Ladies and gentlemen, thank you for standing by. I am Yota, your conference call operator. Welcome and thank you for joining the Bank of Cyprus conference call to present and discuss the preliminary full year 2024 financial results conference call. All participants will be in a 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. Panicos Nicolaou, Chief Executive Officer. Mr. Nicolaou, you may now proceed.
Good morning, everyone. Thank you for joining our financial results conference call for the year ended 31st of December 2024. I am joined by Eliza Livadiotou, Executive Director of Finance, and Annita Pavlou, Manager IR and ESG. After my introductory remarks and updated financial targets, Eliza will go into more detail on our financial performance, and then we will be happy to take your questions both during this conference call and afterwards. I would like to start by briefly reminding you of our powerful equity story and our core strengths on slide number four. We are the leading financial group across banking in Cyprus, which is a highly liquid and concentrated banking sector, and we operate in a supportive macroeconomic environment. The Cyprus economy remains strong, delivering good growth, proving once again its flexible and resilient characteristics.
We are managing the headwinds from the normalization of interest rates while simultaneously investing in new growth initiatives, leveraging our key strengths under our control. Our diversified business model, our robust asset quality, and our strong capital position all support our commitment for attractive shareholder returns by continuing to deliver sustainable high teens ROTE on a 15% CET1 ratio in a normalized 2% interest rate environment. Slides five and six show an overview of the macroeconomic environment. We operate in a strong, diversified, mainly service-based economy that exhibits continuing growth. The economy expanded by 2.9% in Q4 and for 2024 overall delivered growth of 3.4%. This is underpinned by a record year for tourist activity, lower unemployment, improved public debt to GDP, and lower inflation.
Going forward, based on the latest projections of the Ministry of Finance, economic growth is expected to be around 3.3% for 2025, once again outpacing the Eurozone average. Economic trends are expected to remain strong in 2025, with unemployment rates remaining broadly stable year on year at 4.8%, and inflation continuing to improve modestly to 2% from the current 2.3% levels. Public debt to GDP continued to decline to 68% as of November 2024 and remains well below the euro area average, with the latest projections indicating that by 2026, public debt to GDP will be below 60%. This strength of the Cyprus economy is reflected in its credit rating, with recent sovereign rating upgrades by the major rating agencies to three notches above investment grade. Let's now turn to slide seven, which shows the Bank of Cyprus is placed at the center of this economy, supporting the wider ecosystem.
We are the leading bank in Cyprus, with around three quarters of the population being customers of the bank. We have a leading market position in both loans and deposits, with market shares of 43% and 37% respectively as of the end of 2024. We have a profitable life and non-life insurance subsidiaries with high market shares, and we hold a 75% stake in the leading payment solution provider, indicating our diversified business model and holistic offering. Slide eight is a summary of our key achievements for 2024. Our key milestones in 2024 included a 50% distribution payout of 2024 earnings, totaling cumulative distribution of EUR 400 million over the last three years, roughly in excess of 20% for a second consecutive year, a record net profit of over EUR 500 million. Further improvements in our asset quality, with NPE ratio below 2% and full compliance with our MREL requirements.
Importantly, we also moved our listing from London to Athens, improving our stock liquidity and visibility. Moving now to slide nine, 2024 saw significant shareholder value creation. Our strong ROTE of over 20% delivered 400 basis points of capital generation on a predistribution level. Our EUR 241 million distribution takes a cumulative distribution to EUR 400 million since 2022, representing a quarter of our market capitalization. This is well in excess of the targets we had originally set ourselves at our summer 2023 investor update in both size and timing. And our book value per share again rose and is now almost 50% higher than it was two years ago. Let's now turn to slide ten, shareholder distributions, a key focus area for us. We have delivered on our promise of shareholder distributions.
To remind you, a year ago, we indicated a distribution payout ratio of between 30% and 50% for 2024, and at the time, we still required ECB approval for distributions. During the course of last year, we raised that commitment to 50%, and today we are delivering on that for 2024, offering our investors a 12% distribution yield based on the share price as of the end of 2024, and we no longer require ECB approval for distributions. We are also today raising our distribution payout policy to a range between 50% and 70%, reflecting the steady sustained progress achieved, the profitability profile, and medium-term growth outlook of the bank. We will also consider the introduction of interim dividends. We recognize how important capital returns are for our shareholders, and we remain fully committed to generous shareholder distributions, continuing to offer an attractive yield in a sector context.
