Ladies and gentlemen, thank you for standing by. I am Gabby, your conference call operator. Welcome, and thank you for joining the Bank of Cyprus conference call to present and discuss the group financial results for the quarter ended 31st March 2019. All participants will be in listen-only mode, the conference is being recorded. The presentation will be followed by a question and answer session. Should anyone need assistance during the conference call, you may signal an operator by pressing star and zero on your telephone. At this time, I would like to turn the conference over to Mr. John Patrick Hourican, Group Chief Executive Officer. Ms. Eliza Livadiotou, Group Finance Director. Mr. Nick Smith, Director of Restructuring and Recoveries. Mr. Michael Sifantakis, Group Chief Risk Officer. Ms. Anna Sofroniou, Director, Real Estate Management Unit, and Ms. Annita Pavlou, Manager, Investor Relations. Mr. Hourican, you may now proceed.
Thank you very much, operator, good afternoon, everyone, and thank you for your time. I recognize that you have not had a lot of time with these numbers, as always, Annita and the team will be available for any one-to-one questions you may have in due course. I'll start with in the last few minutes, we have announced the appointment of Panicos Nicolaou as the CEO designate to succeed me at the bank. Panicos' appointment is subject to ECB's approval. Panicos has been the director of our corporate unit since 2016 and has extensive experience in the local banking sector here in Cyprus. Our nominations committee ran a thorough and intense process under which international and internal candidates were assessed. It is pleasing that Panicos, a member of our executive team, was chosen from this process.
I will, of course, work closely with him over the coming months to help ensure a smooth transition. Turning to the results. As an overarching statement for the first three months of 2019, I would say that our results reflect continuing progress against our core objective of balance sheet repair. Slide two summarizes the key highlights for the three months ended 31 March 2019, I'll briefly touch on each of these points. The bank's capital position remains good. Our CET1 ratio and our total capital ratios stood at 14.9% and 17.9%, respectively, pro forma for the Helix trade at the quarter end. In March this year, we finally received approval from the ECB for the significant risk transfer for Helix, the legal completion process is now underway. Pro forma completion is expected this quarter. We continue to make progress in repairing our balance sheets.
This was the 16th quarter of organic NPE reduction. Since the peak in December 2014, we have reduced the stock of NPEs at the bank by about 70%. During the first quarter of the year, we reduced the NPEs by EUR 157 million to EUR 4.6 billion or EUR 2.4 billion net of provisions. These exposures are covered 48%, our NPE ratio is now reduced to 35% pro forma for Helix. We have a clear strategy for continuing the improvement in asset quality of the bank, we are actively exploring strategies to further accelerate de-risking, including contemplation of further portfolio sales. Bank has significant services of EUR 3.8 billion pro forma for Helix as at March. At March 2019, deposits were 3% lower than they were at the end of last year at EUR 16.3 billion, our loan-to-deposit ratio is a very healthy 67% pro forma for Helix.
Performance in the first quarter was in line with plan. Total income was EUR 176 million, generating an operating profit of EUR 71 million. The underlying profit before restructuring for the quarter amounted to EUR 23 million. Cost of risk stood at 1.2%, reflecting continued de-risking. Completion and timing adjustments relating to Helix resulted in a P&L charge of EUR 21 million for the first quarter. A positive impact of EUR 109 million arose from tax legislative amendments in March this year. The combined result of all of these moving parts was a profit after tax for the first quarter of 2019 of EUR 95 million. With that, I'll hand over to Eliza, who will begin on capital.
Hi from me, too. Starting from capital on slide three. As you see, and as you've seen from last quarter, the bank continues to be well-capitalized. During the first quarter of 2019, we generated 50 basis points of organic capital in operating profits, whilst the deferred tax credit conversion had a positive impact of 190 basis points. These were partly offset by provisions, impairments, and other adjustments, totaling 110 basis points. Pro forma for Helix, the CET1 ratio stands at 14.9% and the total capital ratio at 17.9%. As John mentioned, the bank has received approval from the ECB on the significant risk transfer benefit from Helix, and the project remains subject to other outstanding conditions precedents and is expected to be completed in the second quarter of 2019. Our average risk-weighted asset intensity remained relatively stable during the quarter at 64% on a pro forma basis.
