Ladies and gentlemen, thank you for standing by. I am Yota Yakourou, call operator. Welcome, and thank you for joining the Bank of Cyprus conference call to present and discuss the first quarter 2026 financial results. 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 quarter ended 31st of March, 2026. As always, I am joined by Eliza Livadiotou, Executive Director of Finance, and Annita Pavlou, Manager Strategy, IR, and ESG. After my introductory remarks, Eliza will go into more detail on our financial performance for the quarter, and then we will be happy to take your questions both during this conference call and afterwards. I would like to start with slide number five and our investment case. Today, the bank is in a very good shape with a strong domestic franchise demonstrated by our diversified and efficient business model, holding leading positions in banking, insurance, and payment solutions.
We operate in an economy that is expected to grow faster than the Eurozone average in 2026, notwithstanding geopolitical tensions, an economy that is flexible and resilient to external shocks. We are one of the most well-capitalized banks in the Euro area, have strong capital generation, which enable us to build up an attractive distribution track record, supporting a payout ratio of up to 90% for 2026 profitability and up to 100% annually for 2027 and 2028. Slide six and seven give a brief overview of the macroeconomic environment. Since we last spoke to you in March 2026, the macroeconomic landscape has evolved as a result of the conflict in the Middle East, resulting in heightened uncertainty and volatility.
We entered 2026 with strong economic tailwinds that characterize the Cypriot environment in 2025, when the economy grew by 3.8%. Inflationary pressures were contained, and the government's fiscal position stood out in the European context. While the global backdrop has led to modest economic downgrades, recent official forecasts suggest GDP growth for 2026 in the range of 2.7%-2.9%, level which is expected to continue to significantly outpace the forecast growth for the Eurozone average. Despite the current ceasefire agreement, geopolitical tensions continue to pose a risk for the European and global economies. Clearly, we are not immune to this. The Cypriot economy will be impacted through weaker tourist activity and elevated energy prices. At this stage, the full impact of the conflict on the Cypriot economy remains uncertain and depends largely on its duration.
We have faced many periods of macro and geopolitical volatility in the past. Cyprus is a small, open, flexible economy that has shown it is resilient and quickly recover from crisis. Additionally, the Cyprus government robust fiscal position enable it to support affected sectors. The government has already introduced a package of over EUR 200 million financial support to both households and businesses. Let's now turn to slide number eight, which shows a snapshot for the first quarter performance. For another quarter, we delivered strong profitability at EUR 121 million. This performance was the outcome of stabilizing NII at EUR 181 million, low cost income ratio of 37%, and a positive cost of risk, reflecting a customer-specific release and strong underlying asset quality, partly offset by some IFRS 9-driven overlays. Slide 9 shows our performance and long-term shareholder value creation.
Our return for Q1 stood at 18%, corresponding to 26.5% return based on 15% CET1 ratio. We delivered yet another quarter of strong organic capital generation of over 100 basis points, while our tangible book value per share is up around 5% year-to-date. Let's now turn to slide 10. At our investor update in March 2026, we outlined our strategic priorities to continue to generate sustainable and resilient profitability as well as attractive and sustainable shareholder returns. Our financial targets for 2026-2028 are for a return in the mid-teens, translating into a return of over 20% based on a 15% CET1 ratio and organic capital generation in the range of 350-400 basis points per annum. These targets are supported by remaining focused on cost and underwriting discipline.
We remain committed to a meaningful distribution, with the total payout ratio reaching up to 90% for 2026 and up to 100% annually for 2027 and 2028. These distributions are, of course, subject to market conditions as well as the outcome of the group's ongoing capital and liquidity planning strategy at the time. As you can see, our current performance is tracking well against our 2026 targets, giving us confidence that we will deliver on each metric. Clearly, the world has evolved since we shared our guidance, and many key variables such as oil prices, interest rates, and global growth remain uncertain and volatile. Our guidance is built on robust internal assumptions, and given the information we have today, we are confident on delivering on our targets. I will now hand over to Eliza, who will run through our full year results in more detail.
Thank you, Panicos, and good morning from me, too. Let's now turn to slide 11 and the summary of our key highlights. These include strong volume growth with EUR 829 million of new lending, translating into a 2% increase in the loan book since the beginning of the year. Flat deposits. Our asset quality remains solid, with an NPE ratio declining further to nearly 1% and a net release 17 basis points in cost of risk, driven by a customer-specific reversal. We've had a very healthy organic capital generation of 114 basis points and ended the quarter with a CET1 ratio of 20.7% and a total capital ratio of 25.5%. As a reminder, in March 2026, we announced two targeted bolt-on acquisitions to diversify further our business model and accelerate our balance sheet growth.