Looking at slide 11, as of the start of 2024, we set ourselves several targets for the year, which we subsequently upgraded during the summer. I am delighted to report that we have exceeded every target we set ourselves, including our ROTE and capital generation. Looking forward on slide 12, I would like to share with you our priorities for the group, both for 2025 and beyond. My priorities for the group are to navigate the normalization of interest rates, grow the business, strengthen the franchise investing in new business initiatives with no compromise to our risk appetite, and, of course, maintaining our efficiency mindset. Our guiding light is return on equity, which we expect to be in the mid-teens on a reported capital basis and high teens based on a 15% CET1 ratio in 2025. This is assuming normalized rates of 2%.
For 2025, we expect to deliver organic CET1 capital generation of around 300 basis points, which in turn will support a distribution payout of between 50% and 70%. Supporting the ROTE are our expectations around income and costs, which I will run through over the next few slides. We are also assuming a cost of risk towards the lower end of our 40 to 50 basis points normalized range, with our loan book continuing to demonstrate robust credit quality. Beyond 2025, we expect to stabilize and grow the business, and we will confirm our commitment to high-teens profitability of 15% CET1 in 2026 and beyond, a level we believe we can sustain in a 2% rate environment.
Looking at our net interest income expectation on slide 13, as we have indicated for some time, we expect net interest income to decline in 2025 to below EUR 700 million, largely as a result of lower interest rates. We expect some stabilization into 2026, with net interest income exceeding EUR 350 million for 2026, based on our market expectations that rates will remain broadly stable at around 2%. Within that, we expect deposit volumes and costs to remain broadly unchanged, and we will continue to grow our fixed income portfolio and securities activities subject, of course, to market conditions. Supporting NII, we expect improved loan growth momentum, which I will come back to. Note that this guidance is after factoring in higher expected wholesale funding costs from our 2024 MREL issuance. Moving now to slide 14.
One increasingly important offset to rate-driven market pressure will be an expanding loan book, which we expect to grow around 4% per annum, a similar rate to 2024. There will be two key elements to that. Domestically, 3% economic growth will support broad retail and corporate loan demand, shelved further by a gradual recovery of loan repayments in a normalized interest rate environment. Internationally, we are focusing on expanding our corporate business in Greece in selective sectors in line with the bank's target risk profile and overall expect that portfolio to grow to around EUR 1.5 billion in the medium term. Moving to slide 15. While there are downward pressures on net interest income, we are refocusing our efforts on growing our non- interest income revenue sources.
Slide 15 gives a flavor of our initiatives around growing our fee and commission line, where we expect high transaction volumes, growth in digital sales through our Jinius platform, and growing assets under management in our private and affiliate banking business, and increased fees from the FX platform eFX Convert. As a result, we expect fee and commission income to grow around 4% per annum. In addition, as shown on slide 16, we expect good growth from our two insurance businesses, Eurolife and Genikes. In each business, we have strong market shares and generate the highest profitability in their sector. We target a growth of over 6% total regular income for Eurolife and approximately 6% in premium income for Genikes in the medium term. Finally, moving to slide 17, for several years, we have maintained our focus on careful cost management, and that will remain the case going forward.
Clearly, helped by the rate cycle, our cost-to-income ratio has declined 15 percentage points since 2022. While we expected fall in net interest income, we will place upward pressure on the cost-to-income ratio for 2025. We remain focused on ensuring we remain very cost-efficient, and a ratio of around 40%, we believe, places us amongst the leading group of banks across Europe. Importantly, and incorporated into our existing plans, are high levels of continued investments in the business. This will be offset by savings and staff optimization achieved by the continued digital transformation of our business and the embracing of new technology to improve efficiencies, so hopefully that gives you a flavor of what to expect from us both in 2025 and beyond. I will now hand over to Eliza, who will run through you our 2024 results in more detail.
Thank you, Panicos. Good morning from me too. Let's now provide more details to the full year 2024 highlights on slide 19. As the largest financial group in Cyprus, we extended a record EUR 2.4 billion of new loans in 2024, an increase of 20% on the prior year, while maintaining robust underwriting standards. Our gross performing loan book of EUR 10.2 billion grew 4% in the year. During 2024, we recorded a profit after tax of EUR 508 million, equivalent to earnings per share of 114 cents, being 5% higher compared to the prior year. Our resilient NII, diversified business model, ample liquidity, and healthy asset quality have been pivotal in achieving this strong profitability. Our cost base was impacted by inflationary pressures on staff costs and higher IT, marketing, and professional fees, delivering a cost-to-income ratio at 34% for the full year.
On asset quality, our NPE ratio decreased further to 1.9% in Q4, and we are now fully covered following an additional agreement for a small NPE sale in the fourth quarter. We maintained high liquidity this quarter with cash balances with central banks, representing almost 30% of the group's total assets. Our customer deposit grew 6% and 3% on a yearly and quarterly basis, respectively, to EUR 20.5 billion. Now, focusing on capital metrics, a regulatory CET1 and total capital ratio stood at 19.2% and 24.0%, respectively. As mentioned earlier, we are proposing today a distribution at a targeted 50% payout ratio, mainly via cash dividend supplemented by a share buyback.
