Ladies and gentlemen, thank you for standing by. I am Kelly, your conference call operator. Welcome, and thank you for joining the Bank of Cyprus conference call to present and discuss the group's financial results for the quarter ended 31st March 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 of 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. Good afternoon, everyone, or good morning, depending on where you are in the world. We will get through this very quickly and get to questions. Our results for the first quarter of 2018 reflect continued delivery against our core objective of balance sheet repair. Slide two, which you all have from the presentation we released about 45 minutes ago. Slide two summarizes the key highlights for the first quarter of 2018, and I'll briefly go through the highlights on this. We have continued making good progress on balance sheet repair. This was the 12th consecutive quarter of material NPE reduction. We reduced the stock of NPEs by a further EUR 454 million to EUR 8.3 billion since the beginning of the year. Our NPE coverage stood at 51%, well above the EU average and in line with our medium-term targets of coverage above 50%.
We expect the organic reduction of non-performing loans to continue in line with our EUR 2 billion target for the full year. At the same time, we continue to actively explore certain structured solutions to further accelerate de-risking of the balance sheet. Although it is an obvious statement, it is important to stipulate that our results for the first quarter do not include any material impact from any accelerated asset disposals. The results of subsequent quarters may be affected as transaction execution and the financial consequences become more certain. Our capital levels remain adequate. CET1 ratio stood at 12% and the total capital ratio at 13.5%, with the organic capital generation being largely offset by the previous guided impact of the EBA CRR definition and the deferred tax asset phasing in.
Capital ratios are above the SREP minimum requirements, and we retain our organic target for these to strengthen during the course of the year. Deposits increased by 1% during the quarter to EUR 18 billion, and local deposits increased by approximately EUR 300 million as the bank experienced inflows in local deposits, partly due to deposits looking for greater security, given the uncertainty over the ownership of the local Cyprus Cooperative Bank. At this point, I would like to again confirm and reiterate that the bank is not participating in the Co-op process and does not intend to acquire any of the assets of the Co-op Bank. We continue to be in full compliance with all regulatory liquidity requirements, both at a European level and at a local level. Our loan-to-deposit ratio stood at 80% at the quarter end.
Our operating performance during the first quarter of the year was positive, with total income of EUR 231 million, which includes non-recurring treasury gains of EUR 19 million, arising from the disposal of bonds. Operating profit was EUR 125 million in the first quarter, whilst the results for the quarter amounted to EUR 43 million, corresponding to an EPS of $0.10. The cost-to-income ratio for the first quarter was 46%. Our cost of risk stood at 1.2% as we effectively took advantage of the gains recorded in the quarter to further de-risk the balance sheet. We maintain our organic earnings per share guidance of $0.40 for the full year 2018, enabling some organic rebuilds of capital.
As I mentioned earlier, the pace of organic NPE reduction is expected to continue in line with our two billion target for the full year, whilst maintaining cost of risk at or below 100 basis points for the full year. I would again stress that all our guidance continues to exclude the impact of any accelerated asset disposals. With that, I'll turn over to Nick to take you through the asset quality trends.
Good afternoon to you all. I think for me, it's a business as usual story, I'm going to start by focusing on slide four. The first quarter of 2018 has seen the bank continuing to deliver strong organic NPE reduction, with NPEs reducing by EUR 454 million or 5%. Since 2014, NPEs have reduced by EUR 6.7 billion or 44%, and today represent less than half of the bank's gross loan book. The pace of organic NPE reduction continues to be on track with the guidance levels we have previously indicated, which as you know, is around half a billion euros per quarter.
Write-offs were a more substantial component of Q1 NPE declines, representing 64% of NPE outflows achieved in the quarter, continue to guide that the proportion of write-offs in a given quarter will be volatile, driven by firstly, the volume of heavily delinquent recoveries cases resolved in the quarter, and secondly, the level of natural NPE curing achieved. I'll turn now to slide five. Here we present the bank's view on its core and non-core NPEs using a consistent approach to that described in our last results presentation. 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, could exit from NPE status over time. Core NPEs relate to delinquent borrowers that await consensual or non-consensual solutions to deliver NPE exit.
