Ladies and gentlemen, thank you for standing by. I am Gary, your current call operator. Welcome, and thank you for joining the Bank of Cyprus conference call to present and discuss the group financial results for the nine months ended 30th September 2018. 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. 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 Restructuring and Recoveries, Mr. Michalis Athanasiou, Group Chief Risk Officer, and Ms. Annita Pavlou, Manager Investor Relations. Mr. Hourican, you may now proceed.
Thank you very much, operator. Good morning, everyone. I'm sorry it's so early, but we have a whole schedule of board meetings and things today. So we thought we'd get this call out before the opening of market, and ensure it's recorded for those of your colleagues who haven't managed to get up to listen to it. So let's just start. Our results for this quarter reflect our continuing delivery against our core objectives of balance sheet repair. This was accelerated through the agreement for the sale of non-performing loans in Project Helix, which we announced in August. Slide two summarizes the key highlights for the nine months ended 30 September 2018, and I'll briefly reference these. In the third quarter, we announced three corporate actions. First, the agreement for the sale of EUR 2.8 billion of gross loans, of which EUR 2.7 billion were NPEs.
Helix is an important step forward in repairing our balance sheet and stabilizing our capital position. We expect to complete the transaction during the first quarter of next year upon receipt of regulatory approvals from the ECB. Second, the sale of the UK subsidiary, which was completed last week following the receipt of regulatory approvals from the PRA and the ECB. Third, the pricing of EUR 220 million of an AT1 capital security to further strengthen our capital base. We expect these securities to be issued before the year-end. We have continued making progress on balance sheet repair. This was the 14th consecutive quarter of meaningful reductions in NPEs. We reduced the stock of NPEs organically by EUR 224 million, excluding Helix, which was in line with what we guided the market. The stock of NPEs is now EUR 5 billion pro forma for Helix.
The provision coverage on the residual non-performing portfolio remains adequate at 49%. Our capital levels remain adequate at the quarter end, above the SREP minimum requirements, and are expected to be further strengthened once Helix is completed and the issuance of AT1 is also completed. As at the end of September, the CET1 ratio was 11.9% and total capital was 13.4%. Pro forma for Helix and AT1 capital ratios will improve to 13.2% and 16.2% respectively. During the third quarter, the realized capital gain of 60 basis points from the UK sale partially offsets a 70 basis point prudential capital deduction relating to specific credits. We'll come back to this issue later in the presentation. During the third quarter, deposits in Cyprus remained broadly stable, and we remain in full compliance with our liquidity requirements. The bank has significant surplus liquidity of EUR 1.9 billion at the balance sheet base.
Our loan-to-deposit ratio stood at 72% at the quarter end and 65% pro forma for Helix. We remain focused on further reducing the cost of deposits and ensuring our deposit base has the appropriate shape to maintain compliance with liquidity requirements. Our performance in the third quarter generated total income of EUR 179 million and a positive operating result of EUR 86 million, whilst the net profit for the quarter was EUR 17 million. The underlying positive result in Q3 was EUR 37 million. The cost of risk for the nine months was 100 basis points and 70 basis points for the third quarter. Slide three sets out the corporate actions. Helix, in August, we announced the sale, as I mentioned, of EUR 2.8 billion of gross loans for a consideration of EUR 1.4 billion. This translates to EUR 0.24 on contractual balances and EUR 0.48 on gross book value.
Overall, the transaction is capital accretive by 50 basis points to both the AT1 and total capital. We are awaiting the ECB's significant risk transfer approval. We expect to complete the transaction in the first quarter of next year. The accounting loss from the transaction recorded in the nine months amounts to EUR 150 million, which is expected to decline to EUR 105 million by completion as the time value of money of EUR 45 million unwinds. Eliza can elaborate on the accounting of that later on if you wish to discuss it. As previously announced, the bank intends to participate in a portion of the senior funding of Helix, subject to regulatory approval. This initially amounted to EUR 450 million, and we are pleased to say that the bank's participation has been syndicated down to EUR 350 million to date.
Efforts to further sell down are continuing. This further validates the commercial validity of the risk reduction trade. Last Friday, we completed the sale of our U.K. bank for GBP 120 million. The sale had a positive capital impact of 70 basis points, 60 basis points of which is in the third quarter 2018 and is neutral to the income statement. The third item is the EUR 220 million AT1 securities, which we announced and priced in August. We expect the relevant condition precedent and regulatory approvals to be put in place, enabling the issuance of these securities before the year-end.