Overall, the average risk-weighted asset intensity has reduced by 21 percentage points since 2016, reflecting the de-risking and change in balance sheet mix. With that, I'll hand over to Nick for asset quality.
Good afternoon, everyone. I'll start in my usual place on slide four. In the first three months of 2019, the bank continued to deliver organic NPE reduction, with NPEs reducing by EUR 157 million or 3%. Since 2014, organic NPE reduction totaled EUR 7.7 billion or 51%. Pro forma for Helix and Velocity, NPEs reduced by a further EUR 2.7 billion and the NPE ratio improved by 11 percentage points to 35 million.
I'm going to turn now to slide five. The pace of NPE outflows presented in the top chart remains reasonable, totaling EUR 281 million in Q1, and on average is running at EUR 320 million per quarter since Helix was announced. Inflows in the fourth quarter amounted to EUR 130 million. Overall, for Q1, the net organic NPE reduction, as John mentioned, on the residual portfolio is EUR 157 million. We continue to expect organic NPE reduction of around EUR 800 million for the whole of 2019, in line with our target. Variances quarter-on-quarter are to be expected, though. Let's move now to slide six. Here we present the bank's view on what we describe as core and non-core NPEs using a consistent approach in line with previous results presentations.
Pro forma for Helix non-core NPEs totaled EUR 870 million as at 31 March, representing 7% of gross loans and around 19% of total NPE stock. Coverage on these loans pro forma for Helix is relatively modest at 19%, reflecting the lower risk associated with this stock of NPEs. Around 51% of these are available for NPE exit by the end of 2019, subject to continuing to meet all relevant exit criteria. Again, pro forma for Helix core NPEs totaled around EUR 3.7 billion as at 31 March, representing 28% of gross loans and with 55% provisional coverage. Let's now turn to slide seven. Continuing to tackle the bank's NPE loan portfolio is of utmost importance for the group and our stakeholders.
We have been successful in developing restructuring solutions across the book. We expect this to continue in the coming quarters at a pace of around EUR 200 million per quarter. Today, the bank's EUR 3.7 billion of core NPEs falls into three principal buckets. Firstly, ESTIA. It is frustrating that the scheme launch continues to be delayed for reasons that are outside of our control. We continue to push for an immediate conclusion and launch of the scheme. Based on the bank's available data, the scheme is expected to positively impact up to EUR 0.9 billion of stickier retail core NPEs, which represent around a quarter of our remaining core NPEs, subject as usual to eligibility criteria and participation rates. ESTIA also remains indirectly important to other NPEs, as it provides a clear definition of socially protected borrowers, discouraging strategic defaults. Secondly, retail non-ESTIA eligible loans of around EUR 1.5 billion.
These will continue to receive clear focus from management, which continue to be aided by refocused servicing support from Pepper and enhanced new products. Options to accelerate NPE resolution through structured solutions will focus heavily on this book. Thirdly and lastly, SMEs and corporate loans of around EUR 1.35 billion. Our plans prioritize realizing collateral using write-offs to incentivize quicker cash or default solutions or via foreclosures or other enforcement routes where borrowers are not willing to cooperate. This will continue to be facilitated by onboarding assets into REMU at conservative 25%-30% discounts to open market value. In parallel, the bank will continue to actively explore alternative avenues to further accelerate this reduction via those structured solutions. Turning to slide eight, ESTIA. I will not cover the terms of the scheme, as I think these are generally well understood.
I would like to remind people that while the scheme will help resolve a stickier component of NPEs, it will not produce immediate results, as restructured credits will be subject to usual curing rules and timetables. Despite delays to its launch, the bank continues to hope to be in a position to execute restructurings for eligible borrowers during 2019. Assuming this can be achieved, the NPE benefit will not materially occur until late 2020 or more realistically, 2021. Even though ESTIA is not officially launched, we have undertaken certain actions in order to assess eligibility and build a book prior to the launch. We have identified the perimeter based on the information available to us today, we have developed an industrialized process to handle large volumes in short time frames. There is a generally positive response for the scheme from the market.