These two pools have materially different characteristics in terms of cash generation and risk, therefore, we continue to believe it is worth considering them separately. Non-core NPEs totaled EUR 1.5 billion at March 31, representing 8% of gross loans and 18% of total NPE stock. Coverage on these loans is relatively modest at 18%, reflecting the lower risk associated with this stock of NPEs. Around one third of these loans are available for NPE exit in the remainder of 2018, subject to continuing to meet all relevant exit criteria. Core NPEs totaled EUR 6.8 billion on March 31, representing 37% of gross loans and 82% of total NPE stock. Coverage on these loans has improved substantially, from 36% in December 2015 to 58% in March 2018. As John has already referenced, the bank continues to explore opportunities to accelerate the reduction in the core NPE book via inorganic trades.
I would again stress that all our guidance and regulatory commitments are based on only organic NPE reduction, we will provide updates on this matter only when, if, there is something meaningful to update. The implementation of IFRS 9 has caused some accounting implications for the mapping of quarterly trends in our traditional NPE reporting buckets. I would guide people to slide 32 for a reconciliation, in short, SME quarterly NPE trends are adversely affected and corporate quarterly trends are positively affected. This is expected to be a one-time issue, which you may want to adjust in your analysis of underlying NPE trends. Turning now to slide six. The pace of NPE outflows depicted in the top chart remains reasonable and in line with our guidance levels. Defaults and redefaults shown in the bottom chart have reverted to the modest levels seen prior to Q4 2017.
This is reflective of continuing positive macro trends, sustained restructurings, and low default rates on new lending. Turning now to slide seven. The bank's NPE coverage ratio stands at 51% at the quarter end, in line with our previously disclosed expectations. This includes the first-time adoption adjustment for IFRS 9 that came into effect on January 1. On an underlying basis, excluding the IFRS 9 adjustment, provision coverage remains broadly flat to December 2017. The bank stands today above the European average coverage ratio of 44%, total coverage, including tangible collateral, remains in excess of 100% at 119%. Going forward, whilst I expect there may be some volatility in coverage ratios, depending on the mix of NPE resolution delivered in a specific quarter, I continue to expect the provision coverage to remain in line with the bank's medium-term guidance of over 50%.
Whilst our cost of risk for the first quarter stands at 1.2%, we continue to guide for a cost of risk of less than 100 basis points for the entire year. Turning now to slide eight. New lending during the first quarter reached EUR 717 million, of which EUR 563 million, or around 80%, relate to Cyprus operations. Cypriot lending was 12% up year-on-year. Corporate continues to be a strong component of new lending, representing 62% of overall loan originations, with SME 15% and retail 23%. 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 below 2%. Now turning to REMU on slide nine. REMU had another strong quarter in Q1 and like RRD, is building a consistent record of quarter-on-quarter delivery against expectations. Sales volumes were high.
REMU sold or signed SPAs in relation to 293 properties during Q1. This represents 11% of the volume of properties held by the bank during one quarter. Sales values continue to be strong, with EUR 114 million of sales made or SPA signed in the year-to-date period, representing 9% of the value of total stock today, excluding golf assets. Prices remained good, with sales in Q1 on average achieving 99% of independently assessed open market value and 119% of book value. As we have seen in previous quarters, land sales continued to be the largest proportion of sales achieved, representing 61% of sales value year-to-date. Market statistics remain encouraging. Property prices rose by 1.5% year-on-year, and sales contracts deposited at the land registry, excluding those related to bank foreclosure activity, increased by 38% year-on-year by volume.
Sales to date exclude the EUR 175 million CyREIT, which was launched in 2017. Following the incorporation of the CyREIT, properties of carrying value of EUR 166 million were reclassified from revenue stock to investment properties, realizing a valuation gain of EUR 8.4 million upon reclassification. The marketing and execution of investor allocations in the REIT remains ongoing, but it is progressing well. During the first quarter, including the above reclassification, the bank's stock of properties decreased by 5% to EUR 1.5 billion as at 31 March. With that, I will hand over to Eliza.
Good afternoon from me, too. I will move to capital on slide 11. Our capital levels remain adequate. As of 31st March, the CET1 ratio stood at 12% and the total capital ratio at 13.5%, both on a transitional basis. The key driver of improving our capital ratios going forward continues to be retained earnings. As shown during the first quarter of the year, we generated 60 basis points of capital in operating profits, partly offset by 40 basis points of provisions and other impairments. The disposal of bonds during the quarter was not capital accretive. The cost of risk for the first quarter is higher than our full-year expectation, as we effectively took advantage of the gains recorded in the quarter to further de-risk the balance sheet. We continue to stand by our previously disclosed guidance of less than 1% cost of risk for the full year.
