Bank of Cyprus Investor Update 2026, where we will present our strategy and financial targets for the years 2026-2028. I am Annita Pavlou, Manager Strategy, Investor Relations, and ESG. I'm delighted that many of you were able to join us today, both in person in Athens but also remotely. This is our second investor update. The first one was in June 2023. We will start with a welcome address by our Chairman, Mr. Takis Arapoglou. Our CEO, Panicos Nicolaou, and Eliza Livadiotou, our Finance Director, will then take you through the detail of our strategy and financial targets for the years to come. We will follow this with a Q&A. For those of you that are here with us in Athens today, we will finish with drinks and networking. Thank you for your interest in Bank of Cyprus.
I will now hand over to our Chairman.
Thank you, Annita. Good afternoon, ladies and gentlemen. On behalf of the bank's board of directors, I'd like to welcome you all here. Thanks to all of you locals. Thanks to the ones who traveled and are joining here or the ones who are joining remotely. I'm Takis Arapoglou, chairman of the Bank of Cyprus, and I'm delighted to welcome you all to our 2026 investor update. We have here with us, in addition to Panicos Nicolaou, our CEO, Eliza Livadiotou, our CFO for all intents and purposes, a CFO, but for regulatory reasons, we have to call her a finance director. Don't ask me why. We have Annita Pavlou as she introduced herself, Head of Strategy, IR, and ESG. Adrian Lewis, the board's Senior Independent Director, and Irene Psalti , Chair of the Audit Committee.
Before we get started, I want to acknowledge the outbreak of war in Iran in recent days. Clearly, we did not anticipate this when we organized today's event, but unfortunately, it's an example of today's unpredictable, geopolitical environment. Our thoughts are first and foremost with those affected. We hope that peace will emerge very quickly and hopefully with as few casualties as possible. We are here at Aigli Zappeiou, which was built in the early nineteen hundreds, becoming a local landmark, sitting at the heart of social and cultural life in Athens. It has been a source of inspiration for intellectuals, artists, and pioneers. As such, Aigli is a meeting point for the exchange of ideas. We hope that it will prove to be such today.
Our group CEO, Panicos Nicolaou, and our Executive Director of Finance, Eliza Livadiotou, will present to you the group's revised strategy and performance targets for the years to come and answer any questions that you may have. To me, it feels like a lifetime ago that we held our previous and first-ever investor update in June 2023 in London. The world has changed radically and rapidly over the past few years, most notably in terms of geopolitics, interest rates, and technological advancement with AI, in particular, transforming business and society in ways that we not yet fully appreciate. For the Bank of Cyprus, these past 3 years have been transformational. We're here in Athens today because of the decision to list the bank shares back on the Athens Stock Exchange.
Since our listing in September 2024, the Bank shares have entered the FTSE/ATHEX Large Cap Index. Daily liquidity has increased by more than 5 times, and long-term institutional shareholders have built substantial stakes. Today, today's investor update marks the start of a new chapter in the Bank's 127th year. Thank you for your continuous support, for joining us today, and after all this, I'd like to invite Panicos Nicolaou to commence our presentation. Thanks very much.
Good afternoon from myself as well. As you know, I am Panicos Nicolaou. I'm the Chief Executive of the bank, and along with Eliza and Annita, we will share with you our vision for the next few years. Additionally, we have our Economist, Nektarios Michail, who will provide with a detailed overview of the macroeconomic environment in Cyprus. Let me start by addressing the events of the past few days. Clearly, we are all watching the developments very closely, and as the Chairman mentioned, our thoughts are with those that have been affected. Over the next couple of hours, we'll discuss the different ways in which we believe our business model is resilient to the external environment. Let me start by making some high-level remarks.
Firstly, the business plan that we are presenting to you today has been, as you would expect, drawn up before the event of Iran. To the extent that the economic environment in which we operate changes, our plans will evolve. Having said that, there are a couple of really important things that are facts. Firstly, the Cypriot economy has shown high flexibility and resilience in the wake of a series of global uncertainties ranging from COVID, the war in Ukraine, and the more recent conflicts in the Middle East. Moving from the economy to Bank of Cyprus, we are today very well equipped to deal with this changing environment. We have one of the strongest capital ratios of any bank in the euro area, with amongst the highest liquidity.
Combined with a very low cost of risk and sub 40% cost-to-income, we are positioned as well as any bank under this uncertainty. Finally, for those of you who have been follow us for the past few years, you will recognize that we plan conservatively. While we didn't incorporate war with Iran in our plans, equally, as you will hear, we are not anticipating all of the strong trends we experienced in 2025 to continue this year and beyond. Let me start first with slide number five. I have to say this, it's on my script. I became CEO of Bank of Cyprus 6 and a half years ago. Clearly a lot of things have changed over that period, both externally but also inside the group. Today, the bank is in a very good shape.
We operate in an economy that has traditionally demonstrated resilience to external shocks that have grown strongly. We have a leading position in the banking sector in Cyprus, and most importantly, we have strong customer relationships. Financially, our high returns mean we are one of the most highly capitalized bank in euro area, combined with a strong record of shareholder distribution. This combination is very important for us. Moving now to the next slide. On slide six, we show a high-level overview of the group, where our activities range from traditional banking to insurance, payment solutions, investing, as well as in digital marketplace. While we operate in Cyprus, we have a growing international business. Across most of our key activities, we are either number one or number two player, both in banking but also in insurance and payment solutions.
This give us a unique position in our relationships with many of our customers in Cyprus. We also have the leading digital interface with our customers, offering an ability to conduct all of their banking activities with our bank through their phone on their phone. We offer anytime, anywhere, instant and automated credit decision across products ranging from mortgages, car loans, credit cards to buy now and pay later products. We offer insurance products online. We support customers with everyday banking needs across stages in life, starting from the very young age, where financial education is paramount, to their early adulthood years and beyond. Our customers can conduct all of their business with our bank via their phone. Our advanced digital offering has been widely recognized, for seven consecutive years, we received the world's best digital bank in Cyprus award.