Indeed, 98% of potentially eligible borrowers contacted have expressed interest to participate. Moving on to foreclosures on slide nine. The bank has taken actions to significantly boost foreclosure volumes over the last two years. It remains a key priority and further actions have been taken in Q1 to boost pace and allow higher volumes of retail foreclosures to be handled. This is including reaching agreement with an external law firm to boost capacity alongside our experienced internal engine. Overall, between January 2016 and December 2018, foreclosures have commenced on 3,011 properties, including Helix assets. During Q1, foreclosures have commenced on 330 non-Helix assets, Just over half of these borrowers have engaged in active negotiations with the bank following the commencement of the process.
More than 350 auctions were held in the first quarter of 2019, mainly relating to Helix assets. As the Helix portfolio consists of larger corporate exposures, for which the foreclosure process commenced earlier. In our non-Helix retained portfolio, 82 properties were auctioned during the three months, while around 650 non-Helix properties are already set for auction during the remainder of 2019. In addition, around 250 non-Helix properties are today awaiting repossession, having failed to sell at first auction. We again expect further improvements in pace of foreclosures during 2019. Turning to slide 10 on revenue, EUR 37 million of property sales covering 119 properties were achieved in Q1. The bank recorded a EUR 4 million profit on these sales, testament to our conservative policy for onboarding assets at a 25%-30% discount to OMV. The near-term sales pipeline remains strong.
As at 31 March, SPAs relating to EUR 103 million of property sales were signed awaiting execution. At the same time, in addition, EUR 46 million of SPAs were under preparation, having agreed commercial terms with buyers. Lastly, the completion of CYREIT is well underway and is subject to the approval of the buyer by the Securities and Exchange Commission. CYREIT will deliver a further EUR 160 million of property sales. As seen in previous quarters, land sales continue to be the largest component by volume, representing around 41% of Q1 sales. Market statistics also remain encouraging. Residential property prices rose by 1.6% year-on-year, Sales contracts deposited at the land registry, excluding those that relate to bank foreclosure activity, increased by 11% year-on-year by volume. Lastly, from me, slide 11, provision coverage.
The bank NPE coverage ratio remained at 53% at the quarter end, in line with our previously disclosed expectations, and 48% based on pro forma results for Helix. The bank stands today above the European average coverage ratio of 44%, and total coverage, including tangible collateral, at 123%, or 118% on pro forma results. As Eliza will explain in a moment, there has been a small change in accounting, which impacts our cost of risk calculation. On both the old and this new basis, the cost of risk in the first quarter was around 1.2%. This is a little above our guidance of circa 1% for the whole year, largely reflecting volatility in the IFRS 9 calculation. Of note, our Stage 3 assets, those that are in default, actually declined in the quarter, which you can see in the appendix slides.
We continue to expect cost of risk to be around 1% for the full year. With that, I will hand back to Eliza.
Thank you, Nick. Let's now move on to revenue trends for the quarter on slide 12, where we present total income. As Nick mentioned, there was, as a result of implementing of a new IFRS interpretation, a small change in how we recognize interest income and provisions. While it has zero impact on our bottom line, it does impact some of our ratios. To help you, we have included a slide in the appendix that fully maps out the impact, and on slide 12, we show the revenue numbers on the both the old and the new basis. Under the new basis, our total income was at EUR 176 million and was 6% lower than the previous quarter.
Net interest income remained at similar levels with the previous quarter at EUR 102 million, as the lower interest income on loans was offset by a lower funding cost and reactive management of surplus liquidity. Our margins have widened to six basis points, positively impacted by the reduction in the volume and cost of deposits. On our non-interest income, this declined mainly due to lower disposal gains. If I turn now to explore individually the drivers of revenues in more detail, let's start from volumes and volume trends on slide 13. New lending reached EUR 563 million in the first quarter, and we provided over EUR 4 billion of new lending to the Cypriot economy since 2016. Corporate continues to be a strong component of new lending, representing 60% of overall loan originations.