In addition, during the first quarter, the organic capital generation of CET1 was offset by the previously guided impact of three additional individual items that crystallized on the 1st of January. The first one was a 50 basis points impact resulting from the early adoption of the alignment of the default definition with the NPE definition. The second was a 20 basis points impact arising from the phasing in of the deferred tax assets from 60% in 2017 to 80% as from 1st January 2018. The third was a nine basis points impact arising from the first-time adoption of IFRS 9. This nine basis points impact represents the phase-in regulatory capital treatment, which allows the bank to benefit from transitional arrangements, whereby only 5% of the day one impact is deducted from capital in the first year.
We retain our year-end target for the CET1 ratio of 13% and the total capital ratio of 16%, as we expect the organic capital rebuild from operating profitability to exceed the impact from a lower level of provisions and impairments for the remainder of the year. Our average risk-weighted asset intensity increased from 73% to 77%. This increase is exclusively due to the early adoption of the default definition, as you can see on the slide. Turning to IFRS 9 on slide 12. As from 1st January 2018, we have adopted IFRS 9. The first-time adoption impact on shareholder equity was EUR 308 million in the previous guidance. This impact was recognized directly in equity and did not go through the profit and loss account. The regulatory capital treatment of this first-time adoption impact allows banks to benefit from transitional arrangements, which allow for phasing in.
This results in only 5% of the day one impact being deducted from capital, which for our bank amounts to nine basis points in 2018. This affected both CET1 and total capital ratios. The impact of IFRS 9 on capital is expected to be manageable and within the group's capital plan, both on a transitional basis and on a fully phased-in basis after the period of transition is complete. Moving on to funding and liquidity on slide 13. We have maintained the year-end high level of deposits of EUR 18 billion as at the end of March. Deposits in the quarter remained broadly stable, increasing by 1%. This high level of deposits allowed us to be compliant with all regulatory liquidity requirements as of 1st January 2018. Within the Cypriot business, local deposits increased by 2% on a quarterly basis, offsetting the 4% quarterly reduction in international deposits.
Of the deposits in Cyprus, approximately two-thirds represent deposits whose ultimate beneficial owners are Cypriots, while only 6% are Russian depositors. Given the relatively small percentage of our deposit base linked to Russia, the bank's business is not directly impacted by the recent US sanctions imposed on certain named Russian businessmen. The bank complies fully with the US sanctions regime, as well as with all requirements of the US FATCA Act, where these are relevant or applicable to foreign financial institutions. The bank is fully independent, with no shareholder or shareholder in group having special rights or influence. On liquidity ratio compliance, as mentioned in the previous earnings call, the local liquidity requirements were replaced by an add-on requirement on the LCR, effective as from 1st January 2018, with which we are fully compliant.
The elevated deposits, however, cause pressure on NIM. The marginal liquidity is placed with the ECB at negative rates. At 31st March, we carried EUR 5.5 billion of liquid assets and had a buffer of EUR 1.7 billion against the CRR requirements of LCR and NSFR. I would like to remind you that at the start of this journey, we had EUR 11.4 billion of ELA funding, which has all been repaid. The LCR add-on requirements are expected to be relaxed to 50% of their current levels as from 1st July 2018. This relaxation will reduce the liquidity requirements by over EUR 1 billion. Full abolition is expected as from 1st January 2019. Moving on to operating performance on slide 15. As explained in the previous quarter, the continuing balance sheet de-risking is resulting in a smaller but lower-risk loan book.
Overall, net loans have reduced by 16% since the end of 2015, driven by a 45% reduction of the legacy book, mainly due to increased provisions, curing, and better asset quality. The performing book continues to grow. This is on the back of increased new lending in Cyprus, as we highlighted earlier. We expect this trend to continue in the coming quarters. The continued de-risking of the legacy book results in pressure on net interest income, but most of this interest income does not flow through to the bottom line as it is provided for. This circular accounting is something we have explained previously. The performing book interest income continues to be under modest competitive pressure as a result of the sustained low interest rate environment. Moving to slide 16.
