Ladies and gentlemen, thank you for standing by. I'm Redo, your Chorus Call operator. Welcome, thank you for joining the Bank of Cyprus conference call to present and discuss the group financial results for the six months ended 30th June 2020. 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. To identify the assistance during the conference call, you may signal an operator by pressing star and zero on your telephone. At this time, I'm glad to turn the conference over to Mr. Panicos Nicolaou, Chief Executive Officer, Ms. Eliza Livadiotou, Executive Director Finance, Mr. Demetris Demetriou, Chief Risk Officer, Mr. Panicos Mouzouris, Executive Director, RRD, Ms. Anna Sofroniou, Executive Director, Real Estate Management Unit, Mr. Nick Smith, Executive Director, Corporate Finance Solutions, and Ms. Annita Pavlou, Manager, Investor Relations.
Mr. Nicolaou, you may now proceed.
Thank you. Good morning, everyone. Thank you for joining us. I hope everyone remains safe and healthy. Our results for the second quarter show that despite the lockdown, we have continued to deliver on our strategic priorities while supporting our customers, colleagues, and the community through COVID-19. Slide four summarizes the key highlights for the quarter. I will briefly go over this. In the second quarter of the year, we faced what we very much hope will be the current peak of the health pandemic crisis in Cyprus, which was followed by the gradual easing of the restrictive measures, leading to increased economic activity. The global impact from the pandemic, however, continues to affect the economy and uncertainty remains.
We are aware of the key role our bank has to play in the recovery of the Cypriot economy, and we continue to support our customers to alleviate their short-term cash flow burdens. Despite the challenging market conditions, we reached an agreement for the sale of EUR 0.9 billion NPEs in Project Helix 2 earlier this month. We reduced our NPEs organically by a further EUR 279 million in the first half of the year, and we completed the sale of EUR 133 million NPEs in Project Velocity 2. All these combined de-risking actions have reduced NPEs in the first six months of 2020 by EUR 1.3 billion to EUR 2.6 billion and EUR 1.1 billion on a gross and net basis, respectively. The gross NPE ratio reduced to 32% and to 11% on a net basis.
Coverage, and this is important, has been maintained following the impact of Helix 2, with exposure now covered by 58% with loan credit losses. We remain committed to further de-risking of the balance sheet, and we will continue to seek solutions, both organic and inorganic, to achieve this. At the same time, we are working with our clients to prevent future asset quality deterioration once moratorium periods and other government support schemes come to an end. The bank's capital position remains good and in excess of all our regulatory requirements. As of June 30th, 2020, our total capital ratio was 17.9%, and our CET1 ratio was 14.4%, both pro forma for Helix 2. We continue to operate with a significant liquidity surplus of EUR 3.9 billion. The improvement of our operational efficiency remains a key priority for us. Our cost-to-income ratio stood at 57%.
Our total operating expenses for the second quarter of the year declined by 18% year-on-year, in large part enabled by customer switching to digital. New lending for the second quarter was below our usual run rate at EUR 238 million due to the lockdown, which covered most of the second quarter. We expect loan demand to pick up in the second half of the year, especially for housing loans in the context of the government schemes for interest subsidies. The underlying result for the quarter was a profit after tax from organic operations of EUR 4 million, while the overall result for the quarter was a loss of EUR 100 million, including the loss on Project Helix 2 of EUR 68 million and the loan credit losses of EUR 21 million for potential future NPE sales. Turning to slide five, that presents a short summary of Helix 2.
As mentioned earlier, despite the economic challenges prevailing from COVID-19, we announced in early August the agreement for the sale of EUR 886 million gross NPEs, known as Helix 2. The transaction is expected to be completed during the first half of 2021. The consideration translates to EUR 0.46 of gross book value, of which 35% is payable on completion, and 65% is deferred and paid in installments over 48 months from completion without any conditions attached. The consideration can be increased through an earn-out arrangement, depending on the performance of the portfolio. Combined with the other organic reductions, the sale reduced our NPE ratio by 6 percentage points to 22%, reduced net NPEs to EUR 1.1 billion, down 89% since peak. The accounting loss recorded in the second quarter was EUR 68 million, resulting in a capital impact of -48 basis points on CET1 ratio.
At completion, the transaction is expected to have an impact of -36 basis points on CET1 ratio and will eventually turn to + 10 basis points capital benefits upon the full payment of the deferred consideration. As shown on slide six, the four NPE sales we have completed have delivered a combined NPE reduction of EUR 3.8 billion. As I mentioned earlier, we continue to assess opportunities for balance sheet de-risking through additional NPE sales in the future. Moving now to slide seven. Overall, since 2014, gross NPEs reduced by more than EUR 12 billion or 83%, of which EUR 8.6 billion have been through organic actions and EUR 3.8 billion through NPE trades. It should be emphasized, and this is important, that this is a net reduction over and above the NPE inflows we had during this period, which were significant, and I can explain later with reference also to 2021.