The yield on our performing book fell in the quarter as a result of both lower base rates and competitive factors. New lending continues to be carefully considered against robust assessment criteria, 97% of new exposures in Cyprus since the beginning of 2016 is performing. Moving to balance sheet de-risking on slide 14. As explained in the past, the continuing balance sheet de-risking is resulting in a smaller but lower-risk loan book. Overall, net loans have reduced by around 29% since 2015, driven by the legacy book deleveraging and the sale of the U.K. bank in 2018. The performing book experienced a moderate increase of around EUR 100 million quarter-on-quarter. On the new basis, total interest income on loans fell from EUR 131 million to EUR 118 million in the quarter, excluding Helix. Apologies.
Excluding Helix, the decline was from EUR 109 million to EUR 101 million. Within the performing book, interest income fell by EUR 10 million as a result of the lower yield I discussed in the previous slide, driven mainly by lower base rate and the sustained competitive environment, as well as the transfer of portfolio of loans from performing to legacy. Interest income in the legacy portfolio was largely unchanged in the quarter. Going forward, the continued de-risking of the legacy book will result in further pressure on interest income, but this should have little impact on the bottom-line profit as all of this interest income is provided for. Moving to slide 15 now, this should be a familiar slide from previous quarters.
Starting first with legacy, as previously mentioned, you can see that the interest recognized on this book is negative to the bottom line, this quarter especially, due to higher provisions. The risk-adjusted yield of this book was actually negative compared to nearly 4% of the performing book. Moving to slide 16 on funding and liquidity. Local deposits decreased by 3% in the quarter and are up just 1% year-on-year. Of the deposits in Cyprus, around two-thirds represent deposits whose ultimate beneficial owners are Cypriot, whilst only 4% of these are Russian. As you can see on the slide, the cost of deposits fell further in the quarter, which helped offset some of the yield pressures that we have already discussed. On liquidity ratio compliance, the LCR add-on requirement was abolished on the 1st of January 2019, resulting in a significant liquidity surplus of EUR 2.9 billion.
This surplus will increase by a further EUR 1.2 billion through the completion of Helix, bringing the total liquidity surplus to EUR 3.8 billion. These levels of liquidity continue to put pressure on NIM as excess liquidity is placed with the ECB at negative rates. Moving to slide 17 on the drivers of NIM. To bring these asset and liability trends together, I want to now turn to margins. As explained on previous results calls, net interest margins have come under pressure as a result of a number of actions we have taken, which had a positive impact on capital and liquidity. Our NIM in the first quarter has widened slightly to 227 basis points compared to 221 basis points in the fourth quarter of last year. The largest driver was the reduction in the cost and the volume of deposits.
Our margin dynamics are much more complicated than this, and there are several important underlying components that must be analyzed. First, liquidity built up in this interest rate environment. Liquid assets decreased to EUR 5.9 billion, down 8% on a quarterly basis, and now account for 54% of interest-bearing assets. The increase in the yield of liquids on a quarterly basis was driven by liquidity management actions, including the impact of the decrease of the EUR deposits and diverting dollar liquidity from FX swaps to bonds. Secondly, the higher yielding, higher-risk legacy loans are reducing as we successfully exit NPEs. The third component is the yield on the performing book, which dropped from 378 to 346 basis points in this quarter due to lower base rates and continued market pressure. And finally, the cost of funding is decreasing and the impact is increasingly visible.
We continue to aggressively reprice our deposit book down, and the cost of our deposits in Cyprus declined by nine basis points this quarter and by 37 basis points year-on-year. Our overall blended average funding cost came down by nine basis points. Now moving to slide 18 on non-interest income. During the first quarter, this decreased to EUR 74 million compared to EUR 85 million in the previous quarter. Net gains on financial instruments amounted to EUR 18 million, which is in line with prior quarters. Q4 2018 was positively affected by non-recurring FX hedging position closing. Recurring income was at EUR 52 million for the quarter, down 12% quarter-on-quarter, when it stood at EUR 58 million due to elevated insurance claims and seasonality. Net fee and commission income for the quarter stood at 22% of total income. Now turning to expenses on slide 19.
