Ladies and gentlemen, thank you for standing by. I'm your Telco conference call operator. Welcome, and thank you for joining the Bank of Cyprus conference call to further discuss the group financial results for the quarter ended 31st March 2020. 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, 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, Nita. Good afternoon, everyone. Thank you for joining us. I hope everyone remains safe and healthy. Slide three summarizes the key highlights from the first quarter of 2020. I will briefly go over these. The COVID-19 pandemic is testing us all in ways we could never have anticipated. It's causing disruption, stress, and uncertainty. Bank of Cyprus has a massive role to play in supporting our customers and helping to rebuild economic growth. The bank's priorities under these unprecedented times remain clear: to protect the health of our customers and colleagues while ensuring the operational resilience of the bank, to support them and the wider Cypriot economy, and to provide liquidity to businesses and households affected by the crisis to help alleviate their short-term cash flow burdens. Cyprus has successfully managed the spread of the virus. This allowed the gradual relaxation of the restrictive measures.
We are currently in the second phase of the government roadmap for the reopening of the society and the economy. The pandemic has deteriorated the macroeconomic outlook. Conservatively, and as we previously announced, we have updated the macroeconomic assumptions underlying the IFRS 9 calculation of loan credit losses for Q1. This has led to an increase of EUR 200 million in loan credit losses, reflecting an additional 88 basis points cost of risk. Due to the severely markedly operational conditions arising from the outbreak of COVID-19, the NPE sale is taking longer than originally anticipated. Currently, we are focused on proactively assessing the impact of COVID-19 on the loan portfolio. The Bank entered these uncertain times with good capital, strong liquidity, and funding positions. We have capital well in excess of our regulatory requirements.
As of 31st of March, our total capital ratio stood at 17.7% and our CET1 ratio at 14.3%. Our separate liquidity amounted to EUR 3 billion at the end of the quarter. The balance sheet repair continued in Q1 despite the COVID-19 lockdown. The organic NPE reduction from the first quarter amounted to EUR 142 million, NPEs reduced to EUR 3.7 billion and EUR 1.6 billion on a net basis. The gross NPE ratio reduced to 39% and to 15% on a net basis. Exposures are now covered by 56% loan credit losses and by 124% when tangible collateral is included. In May, we completed the sale of EUR 133 million of retail and unsecured NPEs, known as Velocity 2. The transaction was capital neutral. The improvement of our operational efficiency remains a key priority for us.
Following the successful completion of the multiple exit staff in the previous quarter, the cost-to-income ratio decreased by 5 basis points to 58%. During the quarter, total operating expenses decreased by 14% quarter-on-quarter, 28% to EUR 84 million. Today, 70% of our customers are digitally engaged. We expect the increased digital engagement of our customers during the lockdown period to support our efforts to improve further our efficiencies. New lending from the first quarter amounted to EUR 451 million, up 2% quarter-on-quarter. In the first quarter of 2020, we generated total income of EUR 145 million and a positive operating result of EUR 52 million. Loan credit losses for the quarter amounted to EUR 64 million, including COVID-19 related charges of EUR 28 million. The underlying result for the quarter was a loss after tax from continued operations of EUR 23 million and a loss after tax of EUR 26 million.
Turning now to slide five. The Cypriot government swift reaction has successfully contained the spread of the pandemic in Cyprus. Statistics have been very encouraging, demonstrating an ongoing slowdown in new cases. The daily reported cases remain consistently low despite the gradual relaxation of the restrictive measures that commenced on the 4th of May. Slide six provides a summary of the government roadmaps for the opening of the Cypriot society and economy. The lifting of the restrictions takes place in a gradual and controlled manner and is subject to no material increase in the reported COVID-19 incidents. Currently, we are in the second phase of the gradual relaxation of measures. The hotels and the airports are expected to open mid-June. Slide seven provides details for the Bank of Cyprus' pandemic plan.
For the interest of time, I will not spend much time on this, as this slide was discussed on our 2019 investor call results. Slide eight represents the fiscal measures introduced by the Cypriot government aimed at providing liquidity to businesses and preventing sharp rise in unemployment. Again, as I've already talked to you about the various fiscal measures, payment moratorium, and job protection schemes announced in March. The government announced further measures in May 2020 and include liquidity support to SMEs and self-employed via subsidizing a part of their fixed expenses such as rent and supply payment. It's expected that over 36,000 small businesses and self-employed will benefit from this measure. Tax incentives for the reduction of rents on a voluntary basis, and liquidity support to the agricultural sector.