The gross NPE ratio reduced to 22% and 11% on a net basis. Overall, our NPE ratio reduced by 41 percentage points since the peak in 2014. Turning now to slide eight. The Cypriot government has taken decisive steps early on and is managing the health crisis well. As shown on the graph, the 14-day moving average of new cases per 100,000 population for Cyprus remains well below the European average. Following the gradual opening of the economy, new cases are closely monitored through extensive sample testing, and this is important, extensive sample testing, and the government remains vigilant to prevent a second wave of infections. New measures have been introduced in July 2020 for the management of the recent increase in cases following the relaxation of the travel restrictions. Moving on to slide nine.
The Cypriot economy recorded a GDP drop of 11.9% in the second quarter, compared to 15% reduction in the Euro area, reflecting the lockdown. Public projections under the base scenario continue to anticipate that the Cypriot economy will shrink by up to 7% in 2020 and then grow by 5% - 6.1% in 2021. The Cypriot economy has started showing nascent signs of recovery post-lockdown, and economic sentiment is starting to improve, driven by improvement in nearly all sectors. Unexpected international tourist arrivals during the summer were weak, although these were partially offset by the domestic tourism. It is important to note that the impact of the revised macroeconomic estimates has been fully incorporated in the expected credit losses of the bank during the first half of 2020. Turning to slide 11.
Throughout this health crisis, we have prioritized keeping our people safe and healthy, while at the same time providing all the support our customers need in order to overcome their short-term cash flow burden. Illustrating the actions of our responsiveness on slide 11, currently, we have implemented the moratorium of around EUR 6 billion to performing borrowers. At the same time, a total amount of EUR 689 million of new loans have been disbursed in the first six months of the year. We're participating in the government schemes aiming at providing liquidity to impacted businesses and private individuals. During the lockdown, technology and digital banking have been instrumental in changing customer behavior. It is very encouraging to note that this increased digital usage is sustained post-lockdown. In fact, 72% of our customers are currently digitally engaged, and 93% of total transactions are performed through digital channels.
Finally, we at Bank of Cyprus created a network known as SupportCY with aim to contribute to government efforts in the fight against COVID-19. Approximately EUR 500,000 have been distributed so far for the purchase of medical equipment and support of educational activities. On slide 12, we provide an update on the loan moratorium. As of June 2020, the end of the application period, we had granted payment deferrals to 25,000 borrowers for EUR 6 billion of gross loans. As you probably know, the moratorium launched in March was very generous and comprehensive. For many of the customers, this was considered as a benefit without any cost. Business loans on moratorium amounted to EUR 3.91 billion, or 76% of the non-legacy loan book, and private individuals amount to EUR 2.09 billion or 53% of the non-legacy loan book.
For business, under moratorium, individual assessment of customers was initiated in May, starting with the high-risk customers. The 30 largest businesses under moratorium amounted to EUR 1.75 billion, or nearly half of all the business loans under moratorium. We have so far completed the review of over 70% of these without triggering a change in their UTP status. This is very important to note. Individual assessments of private individuals under moratorium have also commenced, with priority to individuals with low credit scoring and employed in high-risk industries such as tourism. In addition, around one quarter of private individuals under the moratorium have paid at least one installment until the end of June, giving us confidence that the payment culture has not deteriorated. This happened just after the moratorium and during the lockdown within the first three months of the moratorium. We'll continue to closely monitor the creditworthiness of our customers.
We are in regular contact with many of these customers to apply for this scheme and support them in order to effectively and timely address any potential worsening of their credit quality following the end of the moratorium. Moving now to slide 13. Coming into the crisis, the group had a well-diversified non-legacy portfolio amounting to EUR 9.15 billion. We continue to closely monitor the book, a set of strategies to prevent further asset quality deterioration. We continue to expect that the tourism sector will be the most impacted, representing 12% of the non-legacy book. Around 15% of the non-legacy portfolio is expected to have a medium impact, including sectors such as trade and manufacturing, due to the impact of the strict lockdown of the previous months. Construction is expected to be only moderately impacted by COVID-19, and its operations recommenced on May 1st.