Our cost-to-income ratio, excluding levies, stood at 56% for the first quarter, compared to 50% for the full year 2018 on the same basis. Our operating expenses are a key and focus area for the bank. During the first quarter of 2019, our operating expenses amounted to EUR 42 million, slightly lower than the fourth quarter. Staff costs for the quarter amounted to EUR 57 million compared to EUR 59 million the previous quarter, but this EUR 59 million included an amount of EUR 4 million relating to the previous quarter and one-off transactional costs. The remaining increase relates to higher social insurance and NHS contributions, this is the National Health Service in Cyprus, which started earlier in 2019. Going forward, as John noted at the beginning, the digital transformation program is beginning to clearly deliver and improve customer experience.
Our branch network is now half the size it was in 2013, and considerable work is going on to identify areas to further reduce costs. Cost reduction is a key focus area for management this year. Now turning to the income statement on slide 20. Net interest income remains broadly flat at EUR 102 million on a quarterly basis, while total income decreased to EUR 176 million for the quarter. Total expenses for the first quarter reached EUR 105 million compared to EUR 110 million in the previous quarter, and provisions amounted to EUR 47 million, whilst cost of risk was at 1.2%, and this excludes the impact of Helix and Velocity. Operating results from organic operations were at EUR 16 million, corresponding to a quarterly EPS of EUR 0.036.
To help you better understand the shape of the group post Helix, slides 26 and 27 in the appendix provide indicative numbers of key balance sheet and profit and loss items. Project Helix had a P&L charge of EUR 21 million this quarter, mainly relating to completion and timing adjustments. The P&L positive impact of the deferred tax asset conversion amounted to EUR 109 million, and the overall profit after tax reached EUR 95 million for the quarter. This concludes our presentation. I will hand back to John and the operator.
Sure. Operator, back to you to take any questions that people have. I recognize that this is a large dump of information on people who have only had this set of information for a short period of time. Again, we will take any questions you have now, and happily, the team will take each of individual calls as there are.
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 their telephone. If you wish to remove yourself from the 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 is from the line of Floriani, Jonas with Axia Ventures. Please go ahead.
Hi, team. Good afternoon, everyone. I have got a question first on NPEs, mostly basically kind of related to slide five. Following on what Nick said about the organic NPE reduction in 2019 to be around EUR 800 million, I was just wondering what will be the dynamics of both the outflows and the inflows going forward. It looks like now, looking at the slides, especially from Q3 2018 onwards, the amount of outflows, it is kind of stable but a bit lower, whilst the amount of inflows has been quite consistent as well. I am just wondering how you see the dynamics of both sides going forward. Finally, if you can give any more guidance for 2019. I think you already mentioned the expectation for cost of risk to be around 100 basis points. Just wondering now what will be your expectations for NII, PPI, and OPEX as well.
That will be very helpful. Thanks.
In terms of the last question, I don't think we're going to be able to give guidance on this call. Let me deal with the first question because I can talk about that. I think what you see in that top chart on slide five is the impact of Helix. When we were reporting Helix prior to the announcement within run rate numbers, we were running at NPE exits of the order of EUR 600 million-EUR 700 million on a gross basis. Post the execution of Helix, a large part of the corporate book, a large part of the SME book, sell into the assets awaiting sale, and were no longer accounted for in terms of NPE reduction because the benefit of tax recoveries and asset recoveries from that transaction, assuming legal closing of the deal, will fall into a lockbox for the benefit of the buyer.
As we guided at that point in time, we said there will be a drop in ongoing run rate for that reason, and what you're seeing there is I think now a sort of three quarters post Helix, a fairly sensible average kind of run rate per quarter, which is in the zone of where we guided. We guided on the net basis rather than the gross basis. I think at the bottom you see the run rate of inflows, as you said. I think it's fair to say that the level of inflows is more heavily biased towards the smaller ticket retail book and the smaller ticket SME book. Both of those areas were outside of the Helix transaction, which as I said earlier, was largely corporate and top half SME.