Slide 20 shows the snapshot of the fourth quarter performance, driven by gradual declines in net interest income, reflecting the lower interest rate, higher cost-to-income ratio, mainly due to seasonally higher expenses, and a contained cost of risk well below our normalized provisioning range, on the back of robust credit performance. All in all, we concluded with a return on tangible equity of 17.1% in Q4. Let us now discuss net interest income on slide 23. Our net interest income for the full year stood at EUR 822 million, up 4% year on year, benefiting from higher rates, higher liquidity, and a well-managed cost of deposits.
On a quarterly basis, net interest income was modestly down 3%, as the impact of lower ECB deposit rates was largely offset by the continuing increase in liquidity through the stock of deposits and the decline in loan yields of 34 basis points, reflects only partly the 60 basis points decline in Euribor , with the full impact evident in Q1. We expect 2025 NII to be lower than EUR 700 million, reflecting lower rates and the slower repricing of deposits. Let's now turn to slide 24 and our hedging activity. Here, I'd like to highlight our significant hedging efforts undertaken over the last couple of years that have reduced our NII sensitivity to 100 basis points parallel shifting rates by EUR 43 million since December 2022. We added 4.5 billion of hedging in 2024, adding a total of EUR 9.0 billion, or 37% of the group's interest-earning assets.
We plan an additional EUR 1 billion of hedging activity in 2025, subject to market conditions. These hedging actions include received fixed interest rate swaps, further investment in fixed-rate bonds, and reverse repos. As of 31st December 2024, hedging carried out an average yield of 2.9%, which means the hedge is already in Q1 a net revenue contributor. Simultaneously, about a quarter of the group's loan portfolio is linked with the bank's base rate, which provides a natural hedge against the cost of deposits. On slide 25, you can see that those deposits increased by 3% on the prior quarter and 6% on the prior year to EUR 20.5 billion. We are encouraged that the shifting deposit mix towards time and notice deposits remains flat quarter on quarter at 33% of the total.
If you look at the breakdown of our EUR 20.5 billion deposit base, you can see on the bottom left chart that 80% of our deposits are from Cypriot residents. Overall, deposit costs remain low at 34 basis points in Q4. This reflects the very liquid Cypriot banking sector, cautious depositor behavior, as well as our strong franchise and market position. As a reminder, the sensitivity to each 10 basis points change in the cost of deposits is equivalent to EUR 21 million NII impact, while the percentage point change in the deposit mix impacts NII by EUR 2 million per annum. Moving now to slide 26 and our lending activity. We are encouraged by the solid growth in new lending, achieving a record EUR 2.4 billion in new loans in 2024, driven mainly by corporate and international demand.
The gross performing loan book was up 4% year on year to EUR 10.2 billion, showing encouraging momentum that we expect to continue into 2025 and beyond. Importantly, we have, of course, maintained our strong underwriting standards, as 99% of new exposures retained since 2016 remain performing today. Slide 27 shows our progress on the fixed income portfolio. As of 31st December, our fixed income book stood at EUR 4.2 billion, up by 19% on the prior year, representing 16% of total assets. The majority of the portfolio is measured at amortized cost, and it is held to maturity. Hence, no fair value of gains or losses are recognized in the group's income statement or equity. The portfolio is comprised of high-quality assets with average maturity of three to four years and is highly diversified.
We aim to grow the fixed income book further in the years to come so that it becomes to represent around 20% of our total assets in the medium term, subject to market conditions. Slide 28 provides a summary of the non-interest income. In 2024, the group's non-NII fell by 9%, mainly due to higher claims and recalibrations of some of our insurance models, subdued transactional fees, and the REMU loss that occurred in the last quarter relating to specific large illiquid REMU properties with idiosyncratic characteristics. Despite this, non-interest income remains an important contributor to the group profitability and covered almost 75% of its total OpEx during 2024. I would also like to remind you that both FX and REMU gains are volatile profit contributors. Separately, our insurance businesses remain a valuable revenue stream for the group despite the yearly lower insurance income in 2024.
They are capital-like businesses, and the net insurance result contributes to 17% of the group's non-NII. Slide 34 provides an overview of operating expenses. Our cost-to-income ratio of 34% in 2024 was supported by strong revenue. Total OpEx rose by 8% year- on- year, driven by salary increments and inflationary pressures in staff costs, variable pay of around EUR 11 million to incentivize individual performance, and higher OpEx reflecting higher professional fees on the Athens listing, higher IT and marketing expenses. Additionally, in 2024, we completed a small-scale targeted voluntary exit plan whereby 57 full-time employees were approved to leave at a total cost of EUR 9.5 million. On a quarterly basis, our cost-to-income ratio increased to 38%, driven by higher seasonal expenses. Given the revenue normalization, we expect an increase in the cost-to-income ratio in 2025 to around 40%.