A minority stake in Wealthyhood, a Pan-European tech company, which allows us to provide retail customers with digital access to stocks and ETFs, and the agreement to acquire the performing loans along with the deposits from the Cyprus Development Bank, amounting to EUR 150 million and EUR 500 million respectively. Let's quickly turn to slide 12. This is our detailed income statement. I will not go through each line, as we will discuss them later, but you can see that our operating profit on a quarterly basis remains flat at EUR 159 million. This was despite the fact that we had some notable positive items in the fourth quarter, affecting largely our non-interest income line.
In a nutshell, these were a EUR 5 million relief on premium tax of life insurance, a EUR 2 million insurance reimbursement, and EUR 10 million coming from elevated REMU sales. When disregarding these items, our recurring non-interest income amounted to EUR 65 million, higher by 8% year-on-year on strong insurance income. While the QoQ reduction reflects seasonality in the fee and commission income. Additionally, effective from first January 2026, the corporate tax in Cyprus has increased to 15% from 12.5% previously, and this is now reflected in the Q1 results. Now moving to slide 13. The structure of our balance sheet is simple and is characterized by high liquidity. Our deposit base is nearly twice the size of our loan book, with liquidity gradually being deployed to loan growth and investment in the fixed income portfolio.
As a reminder, on the lending side, over 40% of loans are linked to Euribor. Slide 14 net interest income. Our NII in the first quarter has stabilized as expected at EUR 181 million, corresponding to a net interest margin of 281 basis points, broadly flat QoQ. Against the prior quarter, net interest income was affected by fewer calendar days in the quarter, while the contributors of NII stayed strong. Loans grew by 2% QoQ. Our fixed income portfolio rose by 5%, and both deposit balances and pricing remained stable compared to Q4. Our 2026 NII outlook remains unchanged.
We continue to expect NII to stabilize at approximately EUR 720 million, with a net interest margin above 270 basis points, based on the underlying assumption of a 2% ECB deposit rate. Moving on now to our hedging activity on slide 15. Our significant hedging efforts undertaken over the last couple of years have reduced our NII sensitivity to a 25 basis point parallel shift in interest rates to EUR 15 million, half the level it was in December 2022. Our hedging level increased by EUR 500 million in the first quarter, taking the total to EUR 12.6 billion, covering almost half of the group's interest-earning assets. We improved the yield of our new interest rate swaps to 2.44% in Q1 from 2.25% in the previous quarter.
We will continue the dynamic management of our balance sheet, subject of course, to market conditions. On slide 16, you can see more details of our deposit trends. Total deposits of EUR 22.3 billion were flat QoQ, supported by strong inflows at the end of the period. We have seen deposit costs stabilizing at 27 basis points in the first quarter, whilst the share of term deposits remains broadly unchanged from the prior quarter at 31%. The well-managed deposit cost and mix mainly reflect the very liquid Cypriot banking sector, as well as our strong franchise and market position. The breakdown of our deposit base at the bottom left chart shows that more than 80% of our deposits are from Cypriot residents. Let's now turn to slide 17, a new lending.
During the first quarter, we granted new loans of EUR 829 million, close to the historical high levels of Q1 2025. Of course, we have and we will continue to ensure prudent underwriting standards, and we will not sacrifice the quality of our loan book for growth. As a reminder, 99% of a new exposure written since 2016 remain performing. Looking now to slide 18, we are pleased to see our loan book grow by 2% since the beginning of the year to EUR 11.1 billion, with growth observed across all business lines. Yields on loans remain broadly flat Q-on-Q at 431 basis points.
We remain confident that we will be able to deliver loan growth of over 5% in the full year 2026, supported both by domestic demand and careful expansion of the international loan book. Slide 19 shows our progress on the fixed income portfolio. Our portfolio stood at EUR 5.4 billion, representing 19% of the group's total assets. The fixed income portfolio comprises of high quality assets with average maturity of three to four years and is highly diversified. The majority of the portfolio is measured at amortized cost and is held to maturity, hence no mark-to-market impact is recognized in the income statement or equity. The mark-to-market of this portfolio as of March 31st was around EUR 48 million loss or 45 basis points of CET1, reflecting interest rate rises as a result of market volatility.
