Ladies and gentlemen, thank you for standing by. I am Yota, your Chorus Call operator. Welcome and thank you for joining the Bank of Cyprus conference call to present and discuss the nine-month 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 nine months ended 30 September 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 nine months ended 30 September 2026, and then we will be happy to take your questions both during this conference call and afterwards. I would like to start with slide five and go on to contemplate our investment case. Our diversified and efficient business model, together with our strong domestic franchise, a leading position across banking, insurance, and payment solutions, are key drivers of our performance. Additionally, we operate in a supportive macroeconomic environment, which continues to exhibit resilience to the global instability, delivering robust growth.
Today, we are one of the best-capitalized banks in the euro area and continue to have strong capital generation. These strengths are our foundation for continuing to deliver sustainable, attractive returns to our shareholders, supporting a payout ratio of up to 90% out of 2026 earnings and up to 100% in both 2027 and 2028. Slides six and seven give a brief overview of the macroeconomic environment. The ongoing uncertainty concerning the on-and-off nature of the conflict in Iran, as well as the on-and-off tensions in the Middle East, continue to shape the global macroeconomic environment through increasing volatility and intensified energy prices.
Despite that, the Cypriot economy remains strong, registering growth of 3.2% in real terms for the first half of 2026 versus less than 1% for the eurozone average, supported mainly by the continued expansion in the IT services sector, with positive growth rates in all other sectors as well. We are seeing a low unemployment rate alongside the sustained growth in labor productivity. Tourism sector is recovering swiftly, returning towards the 2025 record levels, following a setback in tourist arrivals in March and April 2026. In fact, tourist arrivals for September surpassed those of the same month in 2025. Inflation is elevated, driven by the heightened energy prices averaging 3.2% for the nine months, with the expectation to reach to approximately 4% for the year. In public finances, Cyprus continued to have budget surpluses since 2022, with the expectation to close the year at almost 3% of GDP for 2026.
Fiscal ground remains strong, registering the second-largest decline in public debt-to-GDP ratio in Eurozone by June 2026, with the ratio standing below 50%. Going forward, based on the latest projections from the Ministry of Finance, economic growth has been upgraded to around 3% from 2.5% for 2026, significantly higher than the eurozone average forecast, demonstrating its resilience. This strong performance of the economy is recognized by the credit rating agencies. In September, S&P upgraded Cyprus' sovereign credit rating to A with a positive outlook. This is the first time Cyprus has returned to the A rating category with S&P since 2010. Let's now turn on slide eight, which shows a snapshot for Q3 performance. For another quarter, we continue to deliver strong performance across all key metrics. Our net interest income increased to EUR 196 million on the back of rate rises and strong volume growth.
Our cost-to-income ratio remained low at 35% for Q3, supported by ongoing cost discipline and higher revenues. We saw a net cost of risk release of 20 basis points. All in all, our profitability remains flat quarter-on-quarter at EUR 131 million. Moving now to slide nine and our distribution track record. As a reminder, in October, we paid an interim dividend of EUR 0.24 per ordinary share, which corresponded to a circa 44% payout ratio out of the first half 2026 earnings. Slide 10 shows the key drivers of shareholder value creation. We continue to generate high teens on reported ROTE, notwithstanding a highly capitalized balance sheet. Our ROTE increased to over 19% in Q3, corresponding to 27.2% ROTE based on 15% CET1 ratio.
We continue to deliver strong capital generation of over 100 basis points in Q3, totaling 341 basis points for the nine months, while our tangible book value increased to EUR 6.21, up 11% since December 2025, following the payment of the interim dividend of EUR 0.24 per ordinary share. Looking now at slide 11, you can see that our key financial metrics are tracking better than the 2026 target set in March 2026 at the investor update. Capitalizing on this strong performance, we are today upgrading our ROTE guidance for 2026 to high teens. Supporting organic capital generation of over 400 basis points for this year.
This update reflects upgrades on key components of our guidance, including a modest increase in net interest income guidance to EUR 765 million for the year from EUR 750 million, a sub-40 cost-to-income ratio, confirming we now expect small net releases in the cost of risk. We remain committed to a meaningful distribution with a 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. Moving now to slide 12. In October, we completed the acquisition of the performing loan book and deposit book from CDB of EUR 130 million and EUR 440 million respectively. This consideration was near par.
This transaction is estimated to have a limited impact on our capital of around 30 basis points, which will be reflected in our 4Q results. This transaction is aligned with our stated strategy to expand our balance sheet, to extend further our customer base, and is expected to have a modest positive impact in our profitability. I will now hand over to Eliza, who will run through our nine-month results in more detail.