One of the issues with delayed regulatory approvals is that you have to take the capital hit in execution of the trades. You have to wait for the recognition of the corresponding capital relief. Our capital levels will be significantly enhanced following the completion of Helix and the issuance of the AT1. We estimate the pro forma CET1 ratio to be 13.2%, and the pro forma total capital ratio to be 16.2%. Move on to slide four. Slide four presents the impact of the corporate actions on the key metrics. Post the delivery of Helix, NPEs will be reduced by EUR 10 billion since the peak in 2014. To put this in context, this amounts to 55% of the country's GDP. Provisional coverage on the residual non-performing book, as I said, is consistent with 49%.
The NPE ratio pro forma for Helix is 26 percentage points below where it was in 2014, at 37%. The 10 percentage point improvement from Helix is sadly offset by a five percentage point increase arising from the U.K. sale, as the U.K. bank was predominantly performing loans. Our capital level remains above regulatory requirements. As of the 30th September, the CET1 ratio, as I said, stood at 11.9, including the 60 basis points positive impact from the U.K. bank sale and 70 basis points capital impact relating to specific credits that was recorded in the quarter. Pro forma for Helix and the AT1, CET1 ratio will be at 13.2%, and again, total capital at 16.2. I will ask Nick now to take us through the asset quality trends.
Thank you, John, and good morning to everybody. I am going to start in my usual place on slide six. The first nine months of 2018 have seen the bank continuing to deliver strong organic NPE reduction, with NPEs reducing by EUR 1.2 billion or 13%. Since 2014, the organic NPE reduction was EUR 7.4 billion or 50%. Pro forma for Helix, NPEs reduced further by EUR 2.6 billion, leading to a total reduction of EUR 10 billion since 2014. The NPE ratio improved further to 37%. As mentioned earlier, Helix reduces the NPE ratio by 10 percentage points, whereas the U.K. sale increased it by five percentage points due to the reduction of performing loans. Write-offs were a more substantial component of NPE declines in the year-to-date period, representing half of NPE outflows achieved.
We continue to expect that a proportion of write-offs in a given quarter will be volatile, driven by firstly, the volume of heavily delinquent terminated cases resolved in that quarter, and secondly, the level of natural curing of NPEs achieved. Turning now very briefly to slide seven, the pace of NPE outflows presented in the top chart remains reasonable and in line with our guidance. Inflows in the third quarter amounted to EUR 110 million. On slide eight, 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. As a brief recap, non-core NPEs relate to restructured cases that have no arrears, and based on them continuing to meet all relevant exit criteria, should exit NPE status over time. Core NPEs relate to delinquent borrowers that await consensual and non-consensual solutions to deliver NPE exit.
These two pools have materially different characteristics in terms of cash generation and risk, and therefore, we continue to believe it is worth considering them separately. Non-core NPEs totaled EUR 1.3 billion at the 30th of September, representing 8% of gross loans and 18% of total NPE stock. Coverage on these loans is relatively modest at 15%, reflecting the lower risk associated with this stock of NPEs. Pro forma for Helix, non-core NPEs totaled EUR one billion. Around 60% of these are available for NPE exit by the end of 2019, subject to continuing to meet all relevant exit criteria. Core NPEs totaled EUR 6.3 billion on the 30th of September, representing 39% of gross loans, and with a 59% NPE coverage ratio. Coverage on these loans has improved substantially. Pro forma for Helix, non-core NPEs reduced to EUR 4 billion with a coverage of 57%. Turning now to slide nine.
Tackling the bank's loan portfolio is of utmost importance for the group and our stakeholders. The group has been successful in engineering restructuring solutions across the spectrum of its loan portfolio, and expects this to continue in the coming quarters at a pace of around EUR 200 million per quarter as the portfolio size and business line mix have changed radically after Project Helix. At the same time, the Bank will continue to explore other structured solutions to accelerate balance sheet de-risking. In addition to the non-core NPEs exits expected in the forthcoming period, we intend to take specific actions to tackle core NPEs of EUR 4 billion. Firstly, the ESTIA scheme proposed by the government in July that aims to help address NPEs collateralized by lower value primary residences. The scheme is expected to address up to EUR 900 million of stickier retail core NPEs subject to eligibility criteria and participation rates.