Now, turning to cost of risk on slide 35, the continued robust performance of the credit portfolio, along with the improved macroeconomic assumptions in 2024, drove our cost of risk down to 30 basis points. On a quarterly basis, cost of risk stood at 32 basis points. Additionally, we incurred impairment of EUR 17 million in the fourth quarter relating to REMU stock properties due to impairments on large specific illiquid properties. During Q4, there was also a provision of EUR 13 million relating mainly to the progress and final resolution on specific existing litigations and other matters. Now, moving to capital on slide 37. The bank's capital position remains robust. Strong capital generation drove our CET1 and total capital ratios to 19.2% and 24.0%, respectively, net of the distribution at the 50% payout ratio.
We reconfirmed that the regulatory requirement for dividends was lifted in January 2025 based on our final SREP letter. CRR III became effective on the 1st of January 2025. The implementation of CRR III is expected to have a positive impact on the group on its initial application. Moving now to slide 38 and asset quality, we have achieved our 2024 NPE target early and reduced the NPE ratio to below 2% as of 31st December, pro forma for the NPE sales agreement, and we are fully covered. We're encouraged by the fact that NPE inflows remain limited. Slide 39 now on our Real Estate Management Unit. REMU is our engine to manage the stock of properties acquired from defaulted borrowers.
As you can see, the REMU repossessed stock decreased by EUR 200 million year- on- year to EUR 660 million as of 31st December, and we remain well on track to achieve our 2025 target of around EUR 500 million. We carry REMU stock at a conservative value as it represents 72% of the current open market value. It's important to note that we continue to sell on average close to independently assessed open market value and above book value. I would like now to hand back to Panicos for his closing remarks.
Thank you, Eliza. Moving to slide 40. Our priorities going forward will center on prudent capital management, driving new growth initiatives focused on loan book growth, non-interest income diversification, maintaining cost discipline while reinvesting in the business, and protecting the fundamentals of our asset quality.
This is to ensure we maintain a strongly capitalized and highly profitable organization, generating high-teens ROTE on a 15% CET1 ratio and delivering attractive returns to our shareholders. This concludes our presentation. I will now open the floor for your questions.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on 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 Eleni Ismailou with Axia Ventures Group. Please go ahead.
Hello and congratulations for this strong set of results. I have a couple of questions. One is on the NII dynamics, and the second one is on capital, so my first question would be if you could talk us through the drivers behind your expectation of why deposit volumes are expected to remain broadly flat at current levels for 2025, and if you could also confirm the interest rate assumptions baked in your business plan for 2026 onwards, and the second set of questions is that given your excess liquidity, would you consider any inorganic actions to strengthen the group's operating model, especially in a falling rates environment? On your new payout communication, as you said in your presentation, since you no longer require regulator's approval for distribution, what is the likelihood of a 70% payout ratio out of your full year 25 profits, and what would indicate your decision on whether you will give a 60% or a 70% payout? Thank you.
Okay, thank you, Eleni. I will start with some general comment on the capital returns and then answer specifically your question. I would like to remind at all that cumulatively, the last three years, we paid EUR 400 million one quarter of our market cap, and that as we mentioned earlier, we no longer need regulatory approval to pay dividends. I remember that we started in 2024 with a dividend between 30%-50%, and within the year, we announced that we target 50%, and now we're delivering the 50%.
We now update to 50%-70%. This is our current dividend policy, and our intention is to get to the higher end of this policy as soon as possible. The decisions will be taken by the board based on market conditions at that time. Our intention is to go directly to the higher end of the dividend policy as soon as possible. In terms of capital and inorganic actions, yes, it is our duty as management team to consider inorganic actions well. As I have said many times, we are willing to consider small inorganic add-ons that will facilitate and accelerate our, let's say, strategy, especially on the non-NII component. They have to make financial sense, and they will not jeopardize our risk profile and, of course, our ability to be generous to our shareholders.
On the deposits, general comment on the deposits, the deposit is a kind of management of volume and rate. In 2024, we were successful in managing both by increasing the volume and at the same time keeping the cost at very, very low levels. So for 2025 onwards, we have to make an assumption. The basic assumption is that both volume and cost will remain the same. Of course, this is something that we will monitor. We have to see how depositors will behave in a reducing rate environment. And if things tend to be different from this basic assumption, of course, this will be reflected positively in our NII. But the fundamentals of the market, very liquid cost of the market, remain the same.