What you're seeing is an impact on the outflows from Helix, and you're not seeing anywhere near as great an impact on the inflows. Hence the re-energization on the focus on small ticket and exploring alternative potential structured solutions to do something similar with that part of the book that you've seen us do with the corporate and SME book.
On guidance, we can't give new guidance at this stage because of the changing shape of the balance sheet and therefore the P&L. However, we have given some numbers so that you can pro forma out Helix one and they're in the appendix. About EUR 800 million NPEs. Cost of risk.
Thank you.
The next question is from the line of Mohamed Khalout with Citigroup. Please go ahead.
Hi, everyone, thanks for having us on the call. I won't take too much time. I've just got three questions. For starters, you were just talking about the NPEs on the retail segment. I'm just wondering, you've seen EUR 120 million of inflows increase Q on Q. Is that inflows of restructured loans, or is that new loans that have gone bad, or what's happening on the retail side? For starters. Then on your CET1 capital, we've seen a 50 basis points hit from provisions and other impairments. I think we saw something similar last year. Could you maybe explain to us what that is, and is that something we're going to see frequently? Lastly, anything about Helix and ESTIA? What's delaying them really, when can we expect them?
Thank you. I can press one and three, and hopefully it's up for two.
Look, I'll probably hand back to Carlos to deal with the first question on the retail delinquencies, because I think he can give you the best color around here. I'll deal with question 3 first while I'm talking. I think, look, Project Helix, as you know, is a complicated transaction. Very large portfolio relative to the bank, relative to the market, and required a very careful and fairly well-managed carve-out of the servicing solution to accompany the sale of the assets. That's been progressing very well with the buyer. Quite rightly, they are cautious over timing and want to make sure that operational servicing of the loans can continue uninterrupted, both post legal closing and post full migration of the assets onto their own externalized platform. That process, I think, has taken longer, if I'm being honest with you, than I had perhaps hoped.
I think if I was being realistic at the time, it could quite easily have taken this long given the complexity of what was going on. Look, I'm fully confident in the closing steps. We're very closely aligned now with Apollo Global Management on those closing steps. As John made reference to in his first comments, the appropriate legal steps are now underway in terms of executing the SPAs. I'm confident of delivering during this quarter. In that Project Helix. ESTIA, you mentioned, look, I'm not sure I can say a lot more than what I said in my speech. I mean, it's outside of our house. I think there is clearly documented and well-publicized government support for the scheme. I think in terms of the scheme, the government have been quite clear and transparent about what those are and how they work.
It's in the process of final approvals through various ministries in the government. Until that's done, it won't come live. I can't really comment on how quickly that will occur other than the fact that we are obviously seeking to encourage that as soon as possible because it's quite funny having done all of the prep work and got well ahead of the curve. We want to start executing the solutions.
Okay. I'll take the question on the NPEs. It is true that the highest percentage of inflows do come from the retail side. You can see slide five, if you try to understand the reasons for the inflow, as you will see on the slide, it comes from three main categories, which is redefault, new inflows, and what we call unlikely to pay. If you adjust the unlikely to pay could be coming from your so-called healthy book, i.e., the new inflow, or from redefaults. Most of them are obviously from the redefault. If you adjust what category into the other two, I think one can say that the inflows that we have seen in Q1 is more or less 50/50 from redefaults and new inflows.
What would your cost of risk be on the retail book if you were to exclude the redefaults? I mean, on the new healthy book, what would the cost of risk for retail be?
I don't remember the numbers off my head, we can examine that and get back to you. If that's okay.
That's fine. Yeah, sure.
On CET1 ratio, there was no big change like last time, there was no on-site inspection or anything. There were just over 10 basis points between 10 and 20 basis points of SREP related movement that went through that 50 basis points bar or item on the waterfall. It's not material, and it's a number of small factors.