Overall, 15% of our loan book is expected to experience a moderate impact. Around 40% of the non-legacy book is expected to experience a low impact, including sectors like education, real estate, and care. We are setting up targeted and efficient strategies for each client segment and industry. We are in close contact with our customers in order to primarily assess the full extent of the COVID-19 economic side effects, secondly, provide relief in the form of payment deferrals, restructurings, and liquidity assistance to our valuable clients to help them alleviate their short-term cash flow burden. Turning now to slide 14. As at the end of June, non-legacy loans to private individuals amounted to EUR 4 billion, representing 43% of the total non-legacy loan portfolio. Over 80% of the private individual loan portfolio is housing loans. This segment is very well collateralized with a low loan-to-value ratio.
Around 65% of these loans have an LTV below 60%, and 15% of the portfolio has an LTV over 80%. Other loans to private individuals amounted to EUR 0.7 billion as at the end of June. 61% of this portfolio is secured, of which 59 by property and the remaining 41% by other type of collateral. As previously mentioned, around one-quarter of loans to private individuals paid at least one installment by the end of June. Moving now to slide 15, that provides a breakdown of the non-legacy business portfolio and our assessment on the impact of COVID-19. The non-legacy business loan book as at June 30th, 2020, amounted to EUR 5.18 billion and is well diversified with high quality collateral. Following the last crisis, we now have higher-quality origination due to prudent underwriting standards. We make a strong assessment of the prepayment ability of our customers.
To put this in context, 98% of our new exposure since 2016 were performing at the start of the moratorium. Finally, there is an effective foreclosure law in place following amendments that took place in recent years. 89% of the business portfolio is secured, of which 79% by property. Overall, the business portfolio has a low loan-to-value ratio. Around 70% of the portfolio has a loan-to-value ratio less than 18%. Moving now to slide 16. As I mentioned earlier, the sectors mostly impacted by COVID-19 are tourism and trade. As at June 2020, our total exposure to tourism amounted to EUR 1.06 billion. The utilized liquidity of the sectors remained broadly unchanged and amounted to EUR 0.1 billion as at the end of June. Around 95% of our tourism exposures are under payment deferrals. Our exposure to trade amounted to EUR 1 billion.
Around 29% of this is in lower-risk, essential retail services, not materially impacted by COVID-19, such as supermarkets and pharmacies. The utility of the sectors amounted to EUR 880 million as of the end of June. Around 60% of our trade exposures are currently under payment deferrals. Turning now to slide 17 on new lending. New lending from the second quarter, as expected, amounted to EUR 238 million, down 47% quarter-on-quarter, reflecting the lockdown that was in place during most of this quarter. The demand for new lending is expected to pick up in the second half of the year, especially for housing loans, in the context of the government scheme for subsidy of interest. As at August 21st, there was a strong pipeline for new housing loans that amounted over to EUR 65 million. We expect to utilize all available tools to support our customers.
At the same time, we will continue to apply prudent underwriting standards and make strong assessment of the repayment capability of our customers. Moving to slide 18. During the lockdown, technology and digital banking have been instrumental in changing customer behavior. It is very encouraging that the increased usage of digital channels has been sustained post-lockdown. As shown on slide 19, the statistics demonstrate that we continue to make solid progress on digital transformation. 32% of our customers are currently digitally engaged, and 83% of total transactions are performed through digital channels. We expect the increased digital engagement of our customers to support our efforts to improve further our efficiencies. I will now hand over to Eliza to take you through our performance for the second quarter.
Thank you, Panicos. Hi, and good morning from me as well. Starting from capital, actually, on page 21. During the second quarter, we have generated 40 basis points of organic capital and operating profits and another 20 basis points of capital from the decrease in risk-weighted assets. These were offset by expected loan credit losses and impairments of around 30 basis points. Helix 2 has reduced capital by around 48 basis points in the second quarter, and on completion, the cumulative capital impact is expected to improve by 12 basis points to -36 basis points with a further capital benefit equivalent to 46 basis points upon full repayment of the deferred consideration. The recent amendments in capital regulations have resulted in a benefit of around 70 basis points for the bank, 50 basis points of which were actually recorded in the second quarter numbers.
One final comment is that the ECB has completed an on-site inspection on the value of the group's foreclosed properties. The findings of this inspection relate to a possible potential charge of up to 50 basis points of capital and are currently being reviewed by the Bank of Cyprus's joint supervisory team. The size and timing of any charge remain uncertain and depend in part on the Bank of Cyprus's progress in de-risking its balance sheet. Now, moving to the income statement on slide 26. Net Interest Income has decreased to EUR 80 million in the second quarter, mainly due to higher interest cash collections in the first quarter, offset by lower cost of deposits. The Net Interest Margin has decreased to 1.88%. Non-Interest Income amounted to EUR 60 million for the quarter and is broadly flat on a Q on Q basis.