Moving now to the next slide, let's now see what we have achieved since our previous investor day in 2023. We set 4 financial targets covering profitability and distribution, capital and credit quality. On each metric, we deliver well in excess of our target. Our ROTCE has been very high. Our payout ratio in 2025 significantly exceeded our original target range. Our capital ratios are higher than we have expected, our repeat ratio is much lower. While like other banks, we benefit to some extent from higher than expected rates, that wasn't the whole story as we show in the next slide. Slide number 11.
Over the past few years, we have actively managed the rise and then the fall in interest rate and its impact on net interest income, reflecting the acceleration of loan and deposit volumes. Through further support from our dynamic hedging policy. In addition, our profitability has been supported by careful cost management, and as you'll expect from us, by continuous strong underwriting criteria. This strong operational performance has translated into strong capital. Since 2023, we have on average generated over 414 basis points per annum of organic capital generation. This is significantly more than our peers. Even after the impact of a large increase in our dividend payout ratio, this rate of current generation has resulted in our CET1 ratio rising to 21%, again, significantly higher than our peers. Finally, this combination of operational performance and capital generation has driven high shareholder returns.
Net of distributions, book value per share has risen 7% per annum this decade, and our distributions since 2022 represent 87%, again, 87% of our starting market capitalization. This all reflected in our share price, which has risen nearly five times since 2022. In conclusion, we have delivered our commitments over recent years, and we are setting now the new targets for the next three years. Before I discuss those, we thought it would be helpful to hear about the economic background on which we have based our plan. I'm delighted to welcome Nektarios Michail, our economist, who will share his analysis on the Cypriot economy. Nektarios, come on.
Thank you, Panicos. Good afternoon from my side as well. Let me just start by saying that as Panicos mentioned, the current conflict in Iran is certainly adding uncertainty in the macro environment. As the rest of this presentation will show, Cyprus has demonstrated a remarkable ability to quickly recover for adversity. I will now go through the basics on the Cyprus economy. Cyprus is located on the southeast of the Mediterranean. We have been an independent country since 1960. Cyprus has a population of around 1 million people, has been a European Union member since 2004, and has used the euro as its main currency since 2008.
Cyprus is a small, open, service-based economy with strong GDP growth over the past decade, averaging at 5.2% annually in the 2015-2024 period, and proving an ability to quickly overcome crisis. Cyprus has a nominal GDP at approximately EUR 35 billion or around EUR 36,000 per capita. This strong growth is expected to continue into the medium term. Now, Cyprus may be a small-sized economy, but its global impact is large. It is the largest ship management center in Europe and among the largest in the world, while seven out of the world's 100 top mobile game publishers are located in Cyprus. Overall, in a region that has seen its share of geopolitical volatility over the years, Cyprus is a resilient safe haven and EU member country that attracts businesses, talented individuals, and wealth. Let's have a deeper look now into the economy.
In 2025, Cyprus registered a GDP growth rate of 3.8%, the second highest in the euro area, and it continues to grow faster than the euro area average, as has been the case in the previous 10 years. Growth has been broad-based, with the information, trade, and tourism sectors standing out in the past year as the largest growth contributors. Yet the economy remains quite diversified. As the pie chart demonstrates, there is no sector that accounts for more than 15% of total gross value added, with a lower reliance on real estate at just 10% of GVA compared to 20% for Greece.
At the same time, Cyprus has established itself as a tech center with rising importance, evident from the increase in the share of the IT sector in GVA from 7% in 2019 to 14% in 2024, aided by the headquartering policy. Tourism has also become more important, shown here under the accommodation heading, supported by an extension of the tourist season. Both the tech and tourism trends are expected to continue into the medium term, with forecasts suggesting annual GDP growth of around 3%, outpacing the euro area. The positive momentum of the economy can be seen across all indicators. Inflation is expected to be around the target in 2026 and 2027, thus not creating meaningful price pressures on households, while the economy is already operating at low unemployment levels, with most of the growth coming from productivity gains.
Forecasts suggest that unemployment will remain low in the coming years. As already mentioned, the economy continues to benefit from the extension of the tourism season, as well as the record tourist arrivals in off-season months. In 2025. Arrivals were up 12% with revenue increasing by 15% aided by a diversified tourism market. As noted, growth in the information sector has been significant. In the 2022-2025 period, more than 2,600 companies relocated to Cyprus, many in the IT sector, with around 27,000 work permits granted as employees seek to benefit from the 50% tax break for foreign workers and companies seek to benefit from the attractive tax environment.
The impact of these companies is evident in the economy as in addition to an increase in value added, tech companies boost productivity, support real estate growth, both residential and commercial, and boost overall spending, aiding a variety of sectors. As a result, local businesses ended up with more available funds, boosting resident deposits, which led to a stronger financial sector due to the increase in available liquidity. Cyprus has also made strides in improving its fiscal performance. As of September 2025, the public debt to GDP ratio was 57%, lower than the 60% Maastricht threshold and much lower than the euro area average. Excluding a one-off increase during the COVID-19 pandemic, debt has been declining since its 2014 peak, with forecasts showing a further decline to 51% by the end of the year.
The impact of the recent tax reform is not expected to materially affect the budget surplus, which has been positive since 2022 and is expected to average around 3% in the coming years. House prices, aided by FDI inflows, have now recovered to their pre-crisis levels, albeit with a much improved affordability profile. As per the chart, affordability has improved by more than 30% since 2014. At the same time, data from Eurostat on the household overburden rate, which reports how many households have costs that exceed 40% of their disposable income, show that Cyprus has the lowest overburden rate in Europe.
Given that prices are roughly at the same levels as they were, it is easy to see that this improvement was driven by economic growth as GDP per capita is up 76% since 2014 and wages per capita are up 36% since then. The permanent relocation of people and companies to Cyprus has materially aided this improvement as per the headquartering policy mentioned earlier. As a result of the revival in the housing market, the higher liquidity in the economy, as well as the improvement in the overall business environment, Cyprus has seen the end of its deleveraging phase and has started experiencing loan growth. Outstanding gross-performing loans in the economy started rising in 2022 and are up by 14% since then.