Thank you, Panicos, and good morning from me too. Let's now turn to slide 13 and the summary of our key highlights. These include strong volume growth demonstrated by a 7% increase in our loan book and 6% growth in deposits since December 2025. On an annual basis, both our loan book and deposits increased by 9%. Our asset quality remained robust with an NPE ratio of 1% and a net release of 14 basis points in cost of risk, driven by customer-specific reversals. We've had healthy organic capital generation of 341 basis points and ended the quarter with a CET1 ratio of 20.6% and a total capital ratio of 25.2%. Let's quickly turn to slide 14 and 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 improved by 2% year-on-year to EUR 504 million, despite the lower average reference rate, whilst our profit after tax increased by 9% year-on-year to EUR 383 million. Now moving to slide 15. The structure of our balance sheet is simple and is characterized by high liquidity. Our deposit base is 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 our loans are linked to Euribor. Now moving to net interest income on slide 16.
Our NII continued to grow in Q3, increasing by 4% to EUR 196 million, underpinned by the repricing of loans and liquids at higher rates during the quarter, alongside strong growth in both loan and deposit volumes. All in all, for the first nine months of 2026, NII increased by 3% to EUR 565 million, driven by strong growth in lending and deposit volumes, which more than offset the impact of lower average reference rates. As a result of this strong performance and taking into consideration the current forward curves, we're upgrading today our NII outlook for 2026 to EUR 765 million from the previous guidance of EUR 750 million. Let's unpack the main assumptions driving this upgrade. Firstly, we factor in the current market forward curves, which expect an average ECB deposit rate for 2026 at 2.2%.
This reflects the rate hike of 25 basis points in September 2026 and another 25 basis point rate hike in late December 2026. For further details on our interest rate assumptions, please refer to slide 42. Given our rate sensitivity, every additional 25 basis points is around EUR 17 million of annual NII tailwind. Secondly, we have seen our loan book increasing by 7% since the beginning of the year, driven mainly by domestic demand and careful expansion of our international book. For the whole 2026, we expect our book to organically grow by high single digits, whilst the performing loan book of CDB of around EUR 130 million, which we have just completed, will add another percentage point to our loan growth. Lastly, our deposit base grew faster than initially expected, increasing by 6% since December 2025.
We noted a moderate increase in the cost of deposits in Q3, and as we progress into this new rate cycle, we expect to see depositors being more conscious about the rate increases. Given our strong domestic franchise as well as our market position, we will continue to carefully manage the deposit pricing to maintain it to low levels, facilitated also by the highly liquid banking sector in Cyprus. Moving on now to our hedging activity on slide 17. Our significant hedging efforts undertaken over the last couple of years have reduced our NII sensitivity to a 25 basis point parallel shift in rates to EUR 17 million, almost half the level it was in December 2022. During the nine months, we increased our hedging level by EUR 800 million, driving the total to EUR 12.9 billion, covering 47% of the group's interest-earning assets.
The yield on new interest rate swaps stood at 2.8% in the third quarter compared to 2.7% in the prior quarter. We will continue the dynamic management of our balance sheet, subject, of course, to market conditions. On slide 18, you can see more details of our deposit trends. Total deposits of EUR 23.5 billion were up 3% quarter-on-quarter and 9% year-on-year. The bottom left chart indicates that our deposit base is mainly retail funded, with relatively small ticket sizes of around EUR 32,000. Overall, cost of deposits remained low in the third quarter at 32 basis points, in line with the 30-35 basis point guidance we gave at our investor day earlier this year, although we observe a moderate increase in the cost of term deposits to 90 basis points, reflecting a deposit beta of 33%.
Despite this increase, the contribution of term deposits to total deposits remained broadly stable quarter-on-quarter and year-on-year to 31%. Cyprus banking system has one of the lowest loan-to-deposit ratios among EU countries, which should support moderate pricing pressures on deposits. Now let's move to slide 19 and new lendings. During Q3, we granted new loans of EUR 803 million, significantly exceeding the Q3 levels of the same period last year. New lending totaled EUR 2.4 billion for the first nine months, up 9% year-on-year, with growth across all business lines. 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 exposure written since 2016 remain performing.
Looking now to slide 20, we are pleased to see our loan book grow by 7% since the beginning of the year to EUR 11.65 billion, with growth observed across all business lines. Domestic business loans rose 7%, while retail lending increased 5%, supported by strong housing demand and macro fundamentals. Growth in the international loan book contributed a further 2% to the overall increase. Lending yields are rising after a period of stabilization, reflecting higher Euribor rates. We have already comfortably met our loan growth target of more than 5% for 2026. We now expect to close the year with organic growth of high single digits, while the acquisition of CDB's performing loan book of approximately EUR 130 million will add a further percentage point to our loan portfolio.