In mid-May, the loan guarantee scheme was withdrawn, as the government does not expect this to be approved by the parliament. The government is working on a new set of measures expected to be announced this week for the support of the businesses and self-employed. This set of measures is expected to include liquidity support through EIB loans and interest subsidization. It's important to note that the withdrawal of the government guarantee scheme does not affect our intention to support the viable and performing businesses hit by the COVID-19 in order to alleviate short-term cash flow bursting. Slide nine provides a summary of the measures taken by the regulators for mitigating the COVID-19 impact. Seems really familiar from the previous quarter. Again, I will not go over in detail.
As a brief reminder, these measures are unprecedented and have already been put in place to provide flexibility in banks with regards to capital and liquidity requirements. This will enable the banks to provide the necessary support to their customers. On slide 10, we provide an update on the loan moratorium included in the government measures. As a reminder, the loan moratorium was started on 30th of March and offers the suspension of both capital and interest installment for loans, overdrafts, and credit cards for a period of nine months until the end of 2020. This measure is available to all customers, both private individuals and businesses who are loan affected as due as of 29th of February. The loan terms will be extended so that the loan repayment will continue to be as in the existing schedule. During the moratorium period, interest will continue to accrue.
It is important to note that as per the measure announced by the regulators, the COVID-19 moratorium does not trigger automatic classification to NPE status due to forbearance. As at 20th of May, we have received over 34,000 applications for EUR 5.73 billion of gross loans, accounting for 63% of the loan book, excluding the legacy. Applications from businesses amounted to EUR 3.74 billion or 32% of the non-legacy loan book, whereas applications received from private individuals amount to EUR 2.04 billion, or 52% of the non-legacy loan book. I would like to emphasize that during the moratorium period, we'll continue to closely monitor the creditworthiness of our customers who applied for this scheme and support them from the day after in order to effectively and timely address any potential worsening of their credit quality following the end of the moratorium.
Now, I will hand over to Demetris to take you through a deep dive of our loan portfolio and elements of cost of risk. Demetris, the floor is yours.
Thank you, Panicos. Good afternoon to all. I will start from slide 11. The Cypriot economy recorded a growth of 0.8% in the first quarter of the year, reflecting the COVID-19 lockdown. The public projections of the Ministry of Finance, EBRD, European Commission, and the University of Cyprus agree that under the base scenario, the Cypriot economy will shrink by up to 7% in 2020, and then grow by 5%-6% in 2021. Our IFRS 9 macroeconomic projections are in line with these published projections. Under our base case scenario, we expect the Cypriot economy to shrink by 6.9% in 2020 and to grow by 5.4% in 2021. We also expect the unemployment to increase from 7.1 in 2019 to 9.1 in 2020, and to reduce to 7.6 in 2021. Having said that, the outlook remains uncertain.
The impact of the pandemic on the Cypriot economy will largely depend on the duration and intensity of the pandemic. Moving on to slide 12. Coming into the crisis, the group has a well-diversified non-legacy loan portfolio amounting to EUR 9.15 billion as at 31st of March 2020. The plan is to continue closely monitoring the book and set up strategies to prevent further rapid quality deterioration. Based on our assessment on the impact of COVID-19 on the various economic sectors, we expect that the tourism sector will be the most impacted, representing 11% of the non-legacy loan book. Around 18% of the non-legacy portfolio is expected to have a medium impact, including sectors such as trade and manufacturing, due to the shrinkage in demand and effectively consumption stemming from the strict lockdown of the previous months.
Construction is expected to be only moderately impacted by COVID-19 as its operations recommenced on May 4th. Overall, 14% of our loan book is expected to experience a moderate impact. Finally, around 13% of the non-legacy loan book is expected to experience a low impact, including sectors like education, real estate, and health. We are setting up targeted and efficient strategies for each client segment and industry in order to address any issue. We are in close contact with our customers in order primarily to assess the full extent of the COVID-19 economic side effects and secondly, to provide relief in the form of payment deferrals or restructurings and liquidity assistance to our valued clients to help them alleviate the short-term cash flow burdens. Turning to slide 13.