With the official ECB growth rate to the resident private sector standing at 5.6% in 2025 versus 3.5% for the euro area. There still remains room for loan expansion as the private sector bank to GDP ratio is now sufficiently low. Furthermore, exposures remain balanced between households and corporate as the bottom left chart demonstrates. As regards credit quality, the banking sector has experienced an impressive turnaround. From having the highest NPE ratio in the euro area in 2014, Cyprus has now seen its non-performing exposures decline to 3.2% currently as per the Central Bank of Cyprus definition. This is equivalent to an NPE ratio of 1.6% as per the EBA definition, which is below the euro area average of 1.8%.
We note that the Bank of Cyprus's own NPE ratio is much lower at 1.2%. The banking sector has not only benefit from improved asset quality, but also from other important factors. In particular, the sector is highly liquid with the lowest loan-to-deposit ratio in the euro area. As resident deposits amount to 87% of total deposits, these are very sticky. Furthermore, there is also limited concentration risk, with households holding around 59% of resident deposits. The banking sector's capital position is very robust at 26.1%, while the banking sector is quite consolidated with the 2 largest banks of which the Bank of Cyprus is the largest, representing around 80% of total loans and deposits. As a result of all the factors mentioned, Cyprus has seen a material boost in its credit ratings.
Cyprus returned to investment grade in 2018 and is currently standing three notches above investment grade, higher than both Italy and Greece. As per the current ratings, 2 out of the 4 main rating agencies have assigned a positive outlook on the economy. I will now hand over to Panicos for his remarks on our strategy. Thank you.
Okay. Thank you, Nektarios. I will spend around 15 to 20 minutes taking you through our slides. Starting with this slide you see on the screen, this is our financial targets for the next three years. We have two key priorities. First one, to generate sustainable and resilient profitability, which in turn allow us to generate attractive and sustainable shareholder returns. The word sustainable is deliberately chosen for its priority, reflecting the attitude of myself and my management team. Those of you who have followed us over the past few years will recognize that we have consistently managed the Bank with clear focus on delivery, not only on the short term, but most importantly over the long term. In practice, that has meant we have retained pricing, cost, and credit risk discipline over recent years, and that will remain a feature going forward.
These priorities are supported by the economic strength that Nektarios has just described, by our strong franchise and our leading technology, as well as our international contribution. Our financial targets. We expect to deliver mid-teens ROTCE over the next three years. This will be despite our capital ratios remaining well above 15%. Based on a 15% CET1 ratio, this will translate into return on tangible equity of over 20% throughout 2026-2028. We remain committed to a meaningful distribution with the total payout reaching up to 90% for 2026, well exceeding the top end of our distribution policy of 70% payout ratio. For 2027 and 2028, we are increasing this payout ratio targeted to up to 100% per annum.
The distributions are of course subject to market condition as well as the outcome of group's ongoing capital liquidity planning strategy at the time. We will continue to generate very high levels of capital supporting the attractive shareholder returns beyond 2028. All of these targets will be supported by retention of our cost and underwriting standards. Responding to the external environment. As you would expect, our strategic plan is grounded in the external environment that we operate. Cyprus is a small country with increasing levels of competition, not just from traditional players, but through tech-enabled new entrants. We are well-positioned to deal with this. Our customer engagement is strong, and we are diversifying our revenue base, both by type of revenue and by geography.
We have and will continue to invest significantly in both our technology, including AI, and also in the simplification of our operations. As we are all aware, there is considerable geopolitical uncertainty. This has been the case for some time. It's not new for us. Of course, it's especially the case today given the news on Iran over the recent days. The Cypriot economy has traditionally displayed a high ability to cope with unexpected geopolitical events from COVID in 2020 to Russia's invasion in Ukraine in 2022 and the war in Gaza recently. Furthermore, Bank of Cyprus remain very well positioned to deal with this environment. We have a low-risk business model. Our low cost of risk and low cost-to-income ratio means we have strong lines of defense.
Furthermore, our strong underrated culture means that we are well equipped to cope with changes in external events. I am confident that this will continue to be the case. Let me now turn to the building blocks towards maintaining our attractive profitability. There are 3 elements. Firstly, we will generate high-quality revenue growth, balance between domestic growth across both retail and corporate lending, and selective opportunities to grow outside Cyprus. The importance of our capital light insurance business is growing and overall, our recurring non-interest income will drive over 40% of revenue growth over the next three years. Non-II will contribute more than 40% on the revenue growth for the next three years. Our second building block is to maintain low cost-to-income ratio and strong credit quality, which help ensure the sustainability and profitability.
Our final building block is in generation and deployment of capital. We will increase our distribution ambitions, invest in the business, and of course, continue to explore bolt-on acquisition, subject to three criteria, which of course, I will elaborate further on. Starting, let me start with loan growth. In the past two years, loan growth has resumed with an acceleration domestic lending and the expansion of our international loan book. We expect this trend to continue with net lending growing over 5% this year and around 4% per annum over the next three years. We will remain selective in expanding our international book, which will rise to 16% of our total portfolio by 2028. Currently, it's 12%. Eliza will later on give you our detailed assumptions on how we will achieve this loan growth. Deposit.
The bank's deposit franchise is a key source of our competitive advantage. We have a near 40% market share. We are the primary bank for most of our customers. We enjoy one of the lowest costs of deposits among our European peers, reflecting the strong liquidity in the market. In part, reflecting the large deposit inflows we have at the end of 2025, our business model assumptions is for deposits to remain broadly flat throughout the period. Deposits are also an important area of technology investment, where we are deploying AI to deliver real-time, personalized experience, coming closer to our customers at the point of need and broadening our reach in order to leverage further our franchise. Loan growth 4%, deposits flat. Let's go to the next slide, Annita. We service 670,000 customers, representing three-quarters of the Cypriot population.
Two of the most important measures we monitor to assess the strength of our franchise is how our customers engage with us and the number of products they hold. Three-quarters of our customers are actively digital users, up from just 40% in 2019, with one-third logging in daily in our digital channels. The average number of products our customers have with us has risen by over 50% since 2019, helping deepening customer loyalty. Let's moving now to non-NII. Recurring non-interest income is an important source of revenue for the bank. As you know, we are diversified and capital light. It includes fee and commission, as well as our insurance and asset management business.
