Bank of Cyprus Group Pcl (BOC) beat market expectations by reporting a spectacular 67% YoY jump in first quarter profit to CYP 62 mln or EUR 107 mln compared to EUR 64 mln in 1Q’06. Analysts had forecast net profit of EUR 100 mln for the first quarter.
Andreas Eliades, BOC Group Chief Executive Officer said the results are primarily derived from core banking and insurance operations. There was a significant improvement in all of the Group’s performance indicators during 1Q07, with the return on equity increasing to 26,6% and the cost to income ratio improving to 44,0%. The fast growth rate of the Group’s business in all the geographic markets that the Group operates and the positive development of the insurance operations contributed to the profitability improvement.
The efficient management of credit risk, building upon the revised procedures and systems implemented in the last two years, is delivering very positive results. The ratio of non-performing loans to total loans improved from 5,6% only three months ago (31 December 2006) to 5,0% at 31 March 2007. This metric was 8,6% at 31 March 2006.
“In February 2007 we set targets for the three year period 2007-2009. The Group financial results to date prove that we can deliver on our promises. With profits of EUR107 mln in the first quarter 2007, return on equity of 26,6% and cost to income ratio of 44,0% we are continuing to implement our strategy for further significant rates of increase in volumes and profits,” said Eliades.
On the occasion of the announcement of the financial results of the Group, the Chairman of the Board of Directors Eleftherios P. Ioannou said that the results prove that Bank of Cyprus can deliver the promised results and Management continues to create value for shareholders.
The Cyprus operations recorded EUR 82 mln in profit, up 72% YoY while the operations in Greece saw a 50% YoY increase in profit to EUR 21 mln from EUR 14 mln previously and other countries contributed EUR 4 mln in after tax profit, up 61% from EUR 3 mln a year ago.
Prospects
The Group is focused on the implementation of its strategy of autonomous growth and further significant growth rates in volumes and profits. Based on the Group financial results to date, the indications for their further development, as well as the current conditions in the markets in which the Group operates, the Group reconfirms its confidence in achieving the ambitious targets which were announced in February 2007:
Increase in profit after tax for 2007 to EUR415 mln (31% increase).
 Increase of return on equity to more than 25% by 2009.
 Improvement of the cost to income ratio to 40% by 2009.
Annual growth rate of profit after tax of over 25% for the three year period 2007-2009.
Reduction of the non-performing loans ratio to below 4,0% by 2009.
In parallel, the Group is successfully implementing its expansion strategy into new markets where it has comparative advantages. In particular, the Group’s leasing subsidiary in Romania has been operational since March 2007. At the same time, the infrastructure for the provision of banking services in Romania and Russia has been substantially completed. It is expected that the operations of the banking units in these two countries will commence soon. The initial indications of our presence in the two countries are very encouraging, said Eliades.
Group Loans
The Group’s loans reached EUR16,11 bln at 31 March 2007, recording an annual increase of 22%. The Group has increased its market share in total loans of commercial banks and credit cooperatives in Cyprus, to 27,4% in March 2007, compared to 25,7% in March 2006, an increase of 1,7 percentage points. The continuous increase in market share is the result of Bank of Cyprus’ leading brand name and distribution network and the effective marketing campaigns focusing on the retail lending sector and specifically mortgage lending. The Group’s market share in total loans, including those of the international banking units, was 23,9% in March 2007.
The Group’s total loans in Cyprus at 31 March 2007 amounted to EUR7,77 bln, recording an annual increase of 23%.
In Greece, the annual rate of increase in the Group’s loans reached 20%, a growth rate greater than the corresponding rate for the Greek banking system. The Group’s Greek loan portfolio increased to EUR6,81 bln at 31 March 2007 and the market share stood at 3,7% in January 2007 (latest available data).
Non-Performing Loans
During 1Q07, the improvement in the quality of the Group’s loan portfolio was exceptional and was the result of, among others: Collections of overdue amounts.Lower inflow of new NPLs as a result of improved credit risk control systems implemented by the Group over the past two years.
Specifically, the Group NPLs have declined by 29% since 31 March 2006. As at 31 March 2007, Group NPLs decreased to CYP463 mln (EUR797 mln).
The ratio of NPLs to total Group loans at 31 March 2007 was 5,0% compared to 8,6% at 31 March 2006 and 5,6% only three months ago (31.12.2006).
The coverage ratio (NPLs/provisions) increased to 72% as at 31 March 2007, compared to 47% one year ago. The remaining balance of NPLs is covered by tangible collateral.