The major movements of CET1 from the end of last year to the beginning of last year were the phasing in of DTA and PIPP.
That was nice.
They're the two things you would naturally see are damaging your capital in the normal course of business. Other than that, there was nothing.
Yeah.
Okay. Just one more question. On the outflows of Russian and other deposits, has that affected you or the sector? How do you see that progressing?
Look, the deposit base of the bank has been fairly stable. We have been deliberately pricing deposits down to find that point of elasticity. You'll see that our deposits are down a little in the first quarter, mostly in March. We're monitoring it carefully. We're not unhappy with that. The Russian deposits, as at the end of the first quarter, I think, as a chart, we showed it at 4%. It is constantly being a smaller and less relevant part of the overall group's exposures. We're not seeing a flight of any particular type of deposit or any particular. We're paying zero on all non-resident euros, we would expect them to be less than sticky.
Our cost of deposits, Johnny, actually is at an all-time low, all time being post-crisis of 42 basis points blended. They are incredibly cheap at the moment.
Yeah. Look, the Cyprus deposit base funds the Cyprus loan book, the liquidity surplus is broadly coming from, I mean, in my head, the international book. We're not paying for international deposits at this stage, we're careful about where they come from. I wouldn't draw any observations or any trends in this quarter, indeed, any recent quarters, on how capital flows are moving. Okay. Thanks a lot.
Thank you.
The next question is from the line of Kiriakos Vlahos with HSBC. Please go ahead.
Hi, everyone. Two questions from my side. I appreciate there's a lot of underlying components on that 50 basis points negative impact to capital. Could you maybe give us a view on whether you expect these kind of things to happen in the future? A second question on the performing loan book and the reduction we have seen in yields due to competitive pressures and the lower interest rate environment. If you can give us some color on what you expect on that going forward as well, that would be very helpful. Thank you.
Okay. On the capital, let's say, just as an example, we don't expect it to reoccur in the future quarters, at least of this year. Just as an example of what's in there, eight million of the Greek tax impairment that was included in the P&L found its way through on this item in the waterfall. It's not things that you don't know about, and it's not things that haven't come through the P&L. There's nothing unusual about that.
I'll just add on that. You will see every January from every December.
Yeah
the phasing in of IFRS 9 in every bank, and you will also see much less in our bank than others, some level of DTA phasing in as well. They're the two adjustments you expect to see until they are fully phased in by reference to regulatory rules.
Yeah, of course. I think on that waterfall chart, you're very helpfully showing that somewhere else.
Yeah. Okay, on interest income there were two opposite trends in the quarter. One was the base rate reduction. A large percentage of our performing book is base rate related. By base rate, I mean BOC Base Rate, our own base rate. That base rate is linked to the average deposit rate of the country, which fell this quarter, mainly because of the Co-op Hellenic merger, which led to the repricing of Co-op's deposits by Hellenic. It was a base rate reduction impact, not a margin impact. As you will see from the funding costs, we have been working hard to offset that both from the volume and the cost of deposits.
Yeah. I'd add to that we've also changed the manner in which we're doing the new lending in from the first quarter going forward.
Yeah
To be much more attached to Euribor and other rates which are not sensitive in the same way. We are addressing it through a number of actions on pricing.
Okay. Thank you very much.
The next question is from the line of Cunningham, Corinne with Credit, Autonomous Research. Please go ahead.
Hi there. Thanks very much for taking my call. I also wanted to explore that 50 basis points reduction in CET1 from provisions. Is this because you're changing assumptions that are feeding into IFRS 9? Is that any part of that, or is it I'm just quite puzzled to see it in the capital line rather than the P&L line. Just generally, if you have anything you can tell us with more discovery going on with block sales, anything that you can tell us on that. Thank you very much.