And on the right from slide 13, where we show our NII drivers, and you will see transparently, I mean, our objective was to be as transparent as possible on our NII drivers and assumptions behind those, which is why we set them out on the left-hand side of the slide. And on the bottom right, you see our other ECB and Euribor assumptions for the period. So I would refer you to that. It's 2% for the ECB rate and 2.1% for the Euribor for next year.
Excellent. Thank you very much both. And again, congratulations for the results.
Thank you.
The next question comes from the line of Can Demir with Wood & Co. Please go ahead.
Yes. Good morning. Can you hear me?
Yes.
Yes.
Hi. Thank you. Thank you for taking my questions. I actually have a couple. So on the NPE sales in the third and fourth quarters, I think it's a total of EUR 66 million. I was wondering if 2024 numbers include those one-offs, if any. So that's the first question. The second question is on JCC, and I'm asking this question because it's under strategic review. I was wondering why the net income or profit after, yeah, profit after tax, I mean, same thing. Why is that on a declining trajectory despite pretty good volume growth in the past couple of years? So that's the second question. The third one is on litigation provisions. I was wondering if we should expect more of those next year or 2026. Well, next year being actually this year, sorry. And the last one, if I may, is on REMU.
You mentioned that you can sell at or above book value, but you also take impairments on REMU, right? So I was wondering if you conservatively mark to market the whole portfolio, what kind of loss you would take. If you were to take the losses on a wholesale basis, what would the number be? So those are my questions. Thank you very much.
Thank you. We didn't hear the first question very clearly. Would you be kind enough to repeat it?
Of course, Eliza. So the NPE sales in the third and the fourth quarter of last year, I think it's a total of EUR 66 million. So I was wondering if your 2024 numbers include those one-offs, if any.
Okay. So let's start with that then. The NPE sales did have a very small impact to P&L, but it was significantly capital positive. We do have a very small assumption. We do have an overlay, let's say, in our cost of risk guidance for conservatives, which may or may not be used for incremental trades if we decide to do them. But if I refer you to the NPE slide, our NPEs are currently at EUR 201 million, which 74, it's on page 38, 74 million is reperforming. Actual gross NPE stock before provision is at EUR 126 million or thereabout. The numbers are very, very small these days. On litigation provisions and REMU, and then I will hand over to Panicos. On litigation provisions, we did take advantage of a good year to de-risk on a specific legacy case that we had in Q4, which is why you see a relatively higher charge in this quarter compared to previous quarters.
We did not expect Q4 or even the year to be run rate on litigation provisions. Most of these legacy cases, we're running them down. I mean, we're at the end of this journey, and we are conservatively provided on this risk. Now, on REMU, the question was on the mark to market of the portfolio, and you referred to a wholesale transaction. Let me answer it differently. The stock at 31st December was at EUR 660 million. We had a very, very good Q4 where we managed to achieve our EUR 200+ million stock reduction target. And we are holding this stock currently as of December at 72% of open market value. So there is an implied 28% buffer to OMV.
The other point to say is that organically, we continue to be selling significantly above book value, and there is a graph on page 39 on the top right, and broadly at the open market value level. So our strategy, by the way, is to continue this organic delivery of these sales. So we believe we are prudently marking this real estate book on our balance sheet given our track record of delivering sales above the book value prices.
Okay. And on JCC, general comment first. We are constantly reviewing our business, and our focus is always to extract the highest value for our shareholders. So regarding specifically JCC, the current strategy assessment has reaffirmed that JCC is value added to the group. So I'm going to the numbers that are on specific slide 31. You can see there that first, the contribution to non-NII is growing since 2022.
So this is a valuable contribution to our non-NII. It's a very profitable business for us, 23% return on tangible equity. In terms of profitability, there were some one-offs and some of higher third-party expenses coming from Visa during 2024, and that's why you see this small drop in terms of the actual profit. But our strategy remains the same that JCC, it's a utility, one-stop shop, a kind of utility for the country, and that can gradually expand its product offerings, not just being a merchant acquiring. And the contribution to our non-NII is significant, and it's growing.
Thank you very much.
The next question comes from the line of Alexandros Boulougouris with Euroxx Securities. Please go ahead.
Yes. Hello. Many thanks for taking my questions. A quick question on deposits and repricing. You mentioned in the guidance that you expect deposit costs to remain relatively flat in 2025 compared to 2024. However, we have already seen a slight decrease in deposit costs in the third quarter. So that may be a bit too pessimistic, or is this on what should we expect in 2026, assuming the 2% base case scenario on ECB rates? Should we expect deposit costs at what level to stabilize? That's my first question. And my second question regarding capital on the payout. If we assume in your targets with a 70% payout ratio and 4% lending growth that you mentioned, would that lead to a relatively stable quarter one? Or would it mean that you will start consuming part of the capital? Thank you.