As of 31st of March, the non-legacy loans to private individuals amounted to EUR 3.95 billion, representing 44% of the total non-legacy loan portfolio. Over 80% of the private individuals loan portfolio is housing loans. This segment is well collateralized with a low loan-to-valuation. Around 67% of these loans have an LTV below 60%, and less than 15% of the portfolio has an LTV over 80%. Other loans to private individuals amounted to EUR 0.71 billion as of 31st of March 2020. 60% of this portfolio is secure, of which 60% by property and the remaining 40% by other type of collateral. It is expected that over 35% of total employment will remain largely unaffected from the COVID-19 crisis, as these workforces employed in the government, semi-government, and financial sectors, which are protected and have not indicated any intention to adjust salaries.
In addition, measures announced by the government include an employment compensation scheme for businesses impacted by COVID-19 to protect jobs and avoid layoffs until mid-June 2020. The government expects that over half of private sector employees and around 40% self-employed will benefit from employment compensation schemes. As previously mentioned, the moratorium applications received from private individuals amount to EUR 2.04 billion and are driven by mortgages and personal loans. Moving on to slide 14 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 of 31st of March amounted to EUR 5.2 billion and is well diversified with high-quality collateral. Following the last crisis, we now have higher quality origination via proven underwriting standards. We make strong assessment of the repayment capability of our customers. To put this in context, 98% of new exposures since 2016 are performed.
Finally, there is an effective foreclosure in place following the amendment that took place in recent years. 88% of the business portfolio is secure, of which 79% by property. Overall, the business portfolio has a low loan-to-value ratio, around 70% or around 70% of the portfolio has a loan-to-value ratio of less than 80%. Moving on to slide 15. As mentioned earlier, the sectors mostly impacted by COVID-19 are tourism and trade. As of 31st of March, our total exposure to tourism amounted to EUR 1.03 billion. Around 5% of this relates to food services. The unutilized liquidity of the sector remained broadly unchanged and amounted to EUR 0.33 billion as at 30th of April 2020. According to the government's roadmap for the reopening of the economy, airports and hotels are expected to open in mid-June.
The government is taking actions in order to capitalize on Cyprus' success in handling of the health aspects of COVID-19 to position the country as a safe tourism destination. Finally, around 96% of our tourism exposures applied for payment deferrals. Our exposure to trade amounted to around EUR 1 billion as of 31st of March. 13% of this is in lower risk potential retail services, not materially impacted by COVID-19, such as supermarkets and pharmacies. Unutilized liquidity of the sector amounted to around EUR 800 million as at 30th of April. 54% of our trade exposures applied for payment deferrals. Turning now to slide 16 and the cost of risk. The annualized cost of risk for the first quarter increased to 2% of gross loans, of which 88 basis points reflect the initial impact of IFRS 9 forward-looking information driven by the deterioration of macroeconomic outlook.
Excluding this COVID-19 related charge, the cost of risk for first quarter of 2020 was 1.12%. The change in the macroeconomic assumptions also resulted in the migration of around EUR 435 million of gross loans from stage one to stage two. Finally, as a reminder, interest on net NPAs not received in cash is fully provided for, which in Q1 represented 53 basis points out of the 112 basis points non-COVID cost of risk. On slide 17, the bank's digital infrastructure initiatives provide alternative solutions to our customers to carry out their daily banking transactions. Today, 70% of our customers are digitally engaged, up by five percentage points since March 2019. Our active digital users increased by 15% since March 2019 to 263,000. As Panicos mentioned earlier, we expect the increased digital engagement of our customers during the lockdown period to support our efforts to improve further our efficiency.
Now I will hand over to Eliza to take you through our performance in the first quarter of 2020.
Thank you. Hi from me, too. In the interest of time, I will go through some selected slides of the Q1 performance, and we can always discuss anything else you might like to ask in the Q&A session or on bilateral calls afterwards. Starting from page 19, we have a good capital position well in excess of our regulatory requirements. As at 31st March, our total capital stood at 17.7% and our CET1 ratio at 14.3%. The ECB's capital relaxations announced in March 2020 allowing the front loading of the ability to use AT1 and tier two to meet pillar two requirements reduced our CET1 requirement to 9.7%. Our CET1 capital buffer as at 31st March was around 460 basis points. The temporary relaxation of the capital conservation buffer provides a further additional CET1 buffer of around 250 basis points.
Summing it all up, the bank's CET1 buffer increases to 710 basis points. In April 2020, the Central Bank of Cyprus decided to delay by a year the phasing in by 50 basis points of the O-SII buffer, until January 2022. Turning to slide 20. During the first quarter, we have generated 40 basis points of organic capital in operating profits and another 20 basis points of capital from the decrease of risk-weighted assets. These were offset by expected loan credit losses and impairment of around 50 basis points, 20 of which reflected the deterioration of the macroeconomic outlook due to COVID. CET1 ratio was also negatively affected by the decrease in revaluation reserve as a result of the decrease in the fair value reserve for fair value debt securities, that reduced the capital by around 25 basis points.