We expect to grow this revenue source around 4% per annum over the next three years, similar to 2025, with our insurance business growing faster, which Eliza will expand on later. I repeat, total recurring non-interest income will drive over 40% of our revenue growth over the next few years. Okay, this is also an important slide. If we bring all this together, high quality revenues, net of credit losses, which we call risk-adjusted revenues, are over 900 basis points of RWAs. As you see, this is significantly higher than our peers, reflecting our capital light revenue generation from areas such as deposits, banking fees, insurance, and also pricing and risk discipline. High quality revenues is revenues minus credit losses. This, in turn, is a key driver of our superior capital generation, and this will remain the case going forward.
We generate significant capital because of the high quality revenues that we have. Overall, we expect high quality revenues to grow around 3% per annum over the next 3 years, reflecting the trends discussed. Our second building block is sustainability and resilience. As I mentioned earlier, this is especially important at times of geopolitical uncertainty. This is best reflected in our lean operating model and our strong underrated standards, demonstrated by high asset quality and a normalized cost of risk. Careful cost management allow us to invest in the business. As you will hear from Eliza, investment, including spending on AI, will go up over the next 3 years. Despite that, our cost-to-income ratio will remain low at around 40% throughout the period.
On credit underwriting, the expansion of our loan book, both in Cyprus and outside Cyprus, has not come to the expense of credit quality. We expect the cost of risk to remain at the lower end of our normalized range of 40-50 basis points over the next three years. A low cost-to-income r atio and low cost of risk are important factors in supporting our ongoing profitability and delivers high profit margins. Our high level of risk-adjusted revenues to RWAs that I mentioned earlier and our continued low cost-to-income ratio, combined with a low single-digit RWA growth, results in our pace of organic capital generation to remain very high. Over the next three years, we expect to generate between 350-400 basis points per annum of organic capital.
We expect overall ROTCE to remain at mid-teens over the next 3 years or over 20% if we calculate this on a CET1 ratio of 15%. Having outlined how we will generate capital, it's important for investors to show how we'll deploy the capital. Our capital hierarchy is very clear. We will use capital to invest in organic growth in our business through RWA growth and through investment. We are fully committed to attractive distributions with an outright dividend payout ratio of 70%. This comes from sustainability. In addition, as we have seen, we currently have very high capital ratio. This supports our top-up dividends as well as offering optionality for discipline both M&A. We have a CTR target of 50% over the medium term. Moving now to our distribution ambitions.
Firstly, we intend to pay an ordinary distribution at the top end of our 50%-70% policy range of our adjusted recurring profitability. Secondly, for 2026, we will pay an additional top-up dividend of up to 20% and up to 30% per annum for 2027 and 2028, bringing total distributions up to 90% this year and up to 100% per annum for 2027 and 2028. The combination of modest RWA growth and near zero retained profits over the next three years mean that our CET1 ratio falls below from the current 21% level. You will be quickly able to work out the numbers that this does not bring our CET1 ratio to 50% by the end of 2028.
A 50% CET1 ratio is our medium-term target, we'll continue to run above that in the medium term, but of course, lower than the 21% we have today. This is deliberate decision by the board reflecting three factors. Firstly, we are keen on ensuring our distribution sustainable. Secondly, we want to maintain some optionality to organically invest further in our business if opportunities arise. Finally, we want to retain some flexibility for inorganic actions, which I will now discuss on the following slide. Both M&As. We have three criteria for selective bold M&A. Firstly is a strategic rationale. Acquisitions must accelerate organic delivery, in general, be in areas where we are looking to diversify or be a selective clean portfolio and be aligned with our risk profile. They should not impact our distribution policy that we just heard.
Finally, they need to meet our financial criteria. Our acquisition of Ethniki Insurance demonstrates this criteria in action, where we increase our revenues from insurers and our market share in a very light capital way, with minimal impact on capital and of course, meeting return targets. Investment in Wealthyhood that we announced today allow us to expand our offerings in our asset management business, offering access to wide range of stocks and ETFs. Specifically, we have invested a minority holding in a technology pan-European company with a broker-dealer license called Wealthyhood, offering digital access to a wide range of stocks and ETFs to retail clients. These transactions are an example of what you can expect from us in terms of M&A. I will now hand over to Eliza, who will go through our financial plan in more detail before I make my concluding remarks.
Thank you, Panicos. By way of background and going along with the previous tradition, I joined the bank in 1999, holding various roles over that time and have been finance director since 2016. You have heard about our strategic priorities and our target of delivering sustainable mid-teens ROTCE. Now, I will attempt to provide a more detailed financial overview of the key drivers that support our financial targets. I want to start by repeating the financial targets outlined earlier. As noted, we remain committed to delivering high returns, generating significant organic capital generation, and to increasing our distributions to 100% from 2027. Before getting into the detailed financials, let me take a step back.
Our balance sheet has a simple structure, and it is highly liquid, with our deposit base twice the size of our loan portfolio, giving us one of the lowest loans to deposit ratios of any bank in the euro area and helping us have a very attractive funding profile. Almost 30% of our total assets are cash balances with central banks, and our loan book is mostly variable rate, with 44% of loans linked to EURIBOR, although, as I will mention later, we have significantly reduced our rate sensitivity via hedging and increased security holdings. During the past year, our net interest income has demonstrated resilience, absorbing the vast majority of interest rate cuts in 2025.
As rates seem to remain stable at 2% in 2026, we expect the net interest income to also stabilize close to EUR 720 million, comparable to the Q4 run rate of EUR 180 million, which is adjusted for the EUR 3 million impact from the seasonally strong deposit growth in Q4. Over the three-year period, our NII is expected to grow at a 3% CAGR on the back of two elements, lending volume growth while maintaining pricing discipline and careful growth in our fixed income portfolio, subject of course to market conditions. We expect our deposit base and pricing to remain broadly stable at the current 2025 levels, and we will continue to dynamically manage our hedging positions in order to maintain our reduced sensitivity to interest rates.
Our net interest margin is also approaching stabilization at over 270 basis points in 2026, and is expected to expand thereafter as liquidity is gradually deployed, resulting into a shift in our mix of interest earning assets. By the end of 2028, our total loan book and fixed income portfolios are expected to account for 70% of this interest earning assets, up from 61% in December 2025. Meanwhile, the balance of interest earning assets should continue to reflect deposit trends. Let us take a look at the drivers of NII more closely. Starting from loan growth, domestically, we expect balanced loan growth across both our retail and corporate books, averaging around 3% per annum to 2028, broadly in line with economic growth.