This is a familiar slide from previous quarters. It provides a breakdown of the components of interest income on loans between the legacy and performing books, illustrating the interplay between interest income, provisions, and risk-adjusted assets. Starting first with the legacy column, you can see that the interest income made on this book adds very little to bottom-line profitability, as most of it is provided for. The risk-adjusted yield of this book is at 105 basis points. Contrasting this with the performing book, this interest income contributes directly to the bottom-line profitability. The risk-adjusted yield of this book stands at 3.66%.
The key point is that as the performing loan book increases as a percentage of the total book, the overall net interest income 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 is expected to decline as the delinquent book shrinks. I'd like to move on to net interest margin on slide 17. As explained during the full year 2017 results call, NIM has come under pressure as a result of a number of other 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 drop in the first quarter amounted to six basis points, whilst the year-on-year drop in NIM reached 82 basis points. NIM is a multidimensional KPI, as we discussed last quarter. It's affected by the dynamics in its constituent parts. I'll go through these in turn. Firstly, there is an obvious impact of our deliberate liquidity buildup. Liquid assets increased by EUR 2.3 billion in the last five quarters, going from 17% of average interest-bearing assets to 22% by year-end, and 28% at the end of the first quarter. These are very low-yielding assets of around 30 basis points, on which we make a negative spread considering our funding cost is 87 basis points, and we have EUR 5.5 billion of these. We will actively manage these assets as the LCR add-on is relaxed into the second half of the year, depending on market conditions.
The second component of NIM is the cost of funding. Cost of funding, although it appears to be relatively stable, we do continue to reprice our deposit book down and the impact will be visible over time. This funding cost has been impacted by in the latter part of 2017 by liquidity ratio compliance, which pushed us towards a safer but more expensive deposit mix towards the end of the year. We continue to reprice our deposit book down, and the cost of deposits in Cyprus declined by seven basis points this quarter, whilst the overall cost of funding is down by five points this quarter.
We are aiming to continue to reduce the funding cost during this year, this should become more visible in the second half of the year when the more expensive deposits attracted at the end of 2017 are repriced, also as the local liquidity requirements are being relaxed. The third impact on NIM is the higher yielding, higher risk legacy loans, which are reducing as we successfully exit NPEs. This trend will continue, and while it is impacting accounting NIM, it is offset at the provisioning line. This yield is an accounting distortion in NIM that is eroded through the circular into provisions that I referred to earlier. Finally, performing loan yields. On the legacy book, yields are volatile, affected by the timing of cash collection, and as we exit from NPEs, the yield on the remaining book will be coming down.
The yields on the performing book are more resilient at around 3.9%, despite modest market pressure. Our customer franchise is in good shape and is yielding a spread of 3.04%. Note that there has been an adjustment in historical figures to allow for hedging. The combination of the above factors led to margin compression on a year-on-year basis, which is expected to continue into the next quarter before improving in the latter part of the year. It is largely a mix issue. Now moving on to slide 18 on non-interest income. For the first quarter, this stood at EUR 107 million, 25% higher on a quarterly basis, driven by the non-recurring treasury gains of EUR 19 million from the disposal of bonds. This disposal was not capital accretive. In addition, a revenue sale created a profit of EUR 11 million in the quarter.
Another example of foregone net interest income crystallizing in another line of the P&L. Also, upon the incorporation of the
As our expectations for the full year, they remain unchanged. This concludes the presentation formally. We want to take any questions from here, operator.
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 Daragh Quinn with KBW. Please go ahead.
Hi. Good afternoon. It's Daragh from KBW. Just a few questions, if I may. On the loan loss charge, just if you could comment on the provisions associated with the performing loan book. Is that a reasonable level to assume going forward? I think it's around 30 basis points. What is your outlook for the performing loan loss charge going forward? The second question, I'm not sure how much you can comment, but maybe just if you have any impressions on the latest market turmoil events in the rest of Europe and how they could or are impacting discussions on asset disposals in Cyprus. A final question on capital. You reiterated the guidance for 13% transitional ratio for the year.
Just if you've any thoughts around the fully loaded ratio, taking on board the full impact of IFRS 9. How you expect that to evolve during the year. Thank you.
Okay. I'll turn to Michalis Athanasiou to take as many of those questions as he wishes.