General expenses reduced to EUR 87 million compared to EUR 93 million in Q1 due to COVID-related lower staff costs and seasonality of the deferred guarantee fund contribution. Loan credit losses for the second quarter amounted to EUR 23 million, reflecting a cost of risk of 76 basis points. During the quarter, we recorded additional impairments of EUR 25 million on specific, large, illiquid REMU properties. Provisions and net losses relating to NPEs amounted to EUR 104 million in the quarter, including the Helix 2 loss of EUR 68 million and the loan credit losses of EUR 21 million for potential future NPE sales. The overall result was a loss after tax of EUR 100 million for the quarter and a loss after tax of EUR 126 million for the six months. Now, starting from net interest margin on slide 27. As already mentioned, our NIM in the quarter amounted to 188 basis points.
Yields in the performing book increased to 338 basis points. Despite the competitive pressure, an effort to improve credit spread is currently underway. The cost of funding decreased to 25 basis points as the reduction of cost of deposits continued. The cost of deposits declined by three basis points during the second quarter. Finally, the EUR 1 billion take-up in the TLTRO III has a potential annual benefit of EUR 5 million for net interest income. Turning now to slide 28 on non-interest income. In the second quarter, this was broadly flat at around EUR 60 million. Net fee and commission income amounted to EUR 33 million this quarter, down 13% on a QoQ basis, clearly negatively impacted by the COVID lockdown implications.
Specifically, as previously indicated, transaction fees amounted to EUR 12 million for the second quarter, and they were 22% down on a Q o Q basis, mainly due to the lower volume of transactions. Transactional fee volumes are expected to recover to pre-COVID-19 levels as the Cypriot economy continues to recover in parallel. Net insurance income amounted to EUR 18 million in the quarter, compared to EUR 11 million for the first quarter, primarily due to a change in the valuation rate and lower motor vehicle insurance claims. Overall, recurring income for the quarter was at EUR 51 million compared to EUR 49 million in the first quarter, as the higher net insurance income has offset the reduction in the fees and commission. The introduction in liquidity fees to a broader group of corporate clients that was delayed due to COVID-19 is currently under consideration and will be introduced once market conditions allow.
Finally, a fees and commissions review is also currently underway. Finally, moving to costs on slide 30. Our cost-to-income ratio, excluding bank levies, stood at 57% in the quarter compared to 58% in Q1, principally reflecting the lower total operating expenses. Total operating expenses of EUR 81 million for the second quarter were down 3% on a QoQ basis and 18% on a year-on-year basis. Specifically, staff costs reduced to EUR 47 million relating to mostly one-off cost savings from special annual leave to vulnerable groups and suspension of the NHS contribution during the lockdown period. Other operating expenses for the second quarter amounted to EUR 34 million and are broadly flat on a QoQ basis.
The special levy and contributions to the Single Resolution Fund and the Deposit Guarantee Fund for the quarter were at EUR 6 million. As a reminder, as from January 1st, 2020, and until July 2024, the group is subject on a semi-annual basis of the contribution to this Deposit Guarantee Fund in Cyprus. With that, I hand over to Demetris to take you through asset quality and cost of risk.
Thank you, Eliza. Good morning to all. I will start from slide 32 on IFRS 9 staging and coverage. As shown on the left graph, pro forma for Helix 2, around 61% of our loan book is classified in Stage 1 and 17% in Stage 2. The coverage of these two stages, pro forma for Helix 2, stood at 1.5% and 2.5% respectively, while coverage of Stage 3 loans was maintained and amounted to 52%. During the second quarter, there was a one-off migration of around 360 million of gross loans from Stage 2 to Stage 1 due to enriched data availability. Turning to slide 33 and the cost of risk.
The annualized cost of risk for the first half of 2020 was 1.39% of gross loans, of which 59 basis points reflect the initial impact of IFRS 9 forward-looking information, driven by the deterioration of microeconomic outlook recognized in the first half. Excluding this COVID-19 related charge, the cost of risk for the first half of 2020 stands at 80 basis points. The cost of risk for the second quarter has benefited from a release in provisions of 76 basis points, out of which 59 basis points relate to one-off items. Excluding the one-off reversal effect on the COVID-19 related charge of 30 basis points, the underlying cost of risk for the second quarter amounted to 105 basis points and is broadly in line with the respective Q1 charge.
In addition, during the second quarter of 2020, we recorded an accounting loss for Helix 2 of EUR 68 million, EUR 21 million loan credit losses for anticipated future NPE trades, and impairment of EUR 25 million on specific, large, illiquid REMU properties . As a reminder, interest on net NPE not received in cash is fully provided for, which in the second quarter represented 58 basis points cost of risk. Moving to slide 34. Tackling the bank's loan portfolio is of utmost importance for the group and our stakeholders. Today, the bank's 2.58 billion of gross NPEs pro forma for Helix 2 fall into two buckets. Firstly, reperforming NPEs totaling 0.3 billion. As a reminder, reperforming NPEs are loans that have been restructured, have no arrears, are still classified as NPE, but are expected to exit the NPE definition over time. Most of the reperforming NPEs are under the moratorium.
