timing of this? That is my first question.
My second question is regarding your assumptions in the business plan. You mentioned that you assume a further inorganic, an asset sale, an NPL trade, and a new VRS. Could we have a bit more clarity on the timing of this? Do you expect this to take place in 2021 so we can include them in our numbers for 2022? It could be something a bit more longer term?
My third question is regarding cost of risk. You did mention the medium-term target of 70, 80 basis points. Thanks for this. This is in line with what we see now in the numbers. Do we have any more visibility on 2021 or where the cost of risk could stand? Thank you.
Thank you, Alexandros. Okay. For the REMU, I will pass the question to Eliza Livadiotou. As you know, the REMU, it's another force for the Bank, has been considerably successful in selling real estate assets over the last few years. We will continue to be priority, or we continue to see the stock reducing, because de-risking means that we will not onboard any more real estate on our balances. Continue selling will only be a issue.
Yes. Actually, as you may remember, we were actually expecting this year to be the first year when stock would come down post Project Helix and Project Helix 2. Quickly later, as all those sales continue at pace, then the larger sales, the larger transactions, maybe that we got impacted by both practical considerations, but also macro conditions. As from next year, from 2021, we expect to have the stock of properties to start being materially reduced, and we expect that to go down to expected levels by the end of.
Okay.
On the subject, I forgot to mention on the OSI inspection , there's no firm decision on the timing. We have not yet been in discussions with the SSM on this. It remains a pending point. Just don't forget, this point impact will be used as we sell properties in this universe impacted by inaudible. We are already starting to focus on this population of properties.
Some of them, though, will go away. We plan to be selling them more in the medium term because they are larger. Some of the smaller ones, we may be able to successfully sell them relatively quickly. The other thing to just remind everyone is that our real estate stock is carried at 80% of open market value on the balance sheet. We have an inherent, an inbuilt 20% buffer on the open market values.
Okay. Thank you, Eliza. On the NP trade, Alexandros, if we move to slide 56, you're going to see that during the short term, one of the drivers of NP reduction is inorganic, and this is by that we mean trade. The trade in our immediate priority. It's an important key driver for the reduction of the NP. Regarding the question about the exit plan for the employees, this is, yes, part of our medium-term strategy, the timing yet has not been confirmed and decided on this. On the cost of risk question, I will ask Demetris Demetriou , our Chief Risk Officer, to tackle the question. Demetris?
Yes. Thank you, Panicos. Well, during the outlook period, we expect a gradual and steady decline in our cost of risk towards our medium-term target. As you very well understand, currently, there is the uncertainty of the resurgence of COVID-19, and we're working very hard to minimize the influence and offer solutions. Within financial year, you could see volatility, which will depend on time of any NP sale.
It is reasonable to assume that for 2021, it will be higher than the medium-term target, but not significantly higher, as it will be gradually gravitating towards the medium-term guidance. The main message we want to give out is that we are prudent, we will continue to be prudent, and despite the better macros, we are adding to provisions. We are going to be cautious about the impact of the second wave.
Thank you. Appreciate it.
Thank you.
The next question comes from the line of Corinne Cunningham with Autonomous. Please go ahead.
Good morning. Thanks very much for the call. Question on moratoria, please. You said that you've reviewed 80% of the book, and I didn't quite understand the residual 20%. Is that you haven't reviewed them or that they are not performing? Then if you could just give us a bit more color about the transition. Are all of the moratoria lifted in December, or is there something that takes over when that happens? Thank you.
Thank you, Corinne. Starting with the last one, all moratoria list end of December. That's the result. The reason that we review 80% is that because of the remaining 20% is under review. The target was to conclude 100% by mid-December.
As we are moving forward, we want to have clarity on the whole book of the moratoria, of course, excluding those that are already NP, because part of the moratoria, around EUR 300 million, are already in the NP status. Very soon we're going to have more view on the 100% of those in the moratorium. We started, as you know, with the high risk one. It's something that we constantly review.
If I may just clarify the EUR 300 million according to bank convention, were NPEs at the beginning of the moratorium. These are not NPEs that were created during this period. They were NPEs at the beginning.
This is what we call non-current NPE because the only criteria of the moratorium was not to be in arrears, being current. We have a number of NPE clients that are current, and were current before COVID. That's why they were eligible for the moratorium as well.
Thank you. No moratoria going beyond December?
At least so far, Corinne, there is no indication that this will continue now.
Thank you very much.
The next question comes from the line of Alexei Lukovtsov with Bank of America Merrill Lynch. Please go ahead.
Hello. Thank you very much for the call. I have a few different question. Could you please comment on your funding plans for the next couple of years, as well as MREL requirement?
Okay, Alexei. Eliza Livadiotou, this is your area.
Okay. There's two components to this question, MREL and our Tier 2. Our Tier 2 bond, the first call option is in January 2022, and we will look to refinance that at some point between now and then or on the call option date. It is something that's on the cards and that's being planned. Of course, always subject to market conditions.
These days, this is an important disclaimer. On MREL, we currently have a binding MREL target, which is for December 2025, and we have no interim target, binding interim target. However, BRRD II comes into effect at the coming next round of MREL reset. This is an annual process that a Single Resolution Board goes through. We are working with them.