Okay. I will comment on the loan loss charge on the performing book with respect to what is happening now with IFRS 9. As you know, IFRS 9 now has a stage 1 and stage 2 component into the equation. Both those stages do attract some loan loss provisions, and those are the performing part of the book. On the stage 1, obviously those will be considered a very solid part of our book, and the coverage on that part is quite low at this point in time. Actually, the coverage stands at around 1.5%. On the stage 2, obviously because we're talking about lifetime expected losses, there the coverage increases because depending on which segment of the book we're talking about, the probability of default becomes a lifetime, therefore increases. The coverage there, it either increases and currently stands at around 3.5%.
Okay. Look, I think IFRS 9 is still a bedding down, and if you look at our stage 1 versus stage 2 capitalization of loans, there's a high level of loans that are categorized in stage 2. A lot of it is because, for example, in the combination of the two banks, they were not rated at inception. That's something we're working on trying to clean up, and that may or may not have a positive impact as we go forward. Look, I think a modest level of provisionings on the performing loan book is what we'd expect to continue to see going forward, whether 30 basis points is a good guide. I think we'd like to see a couple of quarters of modeling go forward before we start to be sort of confident of that guidance.
No, I agree.
Look, on the second point, Dara, on market turmoil in Europe, certainly interesting to watch from the sidelines. We continue to be very focused on our own market and very focused on our own sort of engagement with potential investors. I'll let Nick give a comment in a second. I would say that our engagement continues to be as has been during the course of the last few months. We are very much focused on making sure that we deliver what we're trying to do in our own books. Look, the Italian government is not something I have any ability to comment on. The general nervousness and twitchiness of markets around the place is something which we're looking at. I need to invite Nick.
We have no significant bond exposure in sovereign bonds at the moment.
Look, we took off a significant level of our sovereign exposure during the course of the first quarter, as you can see from the recycling of capital that we did. That's a risk decision we took deliberately at the beginning of this year, which has proven to be accurate. Nick, did you want to say anything in addition to that about market turmoil and the impact on our own discussions?
No, I don't think so. In substance, I mean, all of the discussions we're having around potential inorganic solutions are focused on the assets themselves and Cyprus itself. I haven't had any questions on wider European market turmoil in relation to that.
Daragh, on the last one on the capital, we're clearly trying to find our way to 13% or thereabout at the year-end organically. IFRS 9 is a one January impact in any given year. It's 5% this year. It's nine basis points. It won't take you much mathematics to work out that the total impact will be 180 basis points, but only 27 basis points in aggregate will be impacting for us to January 2019. It's a one January 2019 next impact, and that's 15% of the transitional arrangements, which again will be nine times three, which is 27 basis points of capital, ceteris paribus. Of course, we will have moved on by then. IFRS 9 during the course of this year, it isn't a capital sort of rollout issue. It is a one-off issue in Q1 2019.
That's great. Thank you.
The next question is from Mr. Galoob Mohammed with Citibank. Please go ahead.
Hello, everyone. Hello, James. Thanks for having us again on the call. I had a few questions. I'll just maybe go through them. In terms of the rise in RWAs, this is a one-off, if I'm to understand correctly, due to IFRS 9 implementation?
Yes. That's a one-off.
Okay. Then on the shift from debt to interbank, the one that you've seen capital gains on, this is in line of you trying to increase your liquid assets, or is this something else?
The gain that we registered on the disposal of bonds had to do with some holdings we had-
Okay
of some sovereign debt that we disposed.
Sorry. Is there a strategy to reduce debt holdings, or was this just
No, look, we looked at the risk-return characteristics on our bond book, sovereign bond book at the end of the year, it was our post-decision, chaired by me, that this risk return was now tight, the spreads had tightened to a level where we thought we should actually crystallize the capital in our capital account. Just to remind you all that as the sovereign spreads move around, you get, depending on where you are categorized from an accounting perspective, you get movement in your equity account and not through your P&L account. We had all through the course of last year, about EUR 40 million of capital available to us through the tightening of bonds, and we decided to take some of that off. We have crystallized half of the capital that had previously been the tightening of spreads through sovereigns and into our P&L account.
It is a deliberate strategy, and so far it has proven to be correct.
If I heard correctly on the call, you don't hold your Italian debt at least at the moment, or similar.
No.
Nothing material, no.
Okay, fine. In terms of REMU sales, I think you sold EUR 55 million this quarter. Is that going to pick up going forward, or just it seems a bit low?