The vast majority of non-performing loans relate to the Group’s Cyprus operations with the relevant indicator improving to 7,3% at 31 March 2007 compared to 13,2% one year ago. It should be noted that in Cyprus, the long time required for the foreclosure of collateral, especially property, acts as an obstacle in the collection of overdue amounts. The potential harmonisation of the relevant legislation to European standards is expected to expedite the process of further decreasing non-performing loans.
The quality of the Group loan portfolio in Greece remains very good, despite the high growth rate of the loan portfolio. Using the stricter definition mentioned before, the Group’s NPLs in Greece decreased to 3,4% of total loans at 31 March 2007, compared to 5,2% at 31 March 2006. This ratio compares favourably to the ratio of the Greek banking system (5,4% at 31 December 2006 as per Bank of Greece data).
Group Deposits
The Group’s total deposits at 31 March 2007 reached EUR21,56 bln, recording a 21% annual increase. In Cyprus, the annual rate of increase in Group deposits was 20%. Deposits in Cyprus amounted to EUR12,18 bln at 31 March 2007. The increase in deposits was accompanied by an increase in the deposit spread in Cyprus pounds (with reference to the base rate), having a positive impact on Group profitability. The Bank’s market share of total deposits of commercial banks and credit cooperatives in Cyprus, for March 2007 amounted to 29,9%, compared to 29,7% for March 2006.
The Group’s foreign currency deposits in Cyprus amounted to 58% of total deposits of the Cyprus operations with the Bank’s market share among commercial banks and credit co-operatives maintained at the high level of 43%.
Group deposits in Greece increased significantly at an annual rate of 21%, with total deposits reaching EUR7,94 bln at 31 March 2007. At the end of January 2007 (latest available data) the Group’s market share in deposits in Greece stood at 3,8%. The increase in deposits was accompanied by an increase in the spread earned by the Group during the last twelve months, thereby having a positive impact on profitability.
At 31 March 2007, the Group shareholders’ funds amounted to CYP961 mln (EUR1,66 bln), recording a significant increase of 20% since 31 March 2006. The Group capital adequacy ratio at 1st January 2007, according to the Basel II guidelines, stood at 12,8% compared to the minimum capital adequacy requirement of 8,0% imposed by the Central Bank of Cyprus.
Net Interest Income and Margin
Net interest income reached CYP100 mln (EUR173 mln), recording an annual increase of 28%. The Group net interest margin for 1Q07 was 2,88%, compared to 2,64% for 1Q06. The NIM of the Group’s operations in Cyprus increased significantly from 2,12% at 31 March 2006 to 2,57% at 31 March 2007, despite the intensified competition. Net fee and commission income for 1Q07 reached EUR50 mln, recording an annual increase of 21%.
The growth of the Group’s insurance operations was significant with an increase in new business premiums of 25% in life insurance and 11% in general insurance. Income from insurance business recorded a 10% annual increase, reaching EUR13 mln. The insurance business contributed 8% to Group profit before tax amounting to EUR10 mln, recording an increase of 28%.
Expenses
Total expenses for 1Q07 amounted to CYP65 mln (EUR112 mln), with the annual rate of increase of 9% being significantly lower than the rate of increase in loans (22%). Also, as a result of the increase in productivity, the cost to income ratio improved to 44,0% in 1Q07 compared to 49,0% for the corresponding 2006 quarter.
Staff costs amounted to CYP41 mln (EUR71 mln), recording an annual increase of 8%, mainly due to the increase in costs of the Greek operations by 24%, due to the Group’s expansion in Greece. Staff costs in Greece increased as a result of the increase in staff numbers by 9% to 2.663 employees, to accommodate for the increased business volumes (20% increase in loans) and for the operation of the nine new branches which opened in the last 12 months. The Group currently operates 121 branches in Greece. During 1Q07, seven new branches have been rented which are being modified according to the Group’s specifications and it is expected that they will soon be operational.
The other (non-staff) operating expenses of the Group recorded an annual increase of 10% and amounted to EUR41 mln).
The cost to income ratio of the Group’s Cyprus operations improved from 47,0% in 1Q06 to 39,9% in 1Q07. The ratio for the Group’s Greek operations stands at the very satisfactory level of 49,7% (1Q06: 50,0%), especially considering the relatively low maturity level of the branch network and the cost of opening new branches which is expensed as incurred. The Group’s expenses in the other countries where it operates increased by 10%.
The provision charge for 1Q07 amounted to EUR19 mln and represented 0,5% (2006: 0,7%) of total Group loans, reflecting the improvement in the quality of the loan portfolio.