We're in close contact with them to understand how and what they are planning vis-a-vis interim targets and whether there are interim targets that will be imposed on banks and how they will be impacting us. Depending on how this goes, in many cases, we intend to start MREL issuance in the next two years at the latest. It may be in 2021 or it may be later, depending on where we get to with the targets.
Yes, there will be MREL issuance, but the exact timing depends on where we are on the compliance path. As I'm sure it's obvious for us, the later the better, because as NPEs are reduced and as tax accelerations are reduced, and as we move away from the moratorium and the COVID times, we expect that funding costs will be reduced.
Okay. The 2025 target for MREL, please?
Yes.
Yes, it's December 2025. It's in the financial statement. I can give you the %.
Okay. Thank you very much. The AT1, the bucket is full?
It's on slide 18, the deck. AT1 is outside our radar for the moment. It was issued in August 2018. Actually, it was issued in January, literally. December 18th. Sorry, I'm trying to remember back. It's not for now. It's not in the next 24 months.
Okay.
Yeah.
Okay. Thank you very much.
Thanks, Alexei.
As a reminder, if you'd like to ask a question, you may press star then one on your telephone. As a final reminder, for any further questions, please press star and one at this time. Thank you. We have a question from the line of Nick Linnane with Sefton. Please go ahead.
Hi. Just going back to the moratoria loans and the review that you've done again, do I understand correctly, you're saying despite the very large amount of loans in moratoria, you think based on the review so far, there's no significant movement of loans into NPE status, or you think there is no significant movement of loans likely to happen into NPE status of loans that were not in that status before? Is that a correct understanding of what you're saying?
This is broadly correct understanding, but I would like our Chief Risk Officer to elaborate more on the moratorium because I understand this is one of the major assessments for next year. As I said we do feel cautiously optimistic because on what we mentioned earlier, reviews. Clients start paying from all affected sectors they currently have their pre-COVID liquidity in place to enter the situation. Nikitas, any more comment on the reviews and the moratorium?
Well, yes, Panicos Nicolaou. Just to add that the review campaign entails the close communication with clients, receipt of updated information on their financials and their status. This takes time, and that is why you see that 80% of the campaign has been completed, and we're still working on the remaining part.
Now, the review campaign, as you understand, given the change in environment due to the resurgence of the virus, is going to be an ongoing and dynamic process. What is important to say is that having worked with these clients, we have in place now pre-packaged solutions and processes and policies which help us to address these clients in a quick and efficient manner. We will continue doing so up until the virus situation goes away.
After the moratorium, Nikitas, after the moratorium, if and when any of the clients need assistance, either through liquidity or through a short-term restructuring, we can provide these solutions, and we are ready to provide these solutions, and this does not trigger an NP status for viable clients. It's important to mention this and clarify this because all these clients are pure performing. They are not forborne, most of them, so we have still the tool of restructuring without a client being marked as NPE, as UTP.
Okay. Do I understand correctly that the key to that is that you put in place a restructuring before the loan goes into a non-performing status, and if you do that, it doesn't become an NPE? Whereas if the loan was technically non-performing and you did the same restructuring, it would be an NPE. Is that a correct understanding?
Broadly, I would say that if the loan is forborne , then if you do restructuring, then it becomes an NP.
Okay.
The vast majority of our loans are pure performing, meaning not forborne. For those that they need restructuring, it doesn't mean that all the clients' moratorium will need any restructuring. For those that they need restructuring to overcome any short-term difficulties, doing, let's say, restructuring. What do we mean restructuring? Mean, let's say, lower installments in 2021 or 2022, depending on each client, that this does not trigger the NP status. Of course, it needs to provide a value viable, right? We do have confidence to this.
For the 80% of loans that you have reviewed, roughly what portion would you expect will need some form of restructuring on exit from the moratorium?
Nikitas, do you have a number? I don't recall the number.
As we have said, because this is a developing situation, the review process will continue to be ongoing and dynamic. The numbers now and the numbers tomorrow, we will need to keep track of clients, be fully engaged with them, in continuous communication with them, and we assess as time goes and discuss. It's not a static situation.
We will not rush to provide this kind of solution unless they are needed. This, of course, depend on how the economy will evolve in 2021. It's something that we'll continue monitoring, and it doesn't mean that all these clients or a significant portion of these clients will need a moratorium or will need a restructuring because as Eliza said, this kind of moratorium was like a kind of benefit at no cost in a period of uncertainty.
I would like to remind all of us, all of you, that the country is doing better than projected at the time of the moratorium. Of course, this has a positive reflection on the unemployment, which is a major driver of, at least for retail, of any default. It's something that we continue monitoring. As we said, we are cautiously optimistic, but this is something that we continue review as we are moving through a kind of more partial lockdown because of the new COVID-19 infection that are rising all over the world, including Cyprus.
Okay. Thanks.
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 participating in this call. I understand this is a kind of short notice, and most of you have the time to review the Q3 results together with the midterm guidance at a later stage. Next week, we'll participate in virtual versions. I hope to see many of you there. Of course, as always, myself and the executive team are available for bilateral discussions and providing more details both for our Q3 results, but most importantly, for our midterm guidance and outlook. Have a nice weekend. Take care, and stay healthy.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for calling, and have a pleasant evening.
Thank you.