Since 31st March, the mark-to-market valuation of the debt portfolio held at fair value through OCI decreased by a further EUR 5 million. The change is recognized directly in equity. Moving to slide 21. Our risk-weighted assets intensity remains broadly flat Q-on-Q at 62%, and the total risk-weighted assets dropped by around EUR 290 million, following the further de-risking of our portfolio. A few points on our key liability metrics are shown on slide 22. Our deposits decreased by 3% Q-on-Q to EUR 16.2 billion, and the reduction in deposits on a Q-on-Q basis took place before the outbreak of COVID, reflecting mainly the introduction of liquidity fees in early March 2020 and seasonality in the first couple of months. Approximately two-thirds of deposits represent those whose ultimate beneficial owners are Cypriots, while only 4% of loans are Russian.
The group maintains strong deposit market share around 35% above the quarter end. We continue to operate with significant excess liquidity of EUR 3 billion as at 31st March 2020. Moving to the legacy portfolio, starting on slide 23. In the first quarter, the gross NPEs reduced by EUR 142 million to EUR 3.7 billion and to EUR 1.6 billion on a net basis. Overall, since 2014, gross NPEs reduced by EUR 11.3 billion or 75%, of which EUR 8.6 billion has been through organic actions and EUR 2.7 billion through NPE trades. The gross NPE ratio reduced by one percentage point on a quarterly basis to 29% and to 15% on a net basis. Overall, the NPE ratio reduced by 34 percentage points since peak in 2014. Despite the COVID-19 outbreak, in May 2020, we have completed the sale of EUR 133 million retail secured NPEs, known as Project Velocity 2.
This transaction is capital neutral. Moving to coverage on page 25. The bank's NPE coverage ratio increased by two percentage points to 56% at the quarter end. The bank stands today above the European average coverage ratio of 45%, and total coverage, including tangible collateral, increased to 124%. Coverage of re-performing NPEs is relatively low at 25%, reflecting the lower risk associated with this stock of NPEs, whereas the coverage of core NPEs increased to 60%. Turning to slide 26. The NPE reduction continued in Q1 but at a slower pace, reflecting the COVID-19 lockdown in March. NPE outflows for the first quarter amounted to EUR 158 million, while inflows in the first quarter amounted to EUR 16 million, representing only around 1% of the performing loan book.
Write-offs for the quarter amounted to EUR 71 million, representing 45% 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. Slide 27. I think the bank's loan portfolio is of utmost importance for the group and our stakeholders. Today, the bank's 3.74 billion of gross NPEs falls into two principal baskets. Firstly, the re-performing NPEs, which total 360 million EUR. As a reminder, re-performing NPEs are loans that have been restructured, have no arrears, are still classified as NPEs, but are expected to exit the NPE definition in due course. As shown on the slide, around 83% of these re-performing NPEs are available for exit by the end of 2021, subject to continuing to meet all relevant exit criteria.
It's important to note that the exit date may be extended if re-performing loans are eligible and choose to apply for the loan moratorium. Current NPEs amounting to EUR 3.38 billion. The COVID-19 outbreak has inevitably slowed the pace of organic NPE reduction and has delayed the planned inorganic trades. The group focus is on arresting any potential asset quality deterioration in the performing book. Once economic conditions normalize, the group expects to renew its efforts to improve its asset quality position by seeking solutions, both organic and inorganic. Current NPE includes FCR eligible NPEs of around EUR 820 million. We have received applications for EUR 383 million of these. 76% of these applications remain incomplete, with a deadline for completion of 30th June. From the applications assessed to date, EUR 42 million are eligible and around EUR 30 million are non-viable.
Our plan for this portfolio prioritize realizing collateral, using writeoffs to incentivize quicker cash or debt to asset swap solutions, and using foreclosures or other enforcement routes where borrowers are not willing to cooperate. This will continue to be facilitated by the onboarding the assets into REMU at a conservative, around 25%-30% discount to open market value. As a last point, I would like to mention that following the COVID outbreak, the foreclosure process has been suspended until 31st August 2020 in line with the latest decision of the Association of Cyprus Banks. Moving to the income statement on slide 32. Net interest income remains broadly flat Q1 at 85 million EUR in the first quarter, including approximately 4 million EUR of interest collections not previously recognized. Net interest margin increased to 1.95%, positively impacted by the lower volume and cost of deposits.