Eligibility criteria relate primarily to the open market value of the residence, total income, and net wealth of households. These will act as a clear definition of socially protected borrowers, acting as an enabler against strategic defaults. Secondly, retail non-ESTIA eligible loans of around EUR 1.4 billion. There will be additional focus of management on retail non-ESTIA eligible loans, powered by an incremental servicing engine with Pepper and enhanced with a new product range. Thirdly, SMEs and corporate loans are around EUR 1.7 billion. The plan is to focus on write-offs and realizing collateral via consensual and non-consensual foreclosures. This will 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 structured solutions. Lastly, foreclosures. Foreclosures are being used as a means of tackling strategic defaults.
The Bank has and will continue to strengthen the foreclosure team and proceed with the foreclosures on all relevant cases. Turning now to slide 10. On this slide, we provide some additional information on the ESTIA scheme. According to the scheme, eligible borrowers are to be restructured to the lower of contractual balance and open market value. Once restructured, will exit at NPE definitions in accordance with the NPE exit criteria. The government will subsidize one-third of the installments, providing certain criteria are met. The terms of the scheme are subject to finalization, and the scheme is expected to go live in early 2019. We have undertaken certain actions in order to assess eligibility and build a book prior to the launch of the scheme.
We have identified the ESTIA perimeter based on the information available to the Bank. We have set up a dedicated specialized team able to handle large volumes of applications in short time frames. We have also developed a contact strategy to ensure high participation. Introductory letters were sent to customers that could potentially be eligible, so as to create awareness. At this stage, the response rate is very encouraging. As I mentioned earlier, ESTIA is expected to facilitate a decrease of the stickier component of NPEs and is expected to act as an enabler against non-ESTIA eligible borrowers. Moving to slide 11, foreclosures. Foreclosures are becoming an important tool in the NPE reduction post Project Helix. The changes in the foreclosure law that were approved in the summer have strengthened the framework, supporting the realization and disposal of collateral.
Overall, since January 2016, foreclosures have commenced for 2,449 properties, with a value of around EUR 800 million. Around 60% of these borrowers have engaged in active negotiations with the bank following the commencement of the process. 589 assets have been resolved, and an additional 500 properties are in the pipeline for repossession. We expect to increase the volume of foreclosures in the coming quarters, specifically on retail billing from borrowers that are non-ESTIA eligible. Turning to slide 12, the bank's NPE coverage ratio remains at 52% at the quarter end, in line with our previously disclosed expectations and 49% 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, is at 122% or 118% on pro forma results.
Going forward, whilst we expect there may be some volatility in coverage ratios, depending on the mix of NPE resolution delivered in the quarter, we continue to expect the provision coverage to remain around 50%. Our cost of risk for the third quarter stands at 0.7%, and our full year guidance remains for cost of risk to be below 1%. Turning to slide 13, REMU sales. REMU sold or signed SPAs for properties of value of EUR 410 million in the year-to-date period, including an agreement for the disposal of CYREIT. REMU organic sales in the period amounted to EUR 250 million, resulting in EUR 32 million of REMU profits. Prices remained good, with sales on average achieving 99% of independent ESS open market value and 122% of book value. REMU sold or signed SPAs in relation to 430 properties during the period.
This represents 14% of the volume of properties held by the bank today. As we have seen in previous quarters, land sales continue to be the largest proportion of sales achieved, representing around 50% of sales value year-to-date. Market statistics remain encouraging. Residential property prices rose by 1.7% year-on-year, and sales contracts deposited at the land registry, excluding those that related to bank foreclosure activity, increased by 19% year-on-year by volume. Finally from me, turning to slide 14, new lending. New lending reached EUR 1.5 billion in the first nine months of the year, exceeding new lending compared to the corresponding period in 2017. Corporate continues to be a strong component of new lending, representing 63% of all overall loan originations, with SME 12% and retail 25%. New lending continues to be carefully considered against robust assessment criteria.
Default rates on new lending provided in Cyprus since the beginning of 2016 continue to be low at 3%. With that, I will hand over to Eliza.