Our retail loan book is expected to continue to grow steadily, benefiting from the favorable housing market prospects and improved affordability. We are still seeing sustained high demand for corporate loans. With interest rates now stabilizing, loan repayments from businesses are returning to normalizing trends. We will maintain our leading market shares and at the same time maintain pricing discipline despite the increased competitive pressures. Over the past two years, we made a conscious decision to build cautiously and diligently our international loan book, which has three components: international corporate, shipping, and syndications. In 2025, our international book grew by approximately EUR 400 million, but we view this pace of increase as exceptional and it is not expected to continue.
Looking ahead, we anticipate the expansion of this portfolio at a rate of around EUR 200 million per annum for the next 3 years, which is consistent with the 2024 levels. In part, the reason for the slowdown in net lending reflects an anticipated increase in repayments as the book further matures. By 2028, this portfolio is expected to reach around EUR 2 billion, representing 16% of the total loan book. Let us deep dive into each of the 3 components I mentioned earlier. Most of the growth is expected to come from our international corporate book, increasing from EUR 700 million currently to EUR 1.1 billion by the end of the period, focusing on broadening our customer reach, targeting well-established corporates, mainly in Greece. Our lending will be focused on selected industries that are aligned with the bank's risk appetite.
Shipping is also an area where we are growing, although it remains small and is expected to represent less than 5% of our overall loan book by the end of 2028. We have considerable experience in shipping lending, and the vast majority of our customers have long established relationships with the Bank. Combined with our strong underwriting criteria, this is an area where credit losses have and are expected to remain very low. Lastly, we will continue with our small participations in highly rated syndicate loans, focusing on deals in the U.S. and EU, increasing it at around EUR 400 million by the end of 2028. Just to confirm, we have no exposure to the Middle East in our international loan portfolio. Overall, we are expanding our international loan growth with discipline and prudent underwriting standards, ensuring sustainable returns.
Turning to the liability side of our balance sheet. In 2025, we saw an overall 8% growth of deposits, with the majority of this increase occurring in Q4. Although we were pleased with this development, it exceeded our expectations, and we do not expect this pace of growth to continue due to the seasonal timing and behavior of the deposits. In this respect, our assumption is that our deposit base will remain broadly unchanged to the December 2025 levels. Additionally, pricing on deposits was well managed throughout the rate cycle, supported by the highly liquid banking sector. We will continue to manage our cost of deposits, and we expect to maintain it in 2026 at broadly the current levels. Thereafter, our cost of deposits is expected to range between 30 and 35 basis points.
As a reminder, the sensitivity to each 10 basis points change in the cost of deposits results to a change in NII by EUR 22 million. Let's talk about the fixed income portfolio. Back in 2022, our fixed income book represented only 11% of total assets. Since then, we have been growing this portfolio, taking into account the improved market risk return dynamics and our liquidity position. Today, it represents 18% of total assets. As we expanded it, we ensured that it remained low risk and diversified, and that remains the case today with the portfolio being highly rated and short duration.
We expect this portfolio to continue to grow, subject of course to market conditions, reaching around 22% of total assets by 2028, whilst we continue to prioritize low risk, high ratings, and short duration bonds. As regards our exposure to the Middle East in this portfolio, it stands at around EUR 70 million, mostly comprising sovereign bonds, and the mark to market of this EUR 70 million is very close to par. We have always managed this portfolio carefully and prudently, and that will not change going forward. Over the past couple of years, we have undertaken significant efforts to build a hedging position of EUR 12.1 billion, a core tool for reducing NII sensitivity. We will continue to manage our balance sheet dynamically by reinvesting the maturing hedges on the interest rate swaps and reverse repos.
We will aim to lock in higher duration to around 4 to 6 years compared to the average 3 years that is today, in order to improve the predictability of future hedged income. The reinvestment rates of IRSs is expected to be at 2.4%. Let's move on to non-NII. Our top graph shows the total non-NII for years 2024 and 2025, which includes, among others, the ad hoc elements of non-NII, as well as REMU, other effects, and gains on financial instruments. These components of non-NII are volatile profit contributors. For us, the key area of focus is the high quality recurring non-NII. This includes fee and commission income, net insurance result, and the FX customer-related fees.
We expect this source of income to continue to grow by an average of 4% per annum to 2028, a similar pace to the prior year, broadly in line with the projected economic growth and increased volume of transactions. This growth is supported by the net insurance result, which I will come back to on the following slide. Additionally, it will be driven by three elements, growth in digital sales via our Genius platform, growing assets under management, and increased fees from the FX platform, eFX Convert. Now moving to insurance, our insurance businesses, Eurolife and Geniki, provide valuable and recurring revenue streams for the group. These businesses have strong market shares and are highly profitable and capital light.
We target a growth of high single-digit in the 3-year horizon, driven by strengthening of the bancassurance model and capitalizing on the Bank's customer base, enhancing further our agency force, realizing synergies from the acquisition of Ethniki Insurance, and upgrading our customer experience through expansion of our product range and engagement via our digital channels. Genius and JCC are contributors to our recurring non-NII growth. Genius, our digital platform, embeds both B2B and B2C elements and will support net fee and commission income through transactional and subscription fees. As at the end of 2025, 1,800 companies were registered on the platform and around EUR 2.6 billion of cash was exchanged via our platform in the year through invoicing and remittance services.
The digital marketplace aims at increasing the touchpoints with customers, offering them a vast range of different categories, resulting in an increase in the merchandise value of the marketplace by 380% year-on-year. In 2026, we aim to continue to increase this by 10 times compared to 2024 levels. JCC's net fee and commission income is also expected to continue to grow with a CAGR of 7% by 2028. Striving for a lean operating model is a key priority for us. The implementation of the digital transformation plan back in 2017 facilitated alternative distribution channels which led to the streamlining of our workforce and the rationalization of our branch footprint. As a result, we significantly improved our cost-to-income ratio, which fell from 59% in 2019 to 37% in 2025, benefiting also from improved revenues.