Nick.
I think overall in terms of sales contracts in the quarter, it was EUR 97 million, with an additional EUR 17 million of SPA signed, but okay, not executed as sales from an accounting perspective in the quarter. It was EUR 114 million of sales in the quarter. I think, as I mentioned in my talk, I don't want to repeat myself, but that's pretty consistent with where we've been, around EUR 100 million of, if I call it organic sales, achieved per quarter. I think the big plus this quarter was the volume, which was close to 300 individual assets sold in the quarter. That's what I would describe as the real hard yards selling very granular portfolio of properties.
Mohammed, just to clarify, if you're looking at the numbers on page 41, they are book values, and Nick is talking about sales prices. That's the delta.
Look, we're feeling reasonably good about Q2 REMU sales.
On a separate topic, on fee income, it seems to be lower than the last few quarters. In the last quarter, I remember you saying you're going to be focusing on non-interest income.
Look, I'll leave it over to IFRS 9 impact on some of the fees and commissions.
There's a component of IFRS 9 that's affecting the fees and commissions. It is to do with different types of commissions on penalty charges and arrears charges on NPEs. They were always non-cash types of commissions, which ended up in provisions. Now, under IFRS 9, we are not allowed to recognize them as we did previously. That's the biggest delta driver.
Okay, fine. I see. Lastly, one more question. I know you don't report 90-day DPD like you used to. I'm assuming this is an IFRS change, but can we have the numbers in terms of the 90 DPD? Because looking at NPEs is yesterday's work, and we'd like to know what you're doing today in a sense.
Yeah. Look, we discussed this intensely. Actually, the concept of impaired loans has gone away in the IFRS 9. There is no way of reporting that because it doesn't exist. What we are giving, Monica will give you the page number.
Slide 36.
On page 36, slide 36. This helps you. It excludes the impaired components, but it's something you can track over time, you have the history data series there as well.
Okay. If I can get in touch with you later just in terms of seeing how you're doing Q on Q. Okay. Those are my questions. Thanks a lot.
Okay. Thank you.
The next question is from Cihan Saraoğlu with HSBC. Please go ahead.
Thank you. Thank you for the presentation. I have a couple of questions. First, is there any update you can give on the accelerated NPE disposal, the amounts, the timing, and under what circumstances do you think you'd need a capital increase to conduct this transaction? My second question is on Co-op Bank. I heard you clear about your intention not to buy any part of their assets, how do you think the competitive landscape will change after this transaction? Thank you.
Look, we're not giving guidance on the NPE trade at this stage. As we said at the beginning, it'll be better. I'll let Nick make any remarks he wants to on that. On the Co-op, look, it depends on what happens. Your information on the Co-op is the same as ours. We have no inside information on what's going on with the Co-op. We understand that there are transaction or two in contemplation. We understand there is a conversation about potentially still good versus bad. We understand that there's potentially new investors, and we understand that it would create potentially a combination of one bank on the island with a component of the Co-op. That can only be good for Cyprus. Bank consolidation has to happen. It may take some of the tensions out of the competitive pricing in the market.
We're actually happy to see a strong, separate competitor with us in the market and to continue the consolidation here. Again, we're watching from the sidelines on the Cooperative Bank process, and I think it would be inappropriate for me to comment on what's going on at another bank or two on the island. We welcome the parity, and we would welcome new capital into the banking system on the island. We're not afraid of competition. We think it may bring more rational competition, in fact, to the island. Nick, did you want to add anything on the NPE trade?
No. The short answer, I don't think there is anything worth updating on at this point. As I said, we will do at the point there is.
Sorry, no, I can't give you anything for your models there.
Nick, just a follow-up question on the fee income. How much was the IFRS 9 impact? Can you quantify it?
Modest single digit. Small single digit.
Thank you, Eliza. Thanks.
The next question is from Mr. Hartmut Mast with Atlantic Capital Management. Please go ahead.
Hi, folks. Thanks for your time, especially so late in the evening over there. A couple of questions for you. First, there was a lot of talk, I guess, a couple of months ago, about a state-led solution for NPEs, particularly in relation to primary dwelling or owner-occupied residential mortgages. For us who are not in Cyprus, it is a little tougher to follow the news and the sentiment on the ground. What is the latest state of play there, and what do you guys expect, and what would you like to see out of that process, if anything? Second, just on MREL, have you had any discussions with the ECB on the scale of that and timing for you guys to have dealt with or have your MREL requirements in place?