Secondly, core NPEs amounted to EUR 2.28 billion. We will continue to seek organic solutions, including the realization of collateral via consensual and non-consensual foreclosures. In parallel, we continue to assess potential opportunities to accelerate the decrease in NPEs through further NPE trades in the future. At the same time, we don't lose sight of the fact that arresting any asset quality deterioration is of paramount importance, and we are working with clients to this effect. Moving now to slide 35 on NPE inflows and outflows. The NPE reduction continued in the second quarter at similar levels to the first quarter. NPE outflows for the second quarter amounted to EUR 145 million, only modestly lower to the first quarter levels despite the lockdown and other such measures as the freeze on foreclosures, while as expected, inflows in the second quarter were limited due to the moratorium.
Write-offs for the quarter amounted to EUR 84 million, representing 58% of organic gross NPE reduction. As we have previously explained, we continue to expect that the proportion of write-offs will be volatile in any given quarter. Turning to slide 36 on coverage. The bank's NPE coverage ratio increased by 2 percentage points to 58% at the quarter-end pro forma for Helix 2. The bank stands today above the European average coverage ratio of 46%, and total coverage pro forma for Helix 2 including tangible collateral increased to 125%. Coverage of core NPE also increased to 63%. With that, I hand over to Panicos for his closing remarks on slide 39.
Thank you, Demetris. Our results this quarter show that we continue to deliver on our strategic priorities by supporting customers, colleagues, and the community through COVID-19. We will continue to support the recovery of the Cypriot economy. At the same time, our key strategic focus remains the improvement of the asset quality and efficiency of the bank. This is something that we constantly deliver all these years with a proven track record, even under the weather circumstances like this quarter during the COVID-19 lockdown. This concludes our presentation. We will now open for questions.
Ladies and gentlemen, at this time, we will begin the question-and-answer session. Anyone who wishes to ask a question may press star followed by one on the 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 Floriani Jonas with AXIA Ventures. Please go ahead.
Hi. Good morning, guys. Thanks for the presentation. I have a few questions. The first one is on the expected volume of new lending in the second half. I acknowledge that you mentioned that most of the pick-up is expected to come from mortgages. What about corporate and SMEs? Anything you can share in terms of the expectations for those guys in the second half? Second is on NPEs de-risking. I take your comments that you still continue to pursue opportunities for transactions whenever that is possible. Is there anything now in the pipeline? I mean, are you in active conversation with investors to some parts of your portfolio? I think I remember that the initial expectation for Helix 2 was for bigger amounts. Maybe there is something that is in more advanced stages at this point in time.
If you can share something on that, it would be great. Finally, just wondering if there's any guidance for the new you can share, more specifically your views on NII, expenses, and also level of impairments going forward, and maybe something on expectation for NPE flows. I think at this point in time, it's probably very difficult to assess or to have a view on next year. If you have something for the short term to share, I think it'll be great.
Sorry to interrupt, Mr. Floriani, we have lost connection to the conference room. Just hold on your line, and the rest of you, please bear with us for a second. We'll reconnect the presenters. Thank you.
Okay.
Hello, everyone. The management is back on the line. Mr. Floriani, if you could please repeat your last question. Thank you.
Sorry.
Hi, guys. I mean, where did you stop hearing? Did you get my first and second question?
The first question about the expected new lending on the second part, how we loaded that, and what is the second one?
The second one was on the risk of the balance sheet. I take your comments that you mentioned that you continue to look for inorganic opportunities on the NPE side. I think it's fair to assume that the original expectation for Helix 2 was probably higher for a bigger portfolio. I was just wondering if there's any advanced stages of interactions between you and potential investors for what could come next on NPEs. Finally, the third question was on expected guidance for 2020. Anything you can share in terms of income statement and balance sheet would be great. Thanks.
Okay. In relation to your first question about the expected new lending for the remaining of the year, we expect to be higher than what we have presented in Q2. It will be something between our Q2 number and our usual run rate, which was around EUR 450 million, EUR 500 million per quarter. We're going to see an increase in the housing loans plus utilization of approved loans for liquidity assistance that we have provided to our clients. It will be higher, but as you know, this depends on the timing of the utilization because new lending is not the approval, it's the utilization of the new lending. I cannot be, let's say, very specific on the amount, but it will be higher than Q2. On the risk of the balance sheet in relation to future NPEs, I will ask Nick to answer the question. Nick?