Thank you, Nick, and good morning from me, too. I'll start with capital on slide 16. During the third quarter of 2018, we have generated 50 basis points of organic capital in operating profits, and this was partly offset by around 30 basis points on provisions and other impairments. In addition, during the quarter, our CET1 ratio was reduced by around 90 basis points due to regulatory adjustments, 70 basis points of which related to specific credits. This is a prudential filter referring to a small number of specific NPEs, reflecting the regulator's view of these credits. We remain confident in our provisioning assumptions and methodology, and expect a significant part of these prudential deductions to reverse in the subsequent quarters.
The U.K. sale added 60 basis points to the CET1 ratio, whereas the extension of the completion date of Helix to Q1 from December previously had a negative 10 basis points impact to capital, and I will explain the accounting later. The pro forma ratios for Helix do assume that we will receive significant risk transfer approval by ECB, which is required in order to realize the Helix capital benefit. Our overall risk-weighted asset intensity decreased from 73% to 71% during the quarter, and to 65% pro forma for Helix, reflecting the further decline in NPEs. Turning to funding and liquidity on slide 17. Local deposits grew by 10% in the first nine months of the year, offsetting the 8% year-to-date reduction in international deposits. Of the deposits in Cyprus, approximately two-thirds represent deposits whose ultimate beneficial owners are Cypriots, whilst only 5% of these are Russian depositors.
On liquidity ratio compliance, as you're aware, the previous local liquidity requirements were replaced by another requirement on the LCR, effective from 1st January 2018, with which we are compliant. On the 1st of July this year, there was a 50% relaxation of this LCR add-on, increasing the surplus liquidity of the bank to EUR 1.9 billion. The elevated deposits and increased liquidity, however, are expected to continue to put pressure on NIM as the excess liquidity is placed with ECB at negative rates. Moving to the income statement slides, starting from page 19. Let me start by noting that in the income statement analysis slides that follow, we have replaced this slide to exclude Bank of Cyprus UK, which was sold last week. The U.K. bank was deconsolidated as of 30th September following the accounting loss of control, we have removed it to make our numbers comparable.
Starting on slide 19, as explained in previous quarters, the continuing balance sheet de-risking is resulting in a smaller but lower-risk loan book. Overall, net loans have reduced by 29% since the end of 2015, driven by the legacy book de-leveraging and the sale of the U.K. bank. It's encouraging to note that the performing book in Cyprus continues to grow for the first consecutive quarter on the back of increased new lending. We expect this trend to continue into the coming quarters. The interest income on loans was reduced to EUR 21 million in the first quarter and amounted to EUR 143 million due to the disposal of the U.K. subsidiary. Sorry, it was reduced by EUR 21 million in the quarter. Excluding Helix, the interest income on loans was flat Q on Q at EUR 123 million.
The legacy book interest income excluding Helix was at EUR 36 million in the quarter, down by EUR 1 million on a Q on Q basis. While the interest income of the legacy book is inherently volatile and is affected by the timing of cash collection. While the accelerated de-risking of the legacy book will result in further pressure on interest income, this should have little impact to the bottom line as most of this interest income on the legacy book is provided for. This secular accounting is something we have explained in the past in detail. The performing book interest income excluding Helix continues to be on a modest upward trend at EUR 1 million up in the quarter, but remains under modest competitive pressure due to the sustained low interest rate environment. Moving to slide 20.
This should be a familiar slide from previous quarters as it provides a breakdown of the component of interest income on loans between the performing and legacy portfolio, illustrating the interplay between interest income, provisions, and risk-weighted assets. Starting with legacy first, as I mentioned, you can see that the interest recognized in this book adds less to the bottom line profitability compared to the performing book due to higher provisions. The risk-adjusted yield of this book year-to-date is at 275% compared to 3.57% for the performing book. The key point is that as the performing loan book increases as a percentage of the total, the overall NII and net interest margin will be negatively impacted, despite this being an entirely positive development and one which confirms the health of our customer franchise.
Our impairment charge, however, is expected to be positively impacted and our risk intensity to decline as the delinquent book shrinks. Moving to slide 21 on net interest margin. As explained on previous results call, NIM has come under pressure as a result of a number of actions we have taken, which had a positive impact on capital and liquidity. However, we remain confident given the strength of the underlying customer franchise. This is not reflected in margin as the accounting NIM is volatile for a bank in recovery. The NIM dropped by 7 basis points in the quarter, reflecting a change in the mix of the interest-earning assets. The year-on-year drop in NIM of 76 basis points reflects a lower volume of loans, pressure on lending rates, and the cost of liquidity compliance.