Non-interest income dropped to EUR 60 million for the first quarter, following a reduction in insurance income and a slowdown in revenue sales due to the COVID-19 lockdown. Total income for the quarter decreased to EUR 145 million, compared to EUR 156 million in the fourth quarter of last year. Now expenses. Total expenses for the first quarter decreased to EUR 93 million from EUR 103 million for the fourth quarter, due to lower staff costs and operating expenses. As a result, the cost to income ratio decreased by five percentage points on a Q-on-Q basis to 58%. Loan credit losses amounted to EUR 64 million, of which EUR 28 million reflects initial impact of IFRS 9 forward-looking information, driven by the macro outlook, as discussed previously. The overall loss after tax amounted to EUR 23 million for the first quarter. Now moving to slide 35, where we analyze the drivers of NIM.
Our NIM in the quarter improved to 195 basis points, mainly due to the lower volume and cost of deposits. The yields on the performing book reduced to 324 basis points in the quarter, as they remain under pressure, mainly due to the continued low interest rate environment. The legacy book yields increased to 560 basis points, positively affected by increased interest collections in the quarter. Finally, the cost of funding decreased to 30 basis points, positively impacted by the reduction in the cost of deposits, but declined by another five points this quarter. Turning to non-interest income on slide 38. Non-interest income for Q1 decreased to EUR 60 million. Recurring income was EUR 49 million in the quarter, down by 9% Q-on-Q, mainly due to lower insurance income. Net fee and commission income remained broadly flat at Q-on-Q at EUR 38 million.
Net fee and commission income comprises 44% from transactional income and is negatively affected by the COVID-19 outbreak. The remaining is non-transactional and therefore more resilient. Net insurance income amounted to EUR 11 million in the first quarter, compared to EUR 16 million in the previous quarter, reflecting primarily the negative market performance following the COVID-19 outbreak and higher insurance claims. Revenue net gains amounted to EUR 1 million for the quarter, compared to EUR 6 million in Q4, reflecting the slowdown in REMU sales due to the lockdown in March.
Your profit remains volatile. Turning to cost on slide 38. Our cost-to-income ratio, excluding bank levy, stood at 58% for Q1, compared to 63% in Q4 2019, principally reflecting the lower total operating expenses. Staff costs for the first quarter reduced to €49 million, compared to €53 million in the previous quarter, reflecting the net savings from the successful voluntary staff exit plan. Operating costs were also reduced to €35 million for Q1, attributable to lower consulting expenses and property. Special levy and contributions to the Single Resolution Fund and the Deposit Guarantee Fund for the quarter amounted to €9 million, including a €2.9 million contribution to the Deposit Guarantee Fund. A reminder, as from January 2020 and until July 2024, the Group is subject on a semiannual basis of a similar level of contribution to the DGF fund.
With that, I hand back to Panicos for closing remarks.
Thank you, Eliza. COVID-19 presents an unprecedented external economic shock. At the moment, we are clearly facing into a period of significant economic uncertainty, and we are taking a measured and prudent approach in how we position the bank going forward. We are mindful of the need to preserve our capital and financial liquidity strength, as well as playing our part in supporting the economy as we go through this difficult period. The gradual reopening of the Cypriot economy is encouraging, and we remain cautiously optimistic. The deterioration of the short-term prospects of the Cypriot economy has led to an 88 basis points increase in our cost of risk. Our currently critically funding and covered position us well to withstand the crisis. We entered the crisis with a well-diversified loan portfolio.
However, as we have no clear visibility of the direct and indirect impacts of COVID-19 on our customers and the effectiveness of the regulatory and fiscal measures taken to support the economy and mitigate the impact of the virus, we will closely monitor their performance. Our medium-term strategic priorities remain clear. With a sustained focus on strengthening our balance sheet and improving asset quality and efficiency in order to continue to play a vital role in supporting the Cypriot economy. This concludes our presentation, and we are now open for questions. Thank you all for having the patience to listen to us.
The first question comes from the line of Floriani Jonas with AXIA Ventures. Please go ahead.
Hi, guys. Good afternoon, everybody. Thanks for the presentation. I have two questions on asset quality. First is on slide 26. I was just wondering if you could run through briefly what you saw in terms of dynamics of Q1 inflows and outflows. I suspect that most of this performance is reflecting January and February, given the macro situation. If you have any color on how we should think about these dynamics now in the second quarter, that will be very helpful. I remember that previously you commented that you're still expecting a reduction in the stock of NPs for 2020, and just wondering if this still holds. My second question is on slide 16.