We have maintained on our focus on careful cost management. That will remain the case going forward. While we continue to exercise disciplined cost management, we are also increasing IT investment, including AI, over the next three years. This proactive approach will allow us to centralize operations, modernize our technology, and phase out legacy systems, reducing complexity and supporting a simplifying model. These investments are expected to deliver significant benefits, notably by reducing manual workloads, employee upskilling, and strengthening organizational resilience through improved risk detection and regulatory compliance. Despite higher IT costs as well as general salary and performance-related pay increases, we expect to maintain our cost-to-income ratio at around 40% throughout the period. This is our journey of balance sheet de-risking and the normalization of our cost of risk.
Back in 2019, our provisions were only covered 1.3 times by our operating profit. Today, that coverage stands at 10 times, reflecting both the meaningful decline in the cost-to-income ratio as well as much lower cost of risk. This profit margin provides us with significant resilience. Strong asset quality is non-negotiable for us, forged, of course, by our experience in the wake of the Cypriot financial crisis a decade ago. Our focus remains on maintaining our prudent underwriting standards to sustain the NPE ratio at broadly current levels. We are keeping the assumption of our normalized cost of risk unchanged at 40-50 basis points, although we expect it to trend towards the lower end of this range during the 3-year period. The REMU stock is expected to continue to increase in the next 3 years through organic actions whilst maintaining minimal inflows.
As a result, other impairments are expected to gradually decrease going forward. Moving to capital, as Panicos mentioned earlier, the CET1 ratio target stands at 15%. This target reflects relatively high regulatory requirements on the counter cyclical and OSII buffers. The management buffer of 280 basis points over the regulatory requirements is broadly aligned with our European peers average. Our strong, sustainable profitability translates into high organic capital generation at 350 to 400 basis points annually, absorbing the impact of investment. Our organic growth will lead to around 3% average growth in our risk-weighted assets. We remain committed to substantial shareholder returns with a 70% ordinary payout ratio and initiation of top-up dividends. Lastly, we will maintain optionality for disciplined bolt-on M&A.
The CET1 ratio will decline from 21%, but will remain above 15% by 2028 as our journey will continue to gradually converge to the CET1 ratio target. Beyond 2028, the key trends should continue. Strong capital generation, funding organic growth, potential M&A, and excess distributions. Slide 58. Here we show that organic growth coming from loan growth, as well as the continuous investment in fixed income securities, will result to a circa 3% compound growth in our risk-weighted assets. Coming back to our distribution ambitions. As mentioned earlier, we target a payout ratio of up to 90% for 2026 and up to 100% for 2027 and 2028, well above our ordinary distribution policy of 50%-70%.
This is, of course, subject to market conditions and the outcome of the group's ongoing capital and liquidity planning. With that, I hand back to Panicos for his concluding remarks.
Three more slides for your Q&A. Before we do, I wanted to make a couple of brief concluding remarks. As a reminder, we operate in an economy that has traditionally demonstrated resilience to external shocks and is growing strongly. We have a leading position in the banking sector in Cyprus, we have strong client relationships, and we are one of the best capitalized banks in Europe with a strong record of shareholder distribution. We will deliver sustainable shareholder value. Returns will be mid-teens over the next 3 years or over 30% on a 15% CET1 ratio. We will continue to generate significant amounts of capital, we'll distribute up to 90% of our earnings this year and up to 100% in 2027 and 2028. The last slide. This is an important slide.
I want to share an updated version of a slide I first discussed with our investors in June 2023. As I said 3 years ago, I believe there are 3 key elements to our investment case. It's future distributions, it's surplus capital, and it's, of course, the ongoing franchise. Distributions, commitment we have announced today, and including the 2025 cash dividend of EUR 208 million to be paid in June 2026, equate to over 30% of our current market cap. Secondly, as I said earlier, we will still have capital in excess of 15% over the medium term. This equates to another 10%-15% of today's market caps. What is left? It leaves our profitable franchise, which generates ROTE of over 20%, and this is a source of the future shareholder value.
This accounts for the residual 55%-60% of our current market cap. If we're going back to 2023, the future distributions and excess capital accounted at that time of nearly all of our market cap. While the sharp increase in our share price since then means that numbers look a little different today, but the overall conclusion back then remains the same and today. Thank you for your attention. I will be delighted to take your questions, which will be moderated by Annita, Manager Strategy, Investor Relations, and ESG. Thank you very much for your time. Thank you.
As Panicos said, I will moderate the Q&A session.
Since the event is transcribed, please can I ask you to state your name and the company you represent? Can I also ask you to limit yourself to two questions each time I call you and wait for the microphone. For those of you watching on the webcast who would like to submit a question, please type your question in the box under the presentation. We will try to answer as many questions as possible, but if your question is not addressed, IR will be very happy to assist with you after the event. We will start with the questions from the audience in the room, and then we will proceed with the questions that we have gathered online. Let's start. Okay.
Can you hear me?
Now, yes.
Okay. Thank you for the presentation. My name is Alex Boulougouris from EUROXX Securities. I have two questions on my end, as you mentioned, Annita. The first would be on capital. Very, very nice slides you showed us, especially the last one. Could you give us a bit more clarity on where you see capital landing in 2028 after the capital distributions and the bolt-on M&A that you mentioned, as it seems that it's quite above the 15% target, you will still have significant buffers in place? That's my first question. My second would be regarding loan growth. Maybe if you could give a bit more clarity, how do you see the trends?
Where do you see it coming from, especially in 2026 where you see still a bit more growth than the 4% trend that you mentioned as a CAG? Is it mostly the international portfolio that we have seen in 2025? Thank you.
Thank you, Alex. Capital, as I said, in the presentation, we start with 21% with anticipated top-ups and payout ratios, and excluding any M&As, we will probably be lower than today's level, so we consume capital. As you said, we'll be more than 50%. How far we will go below the 25% and how close we'll be to 50% is something that will be, let's say, tested on the M&As during this period. It's still premature to set a specific target. I can say that it will be significantly higher than the 15%, excluding both M&As. This give us optionalities going forward. I think regarding the loan growth, yeah. We have some principles for loan growth, and I would like to mention them.