Floriani, hi, thanks for the question. You're right, the original Project Helix 2 side was larger than we ultimately end up with, as you commented on. I think right now, we're super pleased that we managed to get a transaction concluded at the front end of the time window that we guided you to over the last couple of investor calls. Despite the obvious challenges of trying to get deals done in a post-COVID environment. We've seen that around the market, so we're super pleased we got it done. I think in terms of what comes next, yes, you're right, we flagged in the presentation that we will continue to assess all options to de-risk the NPL, including exploring the options for future trades. I'd describe where we are on that is right at the start of that journey again.
If I call it just for now, a third Helix trade, then we're exploring options, and I think that will continue for some time, actually, before we embark on the board's preference in terms of how we structure any targeted follow-on trade. Look, my personal view is that's most likely to be a next year issue. Look, let's keep that under revision as we go through the exploration of the options.
Okay. Eliza,
On guidance.
-the guidance for this year.
For NII, I would say that Q3 and Q4, we expect them to be roughly in line with Q2, net of the new lending moratorium, which means that our repayments are lower, so net net. Given the fact that the Helix book portfolio, life as it, basically, continues to accrue interest. If you look at it pro forma, you need to remove the NII that comes from that book, and there are numbers in the pack to guide you on that. On fees, the guidance we gave last quarter actually continued to inflate. We were expecting around 20% drop in transactional fees. You'll see that we are totally there with quarter. We expect this -20% to gradually reverse in line with the GDP trajectory. On cost, I would say that Q1 is a more representative quarter than Q2.
Q2 did benefit from the fiscal incentive, which helped the bank, and also benefited from lower OpEx because of the lockdown. I would say that moving to Q3 and Q4, use Q1 on your guidance in Cyprus. Offices are now open, so actually, OpEx is more or less back to a normal quarter, I would say. On the cost of risk, Demetris?
Yes. On cost of risk, as I indicated during my speech, the second quarter has been impacted by a one-off reversal of 59 basis points, which is related to data quality improvements. If we are to adjust for this and for the COVID impact for the second quarter, the cost of risk is calculated at 105 basis points, which is broadly in line with our COVID-adjusted cost of risk of Q1, which was 112 basis points. All in all, for the half, the run rate of the cost of risk without the COVID effect is around the 110 basis points mark. Our expectation is that this will be the COVID-adjusted run rate for the remainder of the year. I remind you here again that out of this, almost half relates to interest on NPEs not received in cash.
Now, from what we see today, one can conservatively assume that the COVID effect in the following quarters will also be at similar or lower levels to our Q2 COVID effect.
Thank you.
Thanks.
Thank you.
The next question comes from the line of Boulougouris, Alexandros with WOOD & Company. Please go ahead.
Good morning. I have three questions, if I may. The first one is regarding the losses you booked in Q2 regarding the real estate unit. I think it's about EUR 25 million impairments. Should we expect more going forward in the next quarters? This is my first question, and maybe if you could clarify a bit more on that. The second is on the Helix 2, just to understand a bit the accounting treatment with the deferred payments, because you book a loss of EUR 60 million, if I'm correct, in Q2, EUR 68 million. There will be a negative capital impact of 36 basis points, which then turns into a + 10 basis points with a full payment of the deferred consideration. Accounting-wise, will there also be some capital gain that you will book in the following quarters because of that? Just to understand that.
When should we assume that Sorry, there's a closing of the deal? Maybe you mentioned that in the presentation, but that's also another question. A third question, if I may, regarding the moratoriums, which are due to end on the end of December. Would you expect any extension of that, maybe on the sectors that have been more heavily impacted, like tourism? Thank you.
Okay, thank you. I will start myself with the last question about the moratorium. This is an opportunity to mention a couple of things about the moratorium because it's important for everyone to understand how we think about that. Just as more reminder, you understand and you remember that this government moratorium, when it was launched in March, it was very generous and very comprehensive. For many of our customers, taking advantage of the moratorium, it was just a benefit with no cost, and for most of them, it was not even a sign of distress. It's important to mention this.
As I already mentioned earlier in my presentation, we have already gone through individual assessment of many of our clients and especially the top 30 businesses, and almost 70%-80% of these have been reviewed, and they haven't triggered any UTP status for this year and for the next years as going forward. It's important to understand because having in mind that these are, let's say, this significant amount of loan moratorium creates some questions certainly for the future, and it's important for us and for you to understand what this means under the local accepted perspective. Regarding the specific question about the extension, this is something that we don't have any specific knowledge if this is going to happen or not.