Third, just on the non-core NPEs, is it possible to get a bit more granularity in terms of how those look in terms of the margins, the kind of the redefault rate, whether the margins are all in cash, and whether or not, just a second question, whether for the interest on those, you also have a provision against that even where you might actually be receiving that interest in cash. Thanks.
Okay. I will take the first one, and I will take the second piece. I will leave the third one to Nick. Look, with regard to the state solution to that, it was discussed among borrowers and potential to those people in what are called protected mortgage properties. That is something that has been called for this year. It was mentioned in the president's inaugural address back in February. As we understand it is still on the government's agenda. We have been working closely with the ministry to ensure that they understand our perspective on this. It is not yet certain whether it will go through, but I believe it is on the register of things that the government is seriously looking at and would wish to introduce to help bring an end to the NPE issue. It would relate to approximately EUR 1 billion of our portfolio.
It is something that is both, I think, IMF supported and generally supported as the right thing to do in defining that bunch of retail that is deserving of protection. About a third of our portfolio, a third of our retail book, it relates to, and we are pushing hard to try and get the government to get a move on with it. It is not in our hands, but we are certainly encouraging it and encouraging of it because what it does, it does two things for us. One, it helps us tackle an important segment of the book, which is socially responsible to do. It also then, as a result of that, defines what is protected and therefore by definition, that is not protected, which allows us to engage in a different way with the rest of the portfolio.
Look, we're very focused on it, pushing hard for it, and doing everything we can to get the government to make faster decisions on implementation. That's the state solution there. I think you should consider that still live and just consider it slowed and a little mired in the generality of issues being dealt with by the finance ministry. Nick or Eliza, do you want to do MREL?
Okay. On MREL, as we mentioned last quarter, we have not been given binding MREL targets for this year. Similarly to other banks who are going through a recovery phase. The SRB tells us that this decision will be an annually reviewed one, we don't know when we will be given targets and if we will be given targets this year or not. Also that no decision has been made on the timetable or the timeline for adherence to the targets when we are given those. We are being advised that in all probability we'll get the same transition time as other banks are being given. At the moment, everyone seems to be given a maximum of 4 years, and for banks with bigger gaps to bridge They utilize the full 4 years.
We would expect to begin in the 4 years, but from the time that we get the final targets. What I'm saying is it's not horizontally closed, we're closely monitoring it.
As we found the SRB entirely straightforward to deal with and very open in discussions to ensure that a bank in repair is not disadvantaged by the level of MREL required, given its SREP requirements and of course, its capital intensity will be different than that of a bank that isn't in repair. Now, what it does mean that we have to do is keep thinking about the tenor of the variety of liability if we have an issue. That is something that Eliza has firmly on her agenda. MREL, as Eliza said, it's not a near-term issue for us at this stage, and we are not on a timeline that other banks have been on. Nick, just on the last point on them.
On core NPEs. Well, let me give you an imperfect answer, but I'll give a few numbers. On slide five, we give you our view today of the time horizon in which the EUR 1.5 billion of non-core NPEs could roll out of NPEs over time. I would guide you to split that into two buckets. 2018 and 2019 are things that we can see there is a contractual repayment of both interest, which margins you referenced, and capital. It wouldn't be in those buckets if we didn't think there was a prospect of it repaying adequate levels of capital over that period to exit. That's EUR 900 million of the EUR 1.5 billion. I'd add our track record is improving necessarily to 2017 was a year of flux with differing definitions.
If I wind you back to December, we said that in 2018, EUR 700 million of NPEs were capable of exiting NPE status. In Q1, we exited EUR 170 million successfully, and right now we're guiding you through slide five that the balance, EUR 500 million, is still available for exit with one quarter of further knowledge than we had at that time. I'd say the second bucket is the EUR 600 million, which fits into a 2020 plus category. By definition, if those cases have a near and present cash flow track record of repaying capital, they fall into the 2018 and 2019 buckets. Therefore they represent cases where we've made a balanced judgment on things that will happen and are likely to happen over the course of the next 12 to 18 months, but today we're not wholly certain on.
I would classify those as higher risk in terms of cash flow repayment of interest and capital than the EUR 900 million that sits in 2018 and 2019.