Okay. Thank you. Thank you, Alex. In terms of deposits, let me say again that our basic assumption is that the volume, the mix, and cost will remain broadly flat in medium term. There is always a time lag for deposit repricing, and we need to wait and see how the depositors will behave and review again our assumptions. So this assumption will probably be reviewed again, let's say, with our Q1 results. In terms of payout ratios, I think it's fair to say that our organic we aim to use most of our organic current generation for dividend payments and growing the loan book. So I don't expect the combination of 70% plus organic growth to consume any of the existing capital.
Great. Very clear. Thank you.
The next question is from Alfredo Alonso with Deutsche Bank. Please go ahead.
Well, thank you for your presentation and taking my questions. I have a follow-up on the question on the payout. As you say, it's unlikely that the total capital will decline, and you usually say that the ROTE calculation is made over 15% CET1. So is that your long-term capital target? Do you think that you could find some way of accelerating the convergence to those levels? And I have another question, if I may, which is on the cost of risk. We've not seen any significant deterioration of the asset quality, actually. And you are guiding for a higher cost of risk. For sure, it's not much higher, but what are the trends lying behind that could entail some increase in the cost of risk going forward? Thank you very much.
Okay. I will start with the cost of risk. Yes, you are right. Okay. Firstly, cost of risk this year, 13 basis points. So this is a kind of tick the box on our credit quality and the stable economic environment in the country. So in our medium term, we reiterate our existing guidance, which is 40-50 basis points towards the lower end of this range. Okay. I think we don't have any evidence of any deterioration. This is not the case. We are optimistic on our portfolio quality. But okay, we remain cautious on the volatility in the market. And because you also said that the difference is not significant. So 10 basis points is just 10 million for us. So it doesn't make too much difference in our projection. But what I would like to reconfirm or reaffirm is that there are no trends in any segment of our portfolio or of our quality, of our lending book that indicate towards higher risk.
On the capital question, okay, 15% is not our official target. It's a level that we have got the Board's approval to pay dividends. And for us, it's kind of a stable measure based on which we measure our performance. Given that generation of organic capital, it's much faster than the time we need to optimize the denominator. So yeah, I mean, as we said, first, we want to reach the high-end range of our new dividend policy. We align with peers in terms of how much we pay our shareholders. As I said before, the new organic capital will probably be consumed with payout ratios and growth. Obviously, these kind of capital levels that were the results of two years of profitability, right? We just have this surplus capital for the last two years. Give us a lot of flexibility, give us a lot of optionalities.
We feel very comfortable about it. But okay, I believe that the trajectory of capital to more normal levels will be gradual, and this is something that the board will decide in due course. But even, sorry, even with payout ratio with the organic capital generation, the dividend yield will be still very attractive for our shareholders.
Thanks.
The next question comes from the line of Dimitris Giannoulis with Research Greece. Please go ahead.
Yes. Hi, and thank you for the opportunity. One question. Given your cash balance in 2024, is there any type of regulatory restriction that would prevent you from going even higher on your fixed income portfolio than 18% this year and 20% in the medium term? Or is it just a decision based on market terms and finding the good enough yield?
The latter. There's no regulatory constraint, Dimitris. On this, it's a risk return and capital allocation choice of the bank, which is why, for those of you that have been following the build-up of our fund portfolio, we were conservative in the negative rates and low-yield era, and we started building the portfolio when market conditions were such that we liked the risk-return dynamics of the book, and we continue to be at that place. We continue to like the risk-return dynamics and to want to grow the book broadly in line with the existing mix and the existing rating profile.
Okay. Thank you very much.
The next question comes from the line of Hugo Cruz with KBW. Please go ahead.
Hi. Thank you for the time and for the results. A question on fee growth and another on the capital. On the fee growth, it has been negative in 2024. You talked about it in transaction fees, but can you remind us why that shouldn't happen again in 2025? And then on the excess capital, I think you've been quite clear so far, but I was just wondering if there's any you will continue to accrue capital, especially you mentioned positive impact from Basel IV. So when will the board look at the optionality of that excess capital? And what kind of measures are you considering? You said you could look at potentially bolt-on. So if you could be a bit more specific about the timing and the measures to start to use your excess capital, I think could be very helpful. Thank you.