The first one is that we do not chase volume at the expense of our underwriting standards, so we are not doing crazy things to create the NII. This is the first principle. The second principle is pricing discipline. Risk profiles and capital consumption is very important for us. The third one is diversification. 4% growth in the period is the average over the last 3 years. It comes 3% from domestic and average that is coming from international. For 2026 specifically, I expect to be more than 5%. We have more visibility in 2026. We expect to be roughly split between domestic and international. The international, at least for this year, will contribute significantly in the overall growth.
I remind you that 2025 we have 8% growth, 4% was from domestic and 4% from international. Naturally, you should expect international, let's say, contribution growth to ease a little bit, but for 2026, the contribution will still be material.
Thank you.
If I can just add a couple of points, when it come to the capital question. Our 70% distributions to date, we are still leaving some. We were still capital accretive in the 70% world. In the 90% and the 100% world, we will be using up some of the capital. There's a break-even point in that window. It depends on exact year. We also gave guidance on the RWA growth of 3%, I'm sure you will do the math in the model.
Forget the levels of capital. If you add up up to 90% and up to 100% dividend distributions, as I mentioned in the last slide, you said, Alex, that you like it's more than 30% of our current market cap. We want our distributions to be attractive, sustainable in the medium term, plus retain some capital for optionalities. This is our strategy. We prefer long term versus short term. Still, the long term is still very attractive.
Okay. I think we can move to the next question.
Hello, thank you for the invitation. My name is Andreas Souvleros from Eurobank Equities. I have one question regarding deposit growth and one related with NII. You have assumed a stable deposit rate for deposits. Can you give us a color on this assumption? Should we consider that as a conservative assumption? This may be also a conservative assumption for NII, because deposit may have a contribution to the excess liquidity which is beneficial for NII. Thank you very much.
The answer is very simple. We have always been conservative on deposits assumptions in the past, always the last couple of years, because we always say that we have not tested the deposit behavior during the ups and the downs. Having said that, we have been constantly delivering more than what was the assumption. We decided to keep the same assumption as we had in the past. If we perform better, this will be an upside to the NII as well. Deposit, our best assumption is to remain flat and the co-deposit cost to be significantly higher than what we have today. We wanted to be prudent, staying stable for a prolonged period of time may lead marginally to some increased cost. This is a basic assumption. Having said that, we are not seeing any pricing changes for new deposit.
The market is very liquid.
This is, if we do better, it will be a positive upside for NII as well. Shall I use this one?
Sorry, it was a meme.
Can't do this.
Okay.
Okay.
We'll use this one. Andreas, if you're finished, we can proceed with the next one. Thank you.
Hello. Yes. My name is Natasha Roumantzi from Piraeus Securities. I have two questions. One question has to do with the NII evolution. I understand that your NII and NIM evolution is largely based on volume, is largely volume driven and asset mix driven. What are your assumptions and your expectations regarding lending spreads? That although the market in Cyprus is quite concentrated, but still is a small market. What are your expectations regarding spreads? This is the first question. Do you want to go on with my second one? My second one has to do with your concentration in tourism and the property, the real estate sectors. Thank you.
I will start with the last one. We don't have any real concentration on real estate, but on tourism we have around 10% of our loan portfolio. It's a very healthy portfolio and they have EUR 400 million of free liquidity, including most of it is cash. We have EUR 1.2 billion, I think, of exposures in the accommodation sector, which includes tourism. This is a very healthy portfolio, and almost one-third of the exposure is actually covered with liquidity and cash. It's a very healthy portfolio. Eliza, on the NII.
On NII, the first point to say is that we expect that to stabilize in 2026 versus Q4, which can be seen as a more normal quarter following the rate cycle, the rate hike cycle, and then revert to growth of 3% from 2027, as from 2027 onwards. The moving parts, I mean, there are many moving parts, obviously, in this equation. Loan volumes and mix are definitely at play here. We guided both on volumes and on the fixed income securities.
Loan book, we do have or experience pressure on credit spreads, and the new loan creation is at lower credit spreads versus the back book, as the repayments, the retiring stock, especially that part of the book which was given in years that were less, let's say, nice and easy compared to current, the current situation. We are seeing pressure on credit spreads, but not in a way that will derail us from the current guidance of 26 of Q4 being the best data point to use for your 26 numbers. Of course, anything outside our assumptions will be upside or change from that.
Thank you, Panagiotis.
Hello. Panagiotis Kladis from Alpha Finance and Axia Ventures. Two questions from my side. One, I would like to focus on potential upside or downside risks that on your estimates you discussed before about the deposit growth assumptions. I would focus on two things, and if you have anything to add, please let us know. One, on the on the deposit pricing, you're factoring an increase on the base rate, but deposit costs at 30-35%, so broadly stable. Is this an aggressive assumption? You know, if you can elaborate on what you see on the market in terms of competition. Second, on the cost of risk.
The last 2 years where you were close to 30 basis points, your NPE coverage is well above 100%. Again, this 40%-50%, not again. I guess this is a bit conservative, on the conservative side. My second question is more of a strategic one. You discussed your priorities on capital allocation, on your focus on bolt-on acquisitions. My question is whether you do examine any larger size acquisitions, or we should rule out completely, such a potential move, or if you do examine some, let's say, bigger or transformative acquisitions under a stricter set of criteria. Thank you.
I think starting from the deposit cost. The Q4 deposit cost was 27 basis points. The full year 2025 was 13 basis points. Our initial assumption, as I have just mentioned, is for this to remain relatively stable in 2026 and grow a little bit in 2027 and 2028, up to 5 basis points. I think every 1 basis point is around EUR 2 million net profitability for us. This is the assumption that we have with the business model. Other than that, if we do better, this will be an upside. On large acquisitions, I would say that we don't. Currently, we don't examine any transformative large acquisition for the moment. Our focus is small bolt-on M&A transactions, mainly on the fee generating business. What's the third one?
The third was on the cost of risk. Yeah, the cost of risk, it's always a question that we are getting because of the very good credit quality we have. We always got it wrong, but we still, again, maintain our range of 40-50 basis point of, because we believe that this is on the long term, a more, a more, let's say, fair, I would say, range that we can work with. We guide that. We expect this to be at the lower end of our, of our range of 40-50 basis points. This is also come from a historical experience, from expectations, from the regulatory standards. It's. And you should expect that every 10 basis points is around EUR 10 million for us.