Now moving to the fixed income portfolio on slide 21, our portfolio stood at EUR 5.9 billion, representing 20% of the group's total assets. The fixed income pool comprises high-quality assets with average maturity of three to four years and is highly diversified. 95% 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. Slide 22 shows non-interest income of EUR 220 million for the nine months, broadly 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, and these are a key area of focus. This includes the fee and commission income, the net insurance result, and the FX customer-related fees.
Altogether, we refer to them as our recurring non-NII, which grew 10% year-on-year to EUR 201 million, primarily driven by higher net insurance result. Additionally, net fee and commission income was up 3% year-on-year, driven both by transactional and non-transactional fees. On a quarterly basis, recurring non-NII increased by 3% quarter-on-quarter, driven by higher net insurance result due to improved claims experience in the life insurance sector, as well as increased credit card commissions resulting from seasonally higher transaction volumes. Other non-NII items include REMU gains and losses on financial instruments, and other income. Year-on-year, other non-NII decreased by EUR 11 million, driven by lower volumes of FX swaps and fair value losses on financial instruments. As a reminder, other non-NII remains a volatile contributor to our profitability. Overall, non-NII continues to cover around 78% of our operating expenses.
Our insurance businesses are a valuable and recurring revenue stream for the group, as presented on slide 23. In summary, our net insurance result amounted to EUR 51 million in the nine months, up 39% year-on-year, and this mainly reflects lower claims in both life and non-life, lower losses in onerous contracts in the life insurance sector, as well as the contribution of Ethniki Insurance Cyprus. Overall, the net insurance result contributed 23% of total non-interest income, and insurance remains highly profitable, contributing 10% of the group's total profitability. Slide 26 provides an overview of operating expenses. Our cost-to-income ratio for the nine months stood at 36%, reflecting continued cost discipline and higher revenues. On an annual basis, total operating expenses increased by 3%, reflecting mainly the increased exit costs, which were mostly recovered in the previous quarter.
In the nine months, staff costs were up 2% year-on-year, as the salary increments and the cost of living adjustment, which typically take place at the beginning of the year, were partially offset by the completion of a small, targeted voluntary staff exit plan, where 51 employees were approved to leave, reflecting a 2% decrease in headcount. Other OpEx remained broadly flat year-on-year. On a quarterly basis, total operating expenses remained flat compared to Q2, reflecting stable staff costs, seasonally higher other OpEx, offset by lower exit costs. For 2026, we expect cost to income to remain below 40% on the back of strong revenue outlook and continuing cost discipline. Turning now to slide 27 and asset quality. Our underlying credit quality is strong, evidenced by the low NPE ratio of 1.0% and the coverage ratio exceeding 100%.
The cost of risk saw another net release of 20 basis points in Q3, driven by customer-specific reversals, as well as the improved macro assumptions, which assume higher economic growth in 2026 compared to the previous quarter. The modeling weight of the base favorable and adverse scenario remain unchanged compared to the previous quarter. Overall, the cost of risk for the nine months stood at a net release of 14 basis points, driven by customer-specific reversals. Excluding these, the cost of risk is estimated at 17 basis points. Today, we are at a favorable part of the cycle, and we are not seeing any signs of asset quality deterioration. As a result, we expect cost of risk for the full year to be a small net release. Let me also remind you that these are very small figures.
Each 10 basis points cost of risk is equivalent to around EUR 10 million of loan credit losses on an annual basis. Moving on to the REMU portfolio, the REMU stock decreased further to EUR 316 million as of 30th September. We continue to manage our REMU stock prudently, as it is carried on the balance sheet at below 70% of the current open market value. Now let's move to capital in slide 28. The bank's capital position remains strong. We continue to build organic capital generation of over 100 basis points this quarter, totaling 341 basis points for the nine months of the year, on a pace to exceed 400 basis points for this year. Our CET1 ratio and total capital ratios stood at 20.6% and 25.2% 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, and hence the interim dividend at 44% payout ratio did not affect our capital ratio. We remain committed to our distribution target for the full year of an ordinary dividend of 70% payout ratio at the top end of our distribution policy, and a top-up dividend of up to 20% to be decided with the full year 2026 financial results. As a result, we continue to accrue at 70%, and any top-up will be accrued at the time it's announced. The completion of the acquisition of approximately EUR 130 million in performing loans and EUR 440 million in deposits from the Cyprus Development Bank is estimated to have a modest capital impact of around 30 basis points to be reflected in Q4. Finally, let me give you an update on our capital requirements.