Okay. Starting from the fee and general non-NII revenues, okay, you all know that BoC is a very diversified group. And okay, NII has been the only game in town the last two years. Okay, and let me remind you of our strong contribution of non-NII. We have one of the highest fees to assets in Europe at 1.1%, and non-NII covers more than 70% of our cost. Saying that, 2024 was not our best year in terms of non-NII, but if we look a little bit deeper, we can see that the recurring income is 4% higher versus 2022. If we compare this with 2023, the main difference comes from insurance, and there are, let's say, two reasons. The first reason is that there was a recalibration of our model in the life insurance, and there were higher claims in non-life due to some severe conditions we had in Cyprus early 2024. These are one of the events that happened in 2024. Other than that, we have very strong and profitable franchise.
We have a number of initiatives such as Jinius, Affluent Banking, eFX Convert, Asset Management. So all these, we support the growth of the non-NII going forward, and okay, with a spread of around 300 basis points, it made sense to prioritize NII revenues. Under the new normal, interest rates are strongly influencing the repo market. I think it makes more sense now to encourage clients to move to off-balance sheet products. We reiterate that our net fee and commission growth of 4% per annum is still a feasible target for us, and it's a major target for us because non-NII has always been our differentiating factor for you. In terms of excess capital, I think I answered the question in a way, and I will say again that we have been the first bank that paid dividends.
We have been one of the first banks in the region, probably the first that had the ECB restriction lifted. We paid one quarter of our market cap in basically two years and a half because I consider the first year of payment of dividends a symbolic one. So we are having an attractive yield for our shareholders with the organic generation, not only in this year but the years to come. So the excess capital is something that the board will consider, okay, based on some strategic consideration, and once we have this timing and decision, we will, of course, update the market.
Thank you very much.
The next question is from Daniel David with Autonomous Research. Please go ahead.
Hi. Good morning. Congrats on the results. I've got a couple of questions and a quick one on MREL. Just on loan growth, I can see that the growth in the international division is pretty strong. Just interested, is there anything you're doing to kind of win business from the Greeks or any other competing banks in that space? What's driving the growth there? Any comments would be useful. On REMU, really good to see the progress there. I guess in the past, well, previous quarters have not seen the same progress, and I guess it's been quite lumpy. Is there anything in Q4 that's happened to see REMU accelerate? Maybe you could talk about what's happened in Q4. And then finally, just on MREL quickly, I know that your requirements dropped by 110 basis points, 25 to 23.9 excluding the CBR. Could you provide a bit of information on what's driven that? Thanks.
Thank you. So let me start with REMU. It was lumpy. Actually, it was a very good quarter, as I mentioned in the previous question, in Q4. This was the case the previous year as well. It's a nature of the beast. I think there are some bigger transactions in the quarters where we managed to conclude them. They make a different, more meaningful difference to the stock reduction target. So yes, we did have some meaningful large ticket sales in Q4, which took us to the EUR 660 million level. On MREL, it's the mechanics of the formula. I don't think there was anything noteworthy or specific that drove the change of the ratio, and then on the international loan book,
I would say the international loan book. I mean, many of you here have heard me saying about international for some quarters now. And I think now you have started seeing the results. So we granted almost EUR 400 million or 16% of our new lending in international. And now the international exposure is roughly EUR 1 billion and 10% of our loan book. So I said before that there are connections in Cyprus. There are Greek corporates that have their holding companies in Cyprus. There are Greek corporates that are expanded in Cyprus. And it was a matter of decision for us to move to selective cooperation in the lending spectrum for some Greek corporates. So this is a work that has been done the last couple of years to prepare the setup, re-engage with our relationships. And I think the results have been obvious in 2024. And we aim for moving to EUR 1.5 billion in the medium term, so another EUR 500 million.
Thanks for the details.
Nothing particular. Just being more active and more focused on the market.
And if I may just go back to the MREL question, was the question on the minimum ratio or the actual? Because if it was on the minimum, we did get a positive reduction in our MREL target from the SRB. There is a discretion the SRB has for banks that deliver on their deliverables, on the quality of their deliverables. And we ticked that box and got a slight relaxation on that rule. So if the question was on the minimum ratio, then this is the reason.
Great. Yeah, it was on that. Is this related to the market companies charge, or is it just?
Thank you.
Mr. David, are you done with your questions?
Yeah, that's fine. I'll follow up offline. Thank you for your comments.
The next question comes from the line of Souvleros Andreas with Eurobank Equities. Please go ahead.
Hello, and thank you for taking my question. I have just a quick question regarding your hedging strategy. You have successfully managed to reduce your sensitivity to rates from 35% of total NII to 10%. My question is that given the opportunity that is given now, and in terms of securities book that you can increase it, or in terms of increasing your IRS position, do you expect that this sensitivity is going to be decreased further during the next year?