Slide 20 shows that non-interest income of EUR 69 million was flat on an annual basis. Let me try to unpack and share how we look at this important source of revenue that underlines our diversified business model. We have what we consider high quality revenues, which is our area of focus. This includes the fee and commission income, the net insurance reserve, and the FX customer related fees. Altogether, this grew by 8% year-on-year, primarily driven by higher net insurance income, reflecting the acquisition of Ethniki Insurance Cyprus and better claims experience. Other non-NII items include REMU gains losses on financial instruments and other income. These are volatile profit contributors. In Q1, this line was impacted by a lower mark-to-market on equity financial instruments. Overall, non-NII remains an important contributor to profitability and covers 76% of Q1 operating expenses.
Our insurance businesses are a valuable and recurring revenue stream for the group, as presented on slide 21. In summary, our net insurance result amounted to EUR 17 million in Q1, up 41% year-on-year, mainly reflecting the contribution of Ethniki Insurance Cyprus, better claims experience, lower losses in onerous contracts in life insurance, as well as higher new business in non-life. Overall, the net insurance results contributed 24% of total non-interest income and insurance remains highly profitable, contributing 11% of the group's total profitability. Slide 24 provides an overview of operating expenses. Our cost to income ratio in Q1 stood at 37%, reflecting continued cost discipline. On an annual basis, total OpEx increased by 4%, reflecting mainly the accrual on the variable pay.
Overall, staff costs remained flat year-on-year as the salary increments and the cost of living adjustments of around 4%, which typically take place at the beginning of the year, were offset by the completion of the voluntary staff exit plan in the fourth quarter, where around 110 employees left the group. Other operating expenses were also flat year-on-year. On a quarterly basis, other OpEx was reduced, reflecting mainly quarterly seasonality. Turning now to slide 25 and asset quality. Our underlying credit quality is strong, and we are not seeing any signs of deterioration, evidenced by the low NPE ratio at 1.1% and the coverage ratio exceeding 100%. The cost of risk saw a net release of 17 basis points for Q1, driven by a customer-specific reversal.
We took overlays of 21 basis points in the quarter on the back of revised macro assumptions, which assume lower GDP growth and higher inflation compared to the Q4 assumptions, reflecting the ongoing geopolitical environment, whilst underlying provisions continue to reflect the benign credit trends from 2025. Given the current geopolitical volatility, we are regularly monitoring the loan portfolio, and we are not seeing any signs of concern. The tourist sector has seen two consecutive record years, remains cash rich, and is coming from a position of strength to withstand this headwind. The REMU repossessed stock decreased further to EUR 362 million as of March 31. We continue to manage our REMU stock prudently as it's carried on the balance sheet at below 70% of the current open market value. Let's move to slide 26 and capital.
The bank's capital position remains strong. We continue to build organic capital, generating 114 basis points this quarter. Our CET1 ratio and total capital ratio stood at 20.7% and 25.5% respectively, reflecting the accrual for the ordinary dividend at a 70% payout ratio, as well as modest RWA growth. Our 70% dividend accrual represents the top end of our distribution policy for ordinary dividends. I will draw your attention to our intended payout, which is unchanged. 70% ordinary dividend and up to 20% top-up to be decided with the final 2026 results.
Consequently, we plan to accrue a 70% payout during the quarter and any top-up will be accrued at the time it is announced. In March 2026, we announced the agreement to acquire the performing loans and deposits of the Cyprus Development Bank amounting to EUR 150 million and EUR 500 million respectively. The consideration was nearly at par, and the capital impact is expected to be modest at around 35 basis points. I would now like to hand back to Panicos for his closing remarks.
Thank you, Eliza. While global geopolitical uncertainty is ongoing and the associated economic impact is unclear, we at Bank of Cyprus are well-positioned to navigate this period, leveraging on our core strengths. Our efficient business model and strong credit underwriting culture means we have strong lines of defense for this uncertain environment. Combined with our proven ability to successfully execute our strategy, give us confidence today in our ability to deliver on our targets.
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, 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 Ben Maher with KBW. Please go ahead.
Hi, morning, everyone. I've got three questions, please. The first one is just on the impact of the CDB acquisition on NII this year and in 2027. The second question is just any volume trends that you've observed in April, you know, across both loans, deposits, and also fees. Finally, across the risk guidance for this year in light of the IFRS model update and the climate reversal you mentioned as well in the slides. Thank you.