Based on the final SREP decision received in October, the Pillar 2 Requirement and non-public Pillar 2 guidance levels remain unchanged. In November, the Central Bank of Cyprus introduced a Systemic Risk Buffer of 100 basis points effective from 31st December 2026, and this is applicable to all banks in Cyprus. Our capital requirements are therefore expected to increase by a respective amount of 100 basis points to 12.9% for CET1 and 17.5% for total capital ratio. Our medium CET1 target of 15% remains unchanged. I will now come back to Panicos for his closing remarks.
Thank you, Eliza. Our diversified and efficient business model, continued strong credit quality, robust capital and liquidity positions, and our proven ability to successfully execute our strategy mean we are well-positioned to continue to deliver attractive sustainable returns and create value to our shareholders.
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 Alexandros Boulougouris with Euroxx Securities. Please go ahead.
Good morning. Many thanks for the presentation. Two questions, if I may. The first is on the effective loan yields that you have on the presentation on page 20, which seems to be increasing at a relatively slower pace, especially given the hike in the Euribor, the increase in the Euribor. Could you remind us a bit the structure of the loan book between fixed and floating? And maybe if you could tell us if you see any pressure in corporate spreads, as we have seen in especially Greek peers, for example. How is the situation in Cyprus? If you could give us some color. The second question is regarding the provision releases. I know you mentioned that the numbers are small, but if you could give us a bit more color, does it refer to one corporate or is it a cluster of corporates or retail?
Where exactly it derives and what should we expect going forward? Thank you.
Okay. Thank you, Alex. On the second question, the provision releases, it's mostly corporate, and we expect to have overall small net releases by year end. Let me remind you that the underlying cost of risk is 17 basis points, and through the overall cycle, it's 40- 50 basis points, but clearly, we are at a very, very favorable part of the cycle. On the effective loan yields, I think Euribor, it's around 40% of our loan book. The rest are related with the bank spread rate and fixed rates. There is certainly a delay in Euribor repricing. I think most of our six-month Euribor will be repriced by year end, so the effect will be probably in 2027. There is some maturity conversion, especially in good credits in corporate, but our base assumption of maturity conversion is to be a high single digit within the next 12 months.
Let me remind you also the sensitivity on the NII. Every 25 basis points, we have EUR 16 million-EUR 17 million of sensitivity.
Many thanks. Thank you.
The next question comes from the line of Alfredo Alonso with Deutsche Bank. Please go ahead.
Hello. Morning. Congratulations for the results. I have just a few questions. On NII, is this level of sensitivity the one you'd like to keep going forward, or may you tweak your hedging policies, maybe to be more open to the interest rates once they're stabilized or even be more closed? Then another question on the insurance side, the positive impact for claims, which is bringing up the contribution, is something that should remain there, or at some point, that should be translated into lower pricing of your policies? Finally, a follow-up on your comment on the cost of risk. As you say, the 40- 50 basis points now seem to be a bit too high. What should we be expecting for 2027, maybe 2028, given the good conditions that we are seeing right now in asset quality? Thank you.
Okay. I am not sure we understood your second question very well, Alfredo. We did not hear the middle part. But let us take the first and the third, and maybe you can come back to the second. The sensitivity and the structure of our hedging, our guidance, our strategy rather, is that we keep the level of hedging that we currently have, which is around half the balance sheet, at 47% for the last couple of quarters. This is a level of hedging we would like to keep. The reason is that this allows us to predict and to manage our NII going forward and avoid big spikes and big ups and big negatives.
The mix, the type of instruments we use to hedge, depend also on our strategy and on to what extent we decide to use fixed rate bonds or IRSs, which are the two more volatile components. That is a matter of decision, depending also on market conditions, on rates that we find in the market. We do expect that to continue, and this EUR 16 million-EUR 17 million sensitivity is a level we believe you should continue to assume as being there. On the 40- 50 basis point on cost of risk, it is through the cycle. We are not at this point guiding for next year or 2028, because we will be guiding on that with full-year numbers. That said, our underlying cost of risk for the nine months was at 17 basis points. That is a data point. It is not guidance.
It's just a factual data point for the nine months. It's very hard to predict. Let me just repeat what Panicos said before, that this nine months and this year, we did have a number of non-recurring, to a very large extent, positives from specific clients.
On the second question, Alfredo.
Yeah. Sorry, Panicos. Let me just rephrase in case I've not explained well myself. On the insurance side, what I say is you are getting quarter- after- quarter improving results, lower claims. Sometimes this comes because you've improved your systems, your underwriting, and so on. But at the end of the day, it's something that you might see also in others, competition, them bringing down the pricing on those policies. What I wanted to say is how resilient should be those gains that you are getting right now in the future, or there might be some pressure on the pricing?