On a similar note, if there's any visibility on the cost of risk going forward, I assume that if we don't expect any major changes in terms of macro estimates for the year, we should not see additional one-offs in your cost of risk as well. If that's the case, I was also wondering if the 112, 110 or so basis points that you booked in Q1 could be a run rate for the rest of the year on an underlying basis. I'll leave it there. Thanks.
Okay. Thank you, Jonas. I will go ahead with the first question, and then I will tap over to Demetris for the question on the cost of risk. In slide 26, indeed, you see that we have, let's say, the lowest inflows of NPE in this quarter, and this is very encouraging. As you said, this was mainly the first two months of the quarter. Given the moratorium and the measure we are taking on proactively assessing the credit risk of our clients, we do not expect significant inflows of NPE during the remainder of the year. However, on the outflows, there is a plan. We are constantly monitoring it. This is kind of, let's say, more unknown. Just, I think we should keep the conclusion that we don't expect during the next couple of months any significant NPE inflows in our portfolio.
Demetris, on cost of risk, or any comment on which slide are you on?
Let me go to the cost of risk and start first with the macroeconomic parameters. I think that was the first part of the question.
To derive the macroeconomic parameters following the public advisor of the SSM as well, we considered various scenarios of different degrees of adversity, and we combined them with prudent weighting to derive our forecast of the way forward. As we indicated, SARS seems to be coming out early from this crisis. Currently, I would say that we are leaning on a better than expected result. If this continues, pressure of the macroeconomic variables on the provision before will ease off gradually. However, we would need to wait and see how this materializes, and up until the time when we have substantial evidence that the situation has started and is improving, we will continue to be prudent in the weighting of our adverse scenarios. As far as the run rate of the cost of risk, 112 basis points, as indicated, is reasonable given the situation today.
I have to note here that a significant driver of this 112 basis points is the provision we take for the non-cash interest we recognize on NPEs. As shown in the presentation, this is a charge of around 53 basis points. Going forward, a sale and the recognition of an NPE part of the portfolio is expected to have a positive impact on the provisions going forward. I hope that answers the question.
Thank you.
The next question comes from the line of Daragh Quinn with KBW. Please go ahead. Mr. Daragh Quinn, can you hear us? We will continue to the next question. The next question comes from the line of Corinne Cunningham with Autonomous Research. Please go ahead.
Good afternoon, everyone. Thank you for the call. A couple, please. Can you let us know what you're thinking in terms of loan growth? I know you mentioned that the government guarantee schemes are not back in place yet, you don't expect that to affect the support you're going to provide. If you could give us a scale, perhaps, of how much you expect loans and RWAs to increase from that. On the capital front, are there any releases of capital from elements such as IFRS 9 or changes in the software deductions? Could you guide us through any changes in RWAs or capital calculations that might come from either of those types of things? Thank you.
Okay. Thank you, Corinne. I will try to answer your question on loan growth, then I will hand over to Eliza for the capital raise question. Okay, as you may have noticed, the 2019 new loans was a record year for the bank, EUR 2 billion, and even Q1 of this year was up 2% versus 2019, quarter-on-quarter. I wouldn't be prudent to you if I was to say that I expect, let's say, the same amount of new loans in 2020, near EUR 2 billion. I expect large volume of new loans, and this volume of new loans will be mostly related with providing liquidity assistance to our clients, which we already do. As we said, the absence of any state guarantee does not in any way change our way of seeing things in providing the liquidity to our viable clients.
I expect less new loans in 2020, but I also expect the performing book to remain broadly flat through this year, given the moratorium. Eliza, on the capital release?
Yes. Corinne, I think you're referring to the announcement of the European Commission a couple of, three weeks ago or so. Yes, we do expect a benefit to come through from those. We haven't put it in the slides because as you know, it's not yet legally in place. However, actually, the biggest benefit for us is this SME factor on the risk-weighted assets. We expect around EUR 350 million benefit coming from those, which is based on high-level information without knowing all the details yet, because they've not been announced. We do expect, or actually, there is the possibility that we may have another modest level of benefit from software. As the technical guidelines are not yet issued, we cannot assess to what extent our software, our intangibles will qualify for that. That remains a potential positive, but as of this time, unquantified.