Okay, thank you. Thank you, Ben. On CDB, I will say that we expect the transaction to be completed by year-end. Any impact will be probably shown on the 2027 results onwards. Just to remind you that we have not included CDB in our guidance that we have given out to the market in early March. On the second question about April, I will say that the trends either on fees or pipeline are as usual. We have not seen any slowdown so far. All things are on track or how we expect them to be.
On the cost of risk, the cost of risk is, I would say, I would start by saying that the underlying performance of the portfolio continues to be very strong. We are not seeing any change in the underlying credit metrics. I would like to remind you that the 40 to 15 basis points is fundamentally the cost of risk throughout the cycle. Having said that, this quarter was kind of unique. We have the release coming from a cash reversal of a legacy client, plus a charge because we updated macros and took more conservative stance on the weights on each scenario.
As, as things stand today, if you simply do the math, the cost of risk for the year, expected to be a little lower than the lower end of the 40 - 15 basis points. However, given that situation, we all understand and agree that it's fluid, we will not change our guidance. We'll review as we move towards the next quarters. Anyway, the numbers are really small.
If I may just add then to your first question on CDB, I think you asked the impact. We expect NII impact to be nearly EUR 10 million on an annual basis, based on current rates, of course.
Sorry, how much was that? I just I missed it.
Around EUR 10 million.
EUR 10 million . Okay, thank you.
The next question comes from the line of Alex Boulougouris with Euroxx Securities. Please go ahead.
Yes, good morning. Thank you for the presentation. A quick question on the NII regarding the first quarter. Could tell us a bit the impact of the calendar days that you mentioned. Also, given the first quarter trend and the strong loan growth, and we're seeing your Euribor also edging upwards, I think it's 2.2% now. Do you think that there is an upside risk also on NII? You mentioned a bit on provisions as well, given the reversal. That's my first question. The second regarding the loan growth pipeline, how do you see the trend in, let's say, April, early May? I mean, do you see any slowdown or you're confident with this more than 5% that you already mentioned growth rate? Thank you.
Thank you, Alex. I'll start with the NII question. The number of days impact in Q1 is estimated to be around EUR 10.5 million on a daily basis. On Euribor, there was an increase in the later days of March after the war started, but the impact is modest. Anyway, I remind you that our guidance back in March, early March, was on the back of 2.2% average Euribor for the year and 2% ECB rate. The impact in the quarter of Euribor was modest. The sensitivity, we are very transparent in disclosing that EUR 15 million for every 25 basis points. Just preempting the next question, we're not regarding at this point on NII exactly because the situation remains fluid. We chose to be transparent on giving you the sensitivity on rates. On loan growth?
On loan growth, I think that our pipeline remains strong. We have not seen so far any slowdown. The 2% growth in the first quarter give us the comfort to achieving our target for this year, which, as a reminder, is more than 5%. Of course, we'll remain vigilant and monitor the developments. So far we have not seen any slowdown in our pipeline.
Great. Thank you.
The next question comes from the line of Daniel David with Autonomous Research. Please go ahead.
Good morning. Congratulations on the results. I've just got a couple on asset quality and on capital. The EUR 6 million related to change in macro assumptions, could you just maybe talk about how much you have in reserve in total? The EUR 6 million plus whatever you have. Could you provide a bit more information on the release you mentioned related to a specific client? Anything you can say there would be interesting. Finally, on capital, I guess we can see that you're accruing, and you flagged that payouts might be increased. Your capital position is very strong, and your earnings are great. Is there any reason why you wouldn't increase that payout? Anything we should be watching out for? Anything you'd flag specifically? Thanks.
David, on the EUR 6 million, the 21 basis points equivalent of macro impact, that's actually not an overlay, it's a model, it's a modeling impact. There is no port, let's say, which covers the bigger number. It's just how the PD & LGD models are calibrated, and this is the impact of the recalibration, because, A, the GDP growth was lower, modestly this quarter, and B, we increased the relative weight of the adverse scenario given the geopolitical risks. It's on slide 61, the scenarios and the analysis. Panicos?
On capital, on payout ratios, I would say that what we said in early March remains unchanged. What we said is that after our dividend payout ratio of 70%, plus top-up dividend up to 30% for 2026, and up to 30% for 2027 and 2028 for the reason that we explained in the Investors Day. What we said early March remains unchanged as of today.