NIM is a multidimensional KPI and is affected by the dynamics of its constituent parts, and I'll take these in turn. Firstly, there is the obvious impact of the liquidity buildup in this interest rate environment. Liquid assets continued to increase and now account for 31% of total interest-bearing assets. These are very low yielding at around 6 basis points, on which we make a negative spread considering our funding costs. We intend to actively deploy our liquid assets subject to market conditions. Second, the higher yielding, higher risk legacy loans are reducing as we successfully exit NPEs, and will do so even more visibly post Helix. Third, the yields on the performing book are more resilient at around 4%, despite modest market pressure. Our customer franchise is in good shape and is yielding a spread of 3.38%.
Finally, the cost of funding is decreasing. The impact will be visible over time. We continue to aggressively reprice our deposit book down. The cost of our deposits in Cyprus declined by 10 basis points this quarter and by over 25 basis points year-to-date. The overall cost of funding is down by nine basis points. More funding cost reductions are currently underway. The combination of the above factors is expected to continue into the coming quarters post Helix. Continuing to slide 22, with non-interest income. During the third quarter, this reached €66 million and was impacted by the sale of the CYREIT , as Nick discussed earlier. This CYREIT was sold at a blended price of 85% of open market value of the property, generating a year-to-date loss in the P&L of €7 million.
Due to accounting conventions, the loss in the third quarter amounted to €14 million. In the previous quarters, we had a profit impact from the CYREIT . The recurring income was at €56 million in the quarter, 2% up on a Q on Q basis. It does include commission income relating to the Helix servicing. Net fee and commission income for the quarter stood at 24% of total income. Turning to costs on slide 23, our cost-to-income ratio, excluding the regulatory levies, stood at 47% year-to-date, compared to 46% in the six months and 42% last year. Our third quarter costs were lower than those of the second quarter, mainly due to seasonality of lumpy costs relating to stress tests and compliance. The modest deterioration in cost-to-income ratio in the quarter reflects the lower non-recurring income. Our operating expenses are monitored closely.
We are in early-stage implementation of a multi-year digital transformation program aimed at replatforming our product distribution channels and reducing, over time, our operating costs. As regards staff costs, these remained flat at €53 million in the third quarter. The renewal of the collective agreement for 2018 is still under discussion. The cost of regulatory levies was at €6 million, compared to €5 million in the previous quarter. Turning to the profit and loss account on slide 24. Starting from the third quarter of 2018 column, net interest income amounted to €113 million. Total income at €179 million. Costs are €8 million lower on a Q on Q basis. Provisions amounted to €43 million, leading to a cost of risk of 70 basis points. Provision for litigation in the quarter amounted to €15 million, primarily relating to securities issued by the bank between 2007 and 2011.
Operating results from organic operations was a profit of €37 million, corresponding to quarterly earnings per share of EUR 0.08. There was an additional €15 million P&L charge for Helix in the quarter. This resulted or was the result of the extension of the expected time for completion of the transaction to the first quarter of 2019. Overall, the loss of €150 million arising from Helix reported in the nine months will reduce to €105 million by completion at time value of money unwind. To help you better understand the shape of the group after Helix, slides 30 and 31 in the appendix give indicative numbers of key balances and P&L items. As regards forward guidance, we expect it to be issued with the year-end results. This concludes our presentation for this morning. We are now ready to take any questions you might have.
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 comes from the line of Nowacek Andres with HSBC. Please go ahead.
Thank you for the call. First, I wanted to ask about the reasons for the extension in the expected ECB approval to the Q1 from what I think was before year end before.
Yeah. Happy to take that question. Look, I think the timetable was always going to be aggressive to December. We took the view post signing the SPA at the end of August that we would engage with an independent consulting firm to provide an independent assessment of SRT in advance of submitting to the regulator, and that was from Oliver Wyman. We purposely did that to give an independent assessment. They have not been involved in the trade in any aspects up to this point. They provided a positive recommendation for SRT and that process took 3-4 weeks. We ended up submitting rather than at the end of August, at the end of September. Under normal guidance from the regulator, we would expect the process to last around 3 months, which takes us with the Christmas period through to the early part of January.
With other aspects of the execution being reliant on the regulator's review being clear, we would therefore expect actual execution possibly as early as February, let's call it by the end of Q1.