I hope this helps. On the IFRS 9 you mentioned, actually. Yes, it's good that the dynamic part of IFRS 9, so any COVID provisions we may take will be phased out and will start to be impacting capital from 2022. However, the impact of that we expect is modest based on what we currently see. Of course, this depends on how the macro assumptions and how the whole outlook evolves. If we end up with more stage one and stage two provisions, we will have a bigger capital benefit. Effectively, what that decision or recommendation says is any IFRS 9 COVID related provision on stage one and two loans, new provisions, can keep capital with a two-year time lag.
Thank you very much. Just to be clear, when you said the SME factor, the EUR 360 million benefit, that would be a reduction in our RWAs by EUR 360 million?
Yes.
Yes.
It's beneficial. It's the most favorable capital treatment given by the European Union to encourage lending to SMEs. It so happens that in Cyprus, actually quite a large portion of our corporate portfolio also qualifies for this SME definition because of the size of the country and the companies. We stand to benefit disproportionately from this positively. This is a CRR definition, and it's actually an early adoption. It brings forward something that would have happened down the road in 2021, and it's a permanent benefit, unlike the temporary capital conservation buffer and other more temporary benefits. This is an actual hard benefit, assuming it gets voted through.
Thank you.
The next question comes from the line of Robert Stewart with Toscafund. Please go ahead.
Hi there. Thanks for the opportunity. Just a couple of questions, please. Firstly, on fee income, I was wondering if you could just discuss that a little bit more generally around the structural versus cyclical issues there. Just to give a bit of color for going forward. On interest income, similarly, I was wondering, appreciate you've just sort of partly answered the question around balance sheet size performance, but just hopefully can stay at a similar level. I was wondering if you could just give me a bit of an indication what front book versus back book yields were across the portfolio for Q1 for the EUR 450 million of new lending. The final one was just on the NPE sale. Appreciate that's currently off for now.
Have any kind of potential discussions just completely gone or are they just ongoing slower, the portfolio, et cetera, or should we just park that and revisit it at a later stage? Thanks.
Thank you for the question. I will start with the last one and hand over to Nick about the NPE trade. Nick?
Rob, hi, it's Nick. Hope you're well. Thanks for the question. I can't really say a lot more over and above what I said on the relatively recent full year 2019 announcement call, which is, look, obviously COVID has interrupted our hope for a H1 execution. We're tentatively focusing on a delivery into the second half of 2020. We're going to caveat that with, there is a high degree of uncertainty, many of which are outside of our control. I think we need to keep this situation collectively under continuous reassessment. Our endeavors remain, and our hope is focused on the second half of the year.
Thank you, Nick. Eliza, on the income side?
On fees, Rob, if I refer you to page 36 where we have the fees, they were at EUR 38 million this quarter or EUR 39 million the previous quarter, that's the kind of run rate. The fee at risk, as I mentioned, relates to the 44% transactional. Of that, or actually not of that, of the whole fees, we expect a roughly 20% drop due to COVID for Q2, Q3, hopefully recovering or expected to recover from Q4 to start recovering, fully recover next year. The reason, actually, the main reasons for the expected drop are twofold. The first one is card usage, which is linked to consumption and therefore macro, is also linked to tourism and the use of cards for enhanced in Cyprus. The other element is international transfers mainly coming from our international banking services business line.
Now on front back book spreads, I will refer you to page 34, one of the pages I haven't covered. There you will see the effective yields of the legacy and the non-legacy portfolio. I would say that from the non-legacy, so the performing book, there's definitely a skewed I mean, the front book is slightly lower than this average. We don't have the exact number, and it's not public.
Yes, effective non-legacy is slightly lower, actually.
Yeah. This is a good reference.
Yeah.
Don't forget that new lending this year will be actually relatively modest. Actually, the back book, the non-legacy back book will, to a large degree, continue to be in place until the end of the year due to the moratorium. There's a kind of.
It is higher too, higher rate.
Yeah.
The back book is higher rate.
Yeah. No, what I'm more thinking about, the reason why I question is more around the sustainable pre-provision profit, basically.
Yeah.
Assuming at some stage that the legacy is not around or a portion of the new legacy is not around.
Yeah.
Is my thinking. When you say the effective yield, maybe you said so, but are we talking I mean, I don't know, maybe you can answer that a slightly different way. If you look at mortgage rates, for example, what are they coming in at now? Maybe at the beginning of the quarter, because maybe it's slightly unrealistic to think about today.
Okay.
Mortgage rates, did you want to talk? I mean.