As a bank, our view is that the moratorium was generous and the uncertainty that was created because of this high pickup of the moratorium is not beneficial for the bank, not beneficial for the economy. We are not supportive of any extension of the moratorium. At the same time, we are not excluding any, and this is something that the Central Bank and the Ministry of Finance will look into. We are not excluding any, let's say, short extension of any moratorium on a specific sector, for example, like tourism, but I don't expect to see the same kind of moratorium with no criteria and no payments at all. If this will happen, which we don't know, it will be a small part of the existing moratorium. The country has around EUR 12 billion on moratorium now.
If this happens, let's say, for the tourism industry, this will be in the range of EUR 1 billion or EUR 1.5 billion, I don't expect to be, as I described, a benefit with no cost. It will be based on certain criteria, We will include also payments, interest plus part of the capital. At least this is my view. As I said in the beginning, it's something that the Ministry of Finance and the Central Bank will look into. We all know that based on the existing EBA rules, any new moratorium has to be decided and concluded by the end of September this year. Actually, this is the latest information we have. I will pass to Eliza to talk about the remaining two questions about the Helix treatment and the losses on the real estate.
Okay, thank you. Alex, on the EUR 25 million impairment we had this quarter, around half of it relates to a specific property, large property, which had various credit issues and which property is in very advanced stages of being sold. It's very case specific. The other part of the impairment, the other half, again, related to some illiquid legacy properties, which were held at reasonably high, relatively high percentages of OMV, and which, because as they are being held for a large number of years, we are taking some more prudent haircut on their valuation. We do not expect a repetition of this amount. There may be modest minor drops, again, as some of these older properties are becoming older, but very modest. We don't expect anything material to come through in the next short number of quarters.
I do want to remind you that the properties on the balance sheet are held at an 80% on average, at 80% of their open market value. We do have a 20% buffer from any potential price reduction in the market. We don't expect any, by the way. Our projections and indicators of real estate prices do not indicate any drops, but even if there was to be a drop, there is a 20% buffer before that hits our balance sheet. Maybe Anna could give us some guidance or some color on the real estate market and how we see it. Anna?
Yeah. The real estate market is holding up amidst the COVID-19 breakthrough. It has started to recover post-lockdown, and this is evidenced by land registry transactions. Main investor activity is fueled by local demand.
As far as our group is concerned, we have, let's say, a healthy, I would say, fixed pipeline, both in terms of contracts that are signed, in excess of EUR 53 million, and accepted offers. On the accounting treatment of the deferred payment, now this deferred payment carries or attracts 100% risk weight. As it gets repaid, it will be releasing clearly the risk RWA that's attached to the repayment. Also, in accounting terms, it will be interest-bearing between 3% and 4% yields, accounting yields. It's an unwinding of the discount in accounting terms. There will be an NII net positive from this.
The risk will start up from next year as well.
Yeah. It's an interest-bearing on the balance sheet.
Okay. Thank you. Very comprehensive.
The next question comes from the line of Novotny, Ondrej with HSBC. Please go ahead.
Good morning. I have a couple of follow-up questions on the NII outlook. Would you say that the Helix 2 loans are representative of your legacy portfolio in terms of yield and maybe cost of risk as well? Therefore, the forgone NII should be somewhere in the vicinity of EUR 30 million, perhaps? On NII, that EUR 5 million NII potential from the TLTRO that you mentioned, that's based on EUR 1 billion. Can this increase beyond EUR 1 billion? Lastly, is there potential to reduce cost of funding, specifically on customer deposits? Thank you.
Eliza.
Okay. NII, the Helix 2 yield, I would say, is representative of the rest of the NPL portfolio. Remember, NPLs yield interest income on their net loan balance, net of provision. On a net basis, I would say that it is representative. On the TLTRO, the EUR 5 billion, the EUR 5 million rather, NII benefit on an annual basis is expected to start to come through the P&L from Q3. The TLTRO application was in June or drawdown . We've applied for EUR 1 billion. We do have the capacity to increase that EUR 1 billion more. However, the decision was to go for EUR 1 billion because there is also a risk under the TLTRO rules that this NII pick-up does not come through if net new lending doesn't meet the milestones, the thresholds.
We want to monitor a bit more the behavior of the performing loan book before we decide whether we are going for additional transfers. At the moment, we've decided for the EUR 1 billion, I wouldn't guide to anything higher. There is a possibility down the road may apply for more. On the cost of funding, it's gravitating towards zero. There is a possibility to reduce it a bit more. As I mentioned also in the script, we are considering to introduce what we call liquidity fees, which is the way that we have applied negative rates, effectively through a fee arrangement down the road, once market conditions allow us to do this. We were planning to do it earlier. COVID has delayed us. It's probably a 2021 P&L benefit, I would say, early 2021. Again, subject to market conditions here in Cyprus.