Thanks. That is very helpful. Yeah, that's very helpful. Sorry, just one clarifying point. Even for the stuff in the 2018 and 2019 buckets, where they may be making payments of either principal or interest or both, are you still provisioning 100% against that, even if the cash is coming in?
No.
No.
No. Okay.
We only provision non-cash elements and then whatever exposure is left falls down the PD/LGD path.
Look, the bank has been very careful about not doing what some do, which is to allow the interest flow through and then provide 100% against it and show nonsense coverage levels. We've been very keen to keep a sensible level of suppression in the overall balances, because otherwise you just ended with something that is not real.
Thanks so much. Very helpful.
As a reminder, if you would like to ask a question, please press star and one on your telephone. Once again, to register for a question, please press star and one on your telephone. The next question is from Mr. Linnan Mick with [inaudible] . Please go ahead.
Hi. Just a couple small things. Firstly, is there much migration between your categories of core NPEs and non-core NPEs, or have you defined them in such a way that there is no migration? Secondly, and this may be related, where you split the performing book and the legacy book. If a loan within the, what you defined as the performing book a few quarters ago when you first started splitting it out, if a loan goes bad, does it stay in the performing book or it gets moved to the legacy book in subsequent quarters?
I'd guide you to slide 30, which gives you the default rates or success rates in terms of restructuring. There is a circle as things move from core into non-core. Some of them exit non-core as they meet the exit criteria. Some fall back into core as they fail to meet the expectations set at the time of the restructuring. I would guide you right now because of the state of the book, which is much more focused on recovery style collateral realization, that the pace of ongoing restructuring work is relatively modest. The pace of non-core moving up to core has slowed and will continue to be relatively slow compared to historic pace, because we are focusing much more heavily on final solutions in the 6.8.
Realizing cash and full exits with some support from write-offs and realizing physical assets through the same kind of process. Look, there is some circle, but it's relatively modest at this point in time, and I'd expect it to stay so.
Your question on performing and legacy, I'm presuming you refer to page 16 where we set out the mix of the two books. Actually, legacy refers to what Nick manages in his world. Loans are generally usually cured within REMU or nearly cured and then shift to healthy or to performing. This is all done on a case-by-case basis with a lot of governance around it. I think what you'd find is that both core and non-core NPEs are within Nick's world and only migrate to performing upon curing.
There's a little bit at the end, between Nick and Eliza, I think you have your answer there.
That is helpful. If I could just ask one more question. How are auctions and the auction process going these days? Is that sort of getting any more or less smooth?
By auction process, I assume you're referring to foreclosure.
Yes.
Yeah. Okay. Look, despite the noise in the market, the foreclosure process continues to be a much better process than we had prior to 2015. We've got north now of 1,600 assets live through the foreclosure process. Our statistics are showing that broadly eight out of 10 of those asset foreclosures are progressing in accordance with the law, if you were just a cold reader of the law, looking at the steps and the timetable. That doesn't mean to say I don't experience frustration in the two out of 10 that don't, and I do. I think the improvements to the foreclosure law, as has been mentioned in the press in Cyprus, are an important step to closing those loopholes and closing out the opportunities for borrowers who are taking unreasonable steps, in my view, to take the necessary action against them.
I think that's an important part. In terms of where we are in the process, I think as I've referenced on previous calls, but I'll remind you, we reached an important milestone at the back end of 2017 in foreclosure terms in Cyprus, which is the first point in time where the bank was capable of credit bidding, forcibly acquiring assets onto our balance sheet in REMU via the foreclosure process. I'm pleased to say, as I've referenced previously, that that process, while relatively small in volume now because of the nature and the way we started the original foreclosure process, we have evidence at every land registry in Cyprus that that process is being enacted in accordance with how you would expect under the law, and that's, in my view, a hugely significant milestone for us to have achieved. Look, it's working okay.
I would like, I think Cyprus needs it to be stronger.
Okay. Thanks a lot for that.
As a final reminder to register for 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.
Look, I think we've said everything we need to say, ladies and gentlemen, thank you for your time this late in the evening or this early in the morning in the U.S. We're happy to take any of your questions through the usual channels and to provide any clarifications that you may wish. I hope you regard the first quarter as another quarter delivered, but a lot still to do. 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.