Mortgage rates are, let's say, are gradually rising. I have seen them gradually rising in the last couple of months, but it's still on the range close to 20, 25, 2.5%. The business loans are up. I mean, we are seeing average spreads for new business loans are 3.5%. We don't expect, having in mind that the back book, who is higher priced because of the moratorium, will not decrease as it used to happen in the previous years. We expect rates to remain broadly flat or any high profit to become better. I mean, the effectiveness on the loan book. Aside from that, we remain too busy. Yeah.
Actually, on the mortgage loan book, Rob, we don't really see a big difference between front and back book average rates these days.
Okay. Perfect.
Mostly the business loans where this spread.
The business loans have.
They're punching up. Where price sets in more so these days than maybe pre-COVID.
The pricing post-COVID is higher than pre-COVID, it's clear.
Yeah.
We have a follow-up question from the line of Corinne Cunningham with Autonomous. Please go ahead.
Thank you. I just wanted to ask about TLTRO, whether you had plans to use that? Perhaps you can give us an idea of scale or impact that that might have on your NII if you do choose to go ahead. Thank you.
This one is yours.
Okay. Yes, we are well looking into it. We haven't yet decided whether and how much to go for. If I was a betting person, I'd say we'd probably go on, apply, go in, participate. However, the benefit actually relate, it can be from zero to around 50, 60 basis points, depending on the lending that we expect we have done and expect to do in the period, during which the TLTRO formula works. This is something that we are still trying to decipher, so I cannot give you clear visibility yet of numbers. This is something we'll consider in the next couple of weeks ahead of the deadline of participation.
Thank you.
We have another follow-up question from the line of Robert Stewart with Toscafund. Please go ahead.
Hi. Thanks again. Sorry. Just on TLTRO, just to follow up on that question. Do you pay the maximum that you could draw then? I think the line just cut out when I was listening to that. Just on operating expenses. Obviously a good performance this quarter, and appreciated after the hard work that was done last year. Outside of some of the moving parts around levies, et cetera, would you expect this sort of run rate to continue?
Okay. I couldn't hear very well the first question. On the question of operating expenses, there is a clear focus. There was a cost reduction plan within the bank pre-COVID, which has been revised and has been more aggressive post-COVID. We expect the, let's say, reduction versus 2019, not only on the staff costs, which are expected because of the exit plan we had at the end of 2019, but also on the remainder of product expenses, we expect to have a meaningful cost reduction during the year, yes. On the first question, sorry, I couldn't hear very well. You can, I'm confused.
I just wasn't sure. Sorry, I couldn't hear whether Eliza had said whether there was a maximum TLTRO benefit in terms of take-up or you just expect to take as much as possible?
Eliza, I'll pass her.
No, what I said is the benefit is of the order of 50, 60 basis points maximum, but whether we can take that, benefit from that or not, to what extent we can benefit from that depends on our new lending to certain types of customers, local, within a certain period. In EUR there are some restrictions. We're working through our numbers again to see to what extent we feel, what is the probability we feel we will benefit, and depending on where we get to, we will also apply for an amount, depending on our comfort, that we will actually benefit from it. Don't forget, the TLTRO for us, is effectively a carry trade. We would borrow and place back with ECB at the margin. That's how we would think about it. It's a matter of making sure we can benefit.
We feel we will end up participating, but the extent and the benefit is still being worked on.
The amount of TLTRO that we can apply for, it's more than EUR 1 billion, correct?
Yes. It's of that order. Yes.
Mr. Stewart, are you done with your questions?
Yes. That's fine. Thank you.
Thank you very much.
If I can just go back to the TLTRO question, apologies for interrupting. Actually, the amount we can apply for, specific number is in excess of EUR 5 billion. Our thinking, if we are to apply, is for amount of the order of EUR 1 billion, like Panicos mentioned. Just to make sure there's no confusion on this point.
Thank you very much. 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.
Final comment is that our strategy, and I would like to emphasize this, remains the same. We want to strengthen our balance sheet, but at the same time, improve our efficiency. Which improving our efficiency comes with changing our operating model, reducing our cost, and of course, bringing forward more aggressively our digital agenda. Reducing of NPAs is a commitment, together with accelerating the reduction through organic and inorganic and talking about inorganic, we mean trades in our agenda. That's it for the presentation. Of course, we would be more than happy to discuss one by one, let's say, conference call with each one of you that would like to have more information about the strategy of the bank and about the results of Q1. Thank you all for participating, and I wish you all stay safe and healthy. Thank you.