Thank you, Eliza.
As a reminder, if you would like to register for a question please press star and one in your telephone. The next question comes from the line of Memisoglu, Osman with Ambrosia Capital. Please go ahead.
Hello, many thanks for your time and presentation. A couple of questions on my side. First, on the big picture macro side, do you think the government measures so far are adequate? Would you expect them to introduce new things from a support perspective? On the second one, you did comment on the moratorium. I was just wondering if you could give us a bit more color on maybe what percent of these loans, I understand most of them don't even need to be in moratorium, but if you could give us any color of what percent would you think would turn to be problematic, maybe as early as next year? On the NPE reduction with all these moving parts, where do you see the NPE ratio declining to at the end of 2021? How should we envision your actions on that front next year? Thank you.
Okay. Thank you, Osman. On the measures of the government, I would say that so far have been proven adequate. Currently, most of the measures expire in October. As we see this happening usually before the measure expires, usually the minister of council will review the situation, and usually they extend. This is our current expectation as of today.
On the moratorium, okay, it is very hard. I will answer both questions on the moratorium, on the NPE, let's say with one comment, and I will not provide you specific numbers, but I would say that you need to know that this bank is not a bank that with low rates and bank with an old stock of all the legacy stock. I mean, we had earlier in our presentation that we have managed to reduce our NPE from EUR 15 billion to EUR 2.6 billion. This is EUR 12.4 billion on a net basis. During this period, we have more than EUR 3 billion in new NPE entry, so we are used to have NPE exit, and because we have been living the crisis for many years now, and we have managed on a net basis to continue decrease. For next year, yes, we do expect to have some NPE exit.
It wouldn't be prudent from our side to say that we will not have any new NPE entry. We expect that the old legacy book, the organic reduction of the old legacy book, it will offset any new NPE exit from the COVID-19 effect. Over and above as we accept, we are looking to explore our options for another trade. We are to give this market relative confidence will be an additional reduction in NPE. We're expecting a decline on the NPE for 2021.
Got it. That's very helpful. Thank you.
Okay. For the remainder of the year, we expect some declining on our NPE ratio.
Okay. On this year as well. Okay. Thank you very much.
The next question comes from the line of Deans, Penny with Goldman Sachs. Please go ahead.
Hi there. Thank you for taking my question. One quick question from me. On slide 33 of the presentation, you mentioned a one-off reversal of 59 basis points for the cost of risk in the second quarter. Could you please elaborate on what that relates?
Could you, Demetris?
Yes. I can you take the question? With the interaction of IFRS 9, there was a significant part of the portfolio which was in Stage 2 because of data quality issues. The main data quality issue we had was rating at origination. I remind you that a part of the portfolio was transferred to Bank of Cyprus from Laiki Bank in 2013, and there were data missing at the time. These data quality issues, we have been working on these data quality issues through various exercises that we have done over the last couple of years. At each, let's say, milestone of the exercise, a significant part of the portfolio, we got the data that we required. We did proper grading of the portfolio and a part of that has been transferred to Stage 1. This reversal mainly relates to that.
Okay. Thanks. That's all for me.
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, Redo. As a summary of all we just said is that I'm going to highlight the fact that this was a significant, this was the lockdown quarter of Cyprus because for most of this quarter, all businesses were closed, including the airports. As we are an island, we are actually kind of isolated. Despite that, for the Bank of Cyprus, this was a quarter of a significant and material reduction in our NPE, while at the same time we increased our coverage on the NPE. We maintain our coverage ratios without even getting the benefit of the expansion of the DPP, which are specific basis points and will gradually be added for coverage during the next couple of years. We have a small increase in our deposit cost. The liquidity is strong, as it's easy to understand this.
At the same time, we continue to reduce our cost operating expenses 18% year-on-year. Digital, this is one of the good outcomes from the lockdown because we have seen this big shift, and we see increases in our NPE engagement and our digital transactions, and this is something that we'll hear about [mining, gas, and stock] in our efficiency going forward for the next couple of years. We consider this to be a good quarter for the bank, and we are looking forward to have more information to give you on Q3, because at that point of time, we provide more information about, let's say, for 2021, about moratorium, what is next, and how we see our credit portfolio, performing credit portfolio for 2021 and 2022. Thank you all for participating in the call.
Usually, August and summer is actually difficult to have many people on the call but thank you all for taking the time. Both myself, the treasury management, and of course, the investor relations teams, and Annita, we'd be more than happy to have a bilateral discussion with you and provide you with more details on the results and on the future. Thank you.
Ladies and gentlemen, the conference is now concluded. You may disconnect your telephone. Thank you for calling. Have a pleasant evening.