Okay. Let me try again on the 50 basis points to be clear if I may. Of the 50 basis points, around 30 basis points, and this is mathematical, is the provision charge in the P&L. If you just calculate the
Okay
P&L charge over risk-weighted asset is around 30 basis points. There's another EUR 8 million, so that would be just shy of 10 basis points of the Greek tax impairment that went through the tax line, which has been presentationally included in this part, which is another 10-ish basis points, and the other 10 are SREP related, and they're mainly property related. Actually, to formulate SREP higher deduction to capital. That was one lot and came in January mainly relating to other legacy properties. None of these are expected to reoccur other than the cost of risk continuing. I hope it's clear now.
The second question.
In terms of block sales, I'm going to assume that relates to the potential for follow-on trades or structured solutions. I think there clearly is that potential. It's been referenced a few times by John, a few times by me in the course of this conversation. It's something we're looking at. It's naturally the right thing to look at having delivered a Helix solution, having the market recognize what we've been telling the market for quite some time, that Cyprus is different and has a robust property market underpinning it and robust cash generation. I think people are seeing that with the Helix portfolio. I think with the strength of the real estate market, and I alluded to that earlier, continuing to be in place, there's quite a lot of interest in Cyprus from potential other suitors for those kind of trades.
Look, that's all just general comments. At this point, there isn't anything specific to talk to you about. I think if you have a look at our balance sheet and where it sits at the moment in terms of NPEs, you can get a pretty good idea of the kind of assets that'll be in there and a pretty good steer for how that might look. We'll crack on with it, no promises at this point and no decisions, and we won't update you until we have something to update you on, which would be somewhere down the track.
Thank you. Thanks, Nick. Is there any sense that there's more competition now with maybe Hellenic and then the Greek banks as well, looking all to do the kind of same thing that you've already achieved? Is it more difficult, do you think, going forward?
I think there obviously is competition out there. There's also hungry buyers who have an appetite to put their balance sheets to work. They see opportunities. I like to think, maybe I'm biased, but that they see a stronger opportunity in Cyprus than they might elsewhere, given the stats and the performance that our diligence support in Cyprus. Based on the inbound interest I receive, I think there's more than enough appetite out there to credibly think that you could run another trade. Let's not dwell on that too much. It's all nice words at the moment. We'll develop our thinking and talk to you at the appropriate time.
Let me just add one thing to that, Corinne. When we were discussing this trade with investors over the course of the last 12 months, it was an idea that we were gestating to become a reality. We have now delivered a significant trade in reality and proven that spending time on Cyprus risk, in fact, can yield a significant use of equity for an investor. I think we actually have more credibility and more straightforward conversations now than we would have had a year ago. I am just echoing what Nick is saying. I think the incoming is good. There is also a proven debt market for these trades, which we have demonstrated in our own trade. And we feel, I think, quite confident that the conversations we are having with buyers are real.
Thank you.
As a reminder, if you would like to ask a question, please press star and one on your telephone. The next question is from the line of Alexandros Boulougouris with Wood & Company. Please go ahead.
Hello, good afternoon. Just a quick question because I joined a bit late. I am sorry about that. Regarding the cost of risk in Q1, did I hear correctly that you think it is seasonal and in the first quarter, and we should expect that to go down towards 100 basis points in the full year? Thank you.
Alex, for the time being and the information we have at this point in time, our expectation hasn't changed. We do expect it to be below 1% at the end of the year. It's on that, of course, including any credit.
The reason for the increase in the first quarter, what exactly why is it seasonal? What is the seasonality around?
Well, I wouldn't really call it a seasonality view. Also the Q1 of 2015 had a bit of a spike. There are certain work that is being done on IFRS 9, and there is a lot of volatility with respect to that. There is some, let's say, additional findings that hit P&L small one with respect to Helix. I haven't seen anything extraordinary in the Q1 result per se. We do expect that by end of the year all things being equal, we should be going below 1% on that, again.
Thank you.
Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Hourican for any closing comments. Thank you.
Look, I would say thank you very much for your time. The information, as always, is in front of you in the same and consistent format as previous quarters. The team stand ready to answer any detailed questions, which I'm sure many of you will have. We look forward to engaging with you over the coming few days. Thank you very much.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for calling and have a pleasant evening.