Okay. On insurance, I wouldn't say we are seeing any particular pressure on pricing. It's a competitive market, but it has been for a long time, so there's nothing that's changing or has changed in the market. We did have a lower claim inflation, especially in the life company this year, which is below our long-term average for the company model. We do expect, I mean, we can't assume that this will continue forever, but at some point, it should revert to the average. We are still optimistic on the outlook of both companies, and the premium growth and the market share growth remain at strategic targets. And those, as said, without compromising on pricing. Claims is one component of the equation, and that was probably a better year than average, let's say, this year so far.
But on premiums and pricing, we expect to continue on the same.
The base assumption is high single-digit growth on an annual basis, organic growth.
On premiums.
On premiums, and net insurance results, most probably.
Okay. Thank you very much.
The next question comes from the line of Daniel David with Autonomous Research. Please go ahead.
Well, congratulations on the results. Just had a couple of quick ones. After the CDB acquisition, are you still in the M&A market? Still in the market for bolt-ons? If so, could you maybe just remind us on kind of what sectors or targets, the type of targets you might be looking at? Then just a quick one on issuance. I think you have a senior call in July 2027. Can we expect you in primary markets this year, or is it more likely to be early next year? Thanks.
Okay. On the banking market in Cyprus, I mean, it is very clear that it is still being concentrated. I do not think that there is, given our size, there is any realistic M&A target for Bank of Cyprus in Cyprus on banking. In non-banking, we can consider any option that makes financial strategic sense.
On funding, on the wholesale side, we do have a call date of a senior bond in July next year. So at some point during the first six, seven months of next year, we will go to the market to refinance that. We expect to go to the market and refinance that. Timing depends, as always, on the market conditions. We do have a significant MREL buffer, by the way, which allows us the flexibility of adjusting that, of time, and hopefully of credit spreads.
Mr. David, are you done with your questions?
No, thank you. Yeah, thank you.
The next question comes from the line of Ben Maher with KBW. Please go ahead.
Hi. Hi, thanks for taking my questions. My first one's just on the loan and deposit growth. That was obviously much better than expected this quarter, accelerating in Cyprus. I was just wondering if there's any one-offs to explain that performance, or can we expect this trend to continue into 4Q and next year? I think to me, it appears also noted acceleration in loan growth in Cyprus. My second question is just on the loan and deposit price dynamics in Cyprus. Are you seeing any changes or pressure from the Greek competitors? On the CDB acquisition, I think previously you guided to around EUR 10 million in NII in 2027. That was obviously when the rate outlook was very different.
I'm just wondering if you're able to give an update to that, because obviously you look at the revised guidance for this year, and if they imply 4Q, then I think what we have in consensus for next year can arguably be seen as quite conservative. Thank you.
Okay. Thank you, Ben. On the loan and deposit growth, there is no one-off during the nine months. It is just a combination of the good performance of the economy, our strategy for international lending, and our, let's say, business offering a strong franchise. For loans, we expect to end up the year at high single digits in 2026. For deposits, Q3 is usually a strong month in corporates because of the tourist season, and Q4 is stronger in private individuals because of the 13th salary. So we expect also deposits to continue growing, but at, I think, a slower pace for 2026. For 2027 onwards, as Eliza said before, we are currently on our budget cycle, so I will not comment specifically on any metric.
However, I have to remind you that our base assumption is that, at least on loan growth, this, what you see in 2026 and what you have seen in 2025, it's not our run rate going forward, as economic growth is gradually slowing a little bit, and also the international book of the bank is becoming more mature, and we start to see normalization of repayments. On competition in Cyprus and pricing dynamics, yes, market is becoming more competitive because each bank has its own strategy and goals, depending on the stage of where, at which it is. We are seeing, for example, one bank offering very high deposit rates. But as I said many times in the past, our holistic offering and franchise can deal effectively with any competition, and actually you can see this in the results of growth in deposits and loans with relatively good spreads.
On CDB, the EUR 10 million rough guidance, I mean, guidance that we gave remains there more or less. It will be incorporated in our results starting from, consolidated, I mean, starting from mid-October. You will see the impact next year on a full-year basis.
Great. Thank you.
The next question is from Alexander Kantarovich with Roemer Capital. Please go ahead. The next question is from Mr. Alexander Kantarovich with Roemer Capital. Please go ahead. Mr. Kantarovich? As a 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.
Thank you all for your participation in the call. As always, we will be very happy to answer any questions offline upon your request. 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.