It's not huge if it's 35, or if it's 40, or if it's 45. We maintain the same one that we have throughout the years, 40-50. If it goes lower than that, it will be an upset as well. Having said that, we have not experienced any adverse trends of credit quality. On the contrary, I mean, the portfolio is extremely good.
Do we have any additional questions from the audience? If not, well, then we can go ahead with the questions we have online. The first question we have is from Hugo Cruz, KBW. Hugo's first question was on loan growth. This was addressed. The NII sensitivity to deposit growth. Eliza, I don't know if you want to add. I think this was addressed too. What are the areas that you are looking at for inorganic growth initiatives and the financial criteria for the M&A?
Just on NII sensitivity, just to add that every 100 million volume delta on deposits is EUR 1.7 million impact, just on the sensitivity. On the inorganic, Panicos?
In inorganic, I think on slide 38, we have the types of, let's say, inorganic, I would say targeting criteria. It has to be cut below the line. It has to be on the fee area. It has to have strategic fit, low integration, low execution risk. The most important thing, we will not change our distribution policy. I would like to mention that. Any inorganic M&A will not change our distribution policy. Distribution policy to shareholders comes first. Any inorganic M&A will, if it happens, will absorb first part of the surplus capital.
We have a question. The following question is from Alfredo Alonso at Deutsche Bank. How much is the IT investment expected for the period, how that differs versus the costs seen lately? How much return in terms of efficiency would you expect from these investments, both in higher revenues and lower costs?
We've given guidance on the cumulative three-year IT investment to be at EUR 240 million first versus EUR 175 million for the past three years. This increase is expected to be absorbed within our cost-to-income guidance. Given that revenue is more or less stabilizing in 2026 on an all-in basis, we should be able to absorb a lot of this within our changing mix of cost. Our expectation for the increase in total costs year-on-year is for a low to mid-single digit, much in line with what you've been seeing in 2025 as well. We've been consistently guiding on that point. This is not a step change. It's mostly a change of mix, all incorporated within our cost assumptions in the plan.
The following question is from Virgin Asset Management. Do you have any plans to call your Additional Tier 1? If so, how is this reflected in the guidance? Is there a scenario where the lack of M&A in the pipeline may result in higher than a 100% dividend payout ratio?
Okay, I'll take the wholesale question and hand over to Vani. On the AT1, no. The current plan and the current numbers assume that we will keep it till the first call date. We do have a call date coming up in April for our, the tail part of our Tier 2. We did a liability management exercise back at the end of last year. There's a tail left with less than EUR 100 million, which we'll aim to call in April. We have, just to complete the senior wholesale funding picture, we do have also a senior bond with a call date in the summer. We need to, we will be auditing market conditions and look to replace that at some point, hopefully during the year.
There's also an additional question. Do you anticipate any impact on your 2026 operations from the current conflict in terms of pressure on the tourist sector, potential deposit inflows from Israel?
Okay, I think we missed the 100%, right? The dividend payout ratio. I will say it will be premature to comment something different from what we have already said. The current base plan is up to 100% during this period. It will be premature to comment on something different from what we said today.
The question was if we see any impact on our 2026 plan based on if there's an impact on tourist.
It's still early days to comment, I will say. It's still early. I would just say that on tourism, Cyprus usually start up in June until October, November. Depending on how long this will last, it's something that we'll continue monitoring. As I said before, our tourist portfolio is very robust. Almost one-third of our tourist exposure, it's kept on their balances as cash liquidity. We think that the portfolio we have is really strong and can sustain any delays or any reduction in bookings. It's still too early days to comment on lasting, let's say, consequences on tourism. The positive flow from Israel is still very early to comment.
If this happened, generally, I would say that in the past, in any conflict, regional conflict, usually Cyprus has been kind of benefited from inflows from, either from, I will just say deposits from but from relocated business there, which is much more important because there are people living on the island, spending and driving the growth of the economy and positive migration to the country.
The next question is from Dan David, Autonomous. What is the biggest risk you see to the plan? Separately, do you plan to maintain your 81 stack or use CET1 replays?
I think you asked, the second one, right?
Just on whether, just on the optimization of capital point, we've said this a few times in the past. We do want to use up the components of the capital stack, so Tier 2 and AT1, because that frees us up to be flexible on our distributions, our strategy, as you heard before. We do intend to keep it, even that's the current plan, at least, even beyond the first call date. I mean, replace it by a new instrument at that point.
On the biggest risk, it would be very difficult for me not to mention geopolitics, given what is happening today around the world and in Iran. I will also say that, although we did not anticipate the war in Iran when preparing our business plans, we have been always prudent on what we present to you, especially versus the results of 2025. I will give you an example. If you notice in Stella's presentation, the official assumption from the government and from the Central Bank on GDP growth in 2026 was 3.1, and in our calculations, we used 2.2. We plan prudently on what we say.
Okay, there is a question on NIM. 270 basis points NIM guidance implies another 10-ish basis points compression from the NIM achieved in Q4 2025. Can you elaborate on what underlies this assumption? This question is from Dan Mikhailov, Virgin Asset Management.
As I said, the NIM obviously is the result of NII and the denominator movements, the interest earning assets. It's a combination of deposit volumes, the hedges that roll forward, loan growth, all the components that I described earlier on the NII question, as well as the deposit cost assumptions. We do see NIM bottoming out at the 2.7% mark for the full year 2026, and then growing up from there.
I think this is the final question we will address. Where do we see the growth in the abroad loans?
Mr. Markopoulos.
Yes, this is from a private investor.
Sorry, let me find the slide. It's a combination of 3 pockets. One is international corporate, which is mainly in Greek. The other one is shipping, and the other one is international syndication. I will say that mostly will come from the first pocket, which is some large Greek corporates, and secondly from syndication and shipping. The numbers are still very manageable. We have achieved EUR 400 million international loan growth only in 2025. For the next 3 years, we have EUR 600 million. Based on our assumptions, the pace of international growth is expected to be lower than we have in the last 2 years. It's perfectly achievable. Harris, I'm looking to Harris there, who is our international.
Thank you. This concludes our investor update. Please feel free to reach out to IR for any follow-up questions. For those of you here with us in Athens, please join us for drinks. Thank you.