Thanks. Anything you can say on that corporate release?
Apologies.
On the release, it was a cash repayment of a legacy corporate client.
Thanks.
The next question comes from the line of Alexander Kantarovich with Roemer Capital. Please go ahead.
Yes. Can you hear me?
Yes.
Looking at your non-core income, which dropped sharply in the quarter, I presume this was due to the trading result. Can you quantify it, please?
I guess you're re-referring to non-NII, the lines other than fees and commissions, the non-recurring items?
Yes.
No, actually, we don't have any trading books, so we shouldn't consider that there is a hit from that. I would say that year-on-year, the actually, the recurring non-NII was 8% up. The guidance for the full year is to be 4% CAGR per year until 2028. Actually, the recurring non-NII was up 8% year-on-year. Now having said that, the non-NII, for the full non-NII, there is some seasonality between quarters and some one-offs, so I think that's why we focus on the recurring non-NII, which was 8% up year-on-year and was due mainly to the insurance performance.
Okay.
There is no trading book in Bank of Cyprus to have a hit, if this was a question as well.
Okay. Understood. Thank you. Also, as regards salary expense, because the separation scheme is done and the and salary has been moved higher, shall we expect for the next couple of quarters the same run rate of this salary expense?
Yes. The way the payroll works is that staff costs go up on the first of January, and they stay at that level throughout the year. This year's increase, when you compare to Q4 to Q1, is less than what would have been the case on a mathematical basis. Because of the staff exit plan, we did a small one that we did in Q4. You should assume that Q1 is more or less a run rate for this year.
Right. Right. last question. It was pretty decent, there was pretty decent loan growth in Q1, 2%. For the full year, you expect, 5% on the change. Is there upside to the annual number, or shall we expect a slowdown in the last three quarters of the year?
I would start by saying that we expect more than 5% for the year. This guidance was out before the war. Since then, okay, things have changed, The performance from, for 2% averages, 2%, plus the strong pipeline we see, we stand by this more than 5%. It is too early to reconsider guidance because it is still early in the year and it is still too soon versus the last time we guided early March. Let's assume the more than 5% that is currently out for the time being.
Okay.
More to come during the second quarter.
Appreciate your answers. Thank you.
The next question comes from the line of Miguel Dias with Wood & Company. Please go ahead.
Hi, Anna. Thank you for giving us the presentation. Most of my questions have been answered already. Just one last. If you could please comment on the special levy on deposit and other levies and contributions. You booked EUR 14 million this quarter. Fourth quarter was EUR 13 million. Could you just please confirm that this is not the new run rate? Thank you.
Thank you. On this, you're right, actually, to ask the question because the charge in the P&L is not linear through the year just because of how the accounting works. It has two main components, this line. One is a special levy on deposit. That is 15 basis points on the stock of deposits based on 31st March. This would be around EUR 33 million. Assuming, I mean, depending on when deposits land during the year, you can calculate it. There is also another component, which is the deposit guarantee scheme fees. This is EUR 5 million every 6 months, and it started in the first half of last year. You should expect EUR 10 million roughly in the year. A EUR 5 million increase compared to last year's annual in this year.
Last year's annual charge of around EUR 42 million, you should add another EUR 5 million, roughly. That's what we expect this year's charge to be, assuming deposits flat because the deposit level is formulated. Just remember, it's not linear through the quarter. Q1 is not run rate. It's, you should work on the annual number.
Okay. Understood. Thank you so much.
As a reminder if you would like to ask a question please press star and one on your telephone. We have a follow-up question from the line of Ben Maher with KBW. Please go ahead.
All right. Sorry, just another quick one. On M&A, would the CDB acquisition keep you busy or would you still have bandwidth, do you think, to look at other potential platforms this year? Thank you.
Ben, CDB acquisition is more transaction, and we structure it in a way, so that it is easily integrated. I mean, buying a portfolio rather than the bank. No, the question of is that do you still have an appetite for the more bolt-on acquisitions, especially on the non-NII side. CDB is more transaction for us, and it's easily integrable. Okay?
Great. Yeah, thank you.
Mr. Maher, are you done with your questions?
Yes, thank you.
As a final reminder, if you wish 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. Nicolaou for any closing comments. Thank you.
Okay. Thank you all for your participation. As always, we are available to take your questions and provide more clarifications offline. 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.