So it depends on the balance sheet evolution is the answer. So it should reduce as a result of the additional hedging that we are implementing this year. But on the other hand, it may change because of the balance sheet composition. The deposits, especially last year in 2024, this sensitivity suffered because of the increase in our deposit book, which meant we had more liquid assets, which are obviously very sensitive assets. So the equation is not one-sided. It's not just the IRS and the hedging. It's also the balance sheet evolution. Net we do want to reduce it. We do aim to reduce this sensitivity in absolute terms, and what I'm saying is if we see the balance sheet evolution evolving in a way which increases it, we will adjust our hedging strategy accordingly over time.
Have you proceeded to any action until now, I mean, until mid-February?
I don't think we should comment on this, but what I can say is that our hedging strategy involves and entails us delivering on the hedging throughout the year, obviously subject to market conditions.
Okay. Thank you.
The target for this year, by the way, is to increase the IRS book by EUR 1 billion. And there's also the replacement of the existing hedges that eventually, over time, we will need to be doing. So this is an active and alive process. It's not static. We will not buy the EUR 1 billion on a single day. We will phase it out in a year.
Understood. Very clear. Thank you very much.
The next question is from Memisoglu Osman with Ambrosia Capital. Please go ahead.
Hi. Thank you for your time and the presentation. Just to follow up on the hedging and also on loan book. On hedging, just to clarify, apologies if I missed it, this EUR 1 billion addition, does that include the fixed income book expansion? That's my first question. And if so, what percent is roughly swapped? What is the fixed income?
Osman, no. EUR 1 billion is pure treasury hedging, not the fixed income book. The fixed income book is incremental to this.
Understood. And then on loan book, more of a strategic concept question. So you mentioned 4%. There's quite a bit of opportunities in the region in Greece for you. So in 2025, for example, is there a significant upside risk to this figure, or is the management thinking that we're going to strictly be disciplined and keep this around 4%? Just wanted to see if I can get more color on this. Thank you.
No, 4% is the basic assumption, Osman. If there are opportunities for higher than 4%, there are no restrictions for us in doing so. The basic assumptions include the growth of the economy in Cyprus, which is expected to be around 3% on average. Our retail book will continue to grow. There is corporate, despite the growth in lending being at exceptionally high volumes, there were significant payments during 2024. We expect these payments to gradually abate with the rate normalization. And of course, we expect the international book growth from EUR 1 billion- EUR 1.5 billion. So basic assumption is 4%. Anything more than 4%, it will be added on to our existing NII guidance. For 2025, would it be fair to say there's some upside here over that 4% figure? This is something that we will probably talk about, let's say, with our current results. Let's stick to our current basic assumption, which is 4%.
Understood. Thank you.
As a reminder, if you would like to ask a question, please press star and one on your telephone. We have a question from the line of Achilleos Christos with Argus . Please go ahead.
Yeah, just a quick one on slide 12, just to clarify now, especially given the fact that you've consistently beat the estimates that you have given. Are we going for 2025 and 2026 ROTE estimates now? And how comfortable are you on those numbers?
Thank you. Christos, on our 2025 target, I mean, actually, both are on the slide. Obviously, we're more confident on 2025 by definition because we're here already, which is why we are guiding on every line in 2025. Our guidance for 2026 is for high-teens ROTE on a normalized CET1. And we believe we can achieve that at the 2% or about the 2% interest rate normalization level, let's say. We will aim to provide more color on 2026 later this year, as we do every year, especially given the volatility rate and the timing of any of the movements that this may entail.
But generally, on a high-level view of the bank, so there are some basic assumptions for ROTE. The first one is normalized rate, around 2%. The second one is continue being cost-efficient with a cost-to-income ratio of around 40%. The third one is a credit risk focus with normalized cost of risk, 14-15 basis points. The NII expected to reduce and stabilize starting from the extraordinary high point we have been in 2024. And this will support the loan growth. We support the NII mid-term growth. With non-NII, we continue to be a substantial part of our income. And this non-NII will be strengthened further with new investments in new initiatives like Jinius, Affluent Banking, Privilege, FX and all this that I talked about earlier.
So all these assumptions will result in high profitability, high-teens ROTE on a 15% CET1, and mid-teens ROTE on a reported CET1, with attractive shareholder returns, cash dividends by the bank, consideration of interest dividends as well, and with capital surplus, ample liquidity, which all these ample liquidity and capital surplus provide us optionality and for many other initiatives that will deliver additional value for our shareholders. So this is how we view the bank, at least for the next two years.
Thank you.
Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Nicolaou for any closing comments. Thank you.
Okay. Thank you for your questions. I think we were very happy to see this number of questions. So it means that there are a lot of things that we'd like to talk with you offline. So please communicate with us for further, let's say, discussion and questions after we finish this call. 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 good day.