Thank you. Could you give more color on new lending? I can see the sector breakdown, what are the typical terms of these loans, spreads, cost of risk, capital commitment? In general, can you quantify the ROEs on the new business? How does this compare to the overall performing book economics?
Right. As you would expect, we have a model for pricing new loans. As you would expect, we're going through our budgeting process as we speak on next year. We've run the sort of expectations for next year through the pricing models at an aggregate business level to confirm that we're not generating negative EVA as we go forward. We are across the book generating broadly as we believe to be our cost of capital, the lending returns required, taking into account cost of risk, cost of administration, and indeed all other costs that are natural to the lending. We have disciplined pricing models in place. It is the case that there is significant amount of liquidity in the Cyprus banking market, and there are significant pressures on the asset side of the business.
We are trying to maintain our discipline, and you can see that on one of the slides where we show the customer franchise. You'll see we've been maintaining on slide 21 the 338 basis points of customer spread between the cost of funding the book and indeed the assets price. You'll see 403 to 404, a modest uptick indeed in the performing loan book margins quarter-on-quarter. That should give you some comfort that we're maintaining discipline, I can't say the same thing for the entire market.
Okay. Thank you very much.
The next question comes from the line of Corinne Cunningham from Autonomous Research. Please go ahead.
Good morning. Got a few related questions to do with capital. Do you expect any change in your Pillar 2? I know you show on your presentation what the capital position is versus SREP today. Obviously on the 1st of January, everything increases as the buffers become more phased in. It looks to me as if you're on the borderline of actually breaching the SREP on the 1st of January 2019, given that you don't get the benefit of Helix pre-year-end. Any news on Pillar 2 or how you expect to cover the SREP on the 1st of January?
Okay. Eliza will take that.
Okay. Two things. First of all, our SREP, we have not been yet informed about our SREP levels into next year. This is a December conversation. SREP levels or any SREP decisions will be effective as from 1st of March. There's actually two dates you need to have in mind. One is the 1st of January, which will be impacted by the natural phasing in of Basel buffer, different tax assets, IFRS 9. These are set out on slide 69, where we show the phasing in of the minimum ratios that are applicable. You need to think about two dates, the 1st of January, which is the phasing in, and any SREP impact, whatever that might be, positive or negative, which will come into effect on the 1st of March.
That's very close to our estimated Helix completion date as well, which will provide additional comfort and buffer, plus the AT1 will have been issued by then.
Well, as you would expect, we are focused heavily on making sure we understand our capital position and discuss in a very ongoing arrangement with our supervisors to ensure that we are satisfied with those capital levels and our compliance with required ratios.
In terms of the AT1, the timing is you've said to complete before the end of the year. Is that set in stone, given that the ECB approval's been delayed?
Look, our best expectation at the moment is that we will complete this side of Christmas. You can never promise that because some of it is dependent on the ECB, but we have a very high level of confidence that we will get it completed this year. If not, it's only a matter of days into the new year. We do, at the moment, believe firmly that we'll get it through this year.
Thank you. Just one last question. The regulatory deduction this time. Can you give some explanation behind that? I have to say I didn't quite understand why that was coming through in the quarter.
Okay. Michalis, as our Chief Risk Officer, will take that.
Okay. This is basically reflecting the regulator's view on certain specific credits that they have reviewed on our onsite inspection. The regulator has used some harsher assumptions than our provisioning methodology. We are confident of our provisioning methodology. We believe that a large number of these NPEs will either be successfully resolved in the coming quarters, or they will be coming out of NPEs within the first half of 2019. We felt that we didn't need to do any changes in our provisioning assumptions, but we did that to some capital nonetheless.
Fundamentally, it reflects an aggressive hair cutting of collateral beyond any natural ability to account for it in accounting. Therefore, where we have ended up in on-site inspection disagreement and the accounting cannot accommodate, then we have reflected it in a capital deduction from a prudential perspective. As Michele said, we expect actually that gap to close reasonably quickly as our assumptions come through.
Thank you.
As a reminder, if you would like to ask a question, please press star and one on your telephone. 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.
Ladies and gentlemen, we're going to let you get back to your task of analyzing the tome we've sent you overnight. Annita and Eliza and I will be happy to take any questions during the course of the day on a bilateral basis. 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 day.