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Bank of Cyprus Pcl (BOCY) reported in-line expectations profit of EUR 375 mln for the first nine months of 2008, up 1% compared to EUR 369 mln in the same period a year ago, which gives a return on equity of 24.4%.
Management also reiterated its full year 2008 profit target of EUR 540 mln, in sharp contrast to recent downgrades by analysts, most of whom had lowered their 2008 profit forecast to EUR 514-517 mln, as tracked by the Financial Mirror.
The Group maintained its efficiency with the cost to income ratio remaining at low levels (43,9%) for 9M08 despite the significant investment for further expansion of the network in Greece, and also the cost of the development of operations in Russia, Romania and Ukraine. The ratio of non-performing loans to total loans improved to 3,4% at 30 September 2008 from 4,3% at 30 September 2007 and from 3,8% at 31 December 2007.
Bank of Cyprus maintained its strong liquidity with a loan to deposit ratio of 86.3%. The quality of the Group’s loan portfolio improved with the relevant ratio being reduced to 3.4% compared to 4.3% at 30 September 2007 and 3.8% at 31 December 2007. The provision charge was maintained at 0.3% of total loans.
The profitability of the Group’s operations in Cyprus continues to be satisfactory. Profit after tax for 9M08 stood at EUR288 mln generating a return on equity of 42%. The profitability of the Group’s operations in Greece reached EUR73 mln. Group’s operations in Russia and Romania made a positive contribution with profit after tax for the first nine months of 2008 reaching EUR0.9 mln in Russia and EUR2.7 mln in Romania.
Prospects
The Bank of Cyprus Group has effectively shielded itself from the financial crisis, which began last year but intensified in the last three months. It has no exposure to high risk derivative products and has minimal reliance on wholesale (11%) whereas, 80% of the Group’s assets are funded by customer deposits.
Regarding the Group’s expected profitability for 2008, taking into consideration the results to date, the indications for their further development, the Group’s measures to offset against the negative impact of the continued pressure on liability spreads and the current conditions prevailing in the markets in which it operates, it is expected that the profit target of EUR540 mln 2008 will be achieved.
The acquisition of the Russian Uniastrum Bank is a significant step for the Group creating excellent prospects for its profitability and at the same time ensuring the geographic and by sector diversification of its operations. Russia, with its underpenetrated banking sector and relatively strong economic growth, offers significant potential for development of banking services, especially in retail banking. The average real GDP growth of Russia for the period 2004-2007 was 7,3%. The real GDP growth rate for Russia is estimated at 7,0% for 2008 and 5,5% for 2009, which despite demonstrating a certain level of slowdown is still in excess of the growth rates estimated for the EU (1,3% for 2008 and 0,2% for 2009). Banking penetration in Russia is still at its infancy, with the loans to GDP ratio at end-2007 at only 36% compared to 114% in the Eurozone, and with spreads between loans and deposits generally in excess of those prevailing in the Eurozone.
Uniastrum is well positioned to capture the retail banking potential. The strong deposit base and capital base of Uniastrum allow it to self fund its asset growth utilising its extensive, albeit young, branch network. Uniastrum’s focus on the retail and SME sectors complements our existing corporate focused presence in the country.
Net Interest Income and Margin
Net interest income reached EUR578 mln, recording an annual increase of 4%. The net interest margin of the Group’s operations in Cyprus was 2,28% for the third quarter 2008 compared to 2,50% for the second quarter 2008 and 2,19 for the first quarter 2008. The net interest margin of the Group’s operations in Greece was at 2,26% for the third quarter 2008 compared to 2,46% for the second quarter 2008 and 2,58% for the first quarter 2008.
Net fee and commission income recorded a satisfactory annual increase (+7%) and reached EUR 154 mln from EUR 145 mln for 9M07. Foreign exchange income for 9M08 recorded an annual increase of 54% and reached EUR 51 mln compared to EUR 33mln for 9M07.
Total income from insurance business recorded an annual increase of 18%, reaching EUR 48 mln. Profit before tax of the insurance business amounted to EUR 34 mln recording an annual increase of 13% and contributing 8% to Group profit before tax.
Expenses
Total expenses for 9M08 increased 7% to EUR 376 mln. Staff costs amounted to EUR 234mln, recording an annual increase of 10%, mainly due to the increase in the costs relating to the expansion of operations in Greece, Russia, Romania and Ukraine. The other (non-staff) operating expenses of the Group, including the operating expenses for the start up of operations in Russia and Romania, recorded an annual increase of 3% and amounted to EUR 142mln.
Group Loans
The Group’s loans reached EUR 23.42 bln at 30 September 2008, recording an annual increase of 29%. The Group’s total loans in Cyprus at 30 September 2008 amounted to EUR 11.43 bln, recording an annual increase of 30% and represented 49% of the Group’s total loan portfolio.
The Group has increased its market share in total loans of commercial banks and credit cooperatives in Cyprus, to 28.8% in September 2008, compared to 28.3% in September 2007, an increase of half a percentage point in the last 12 months.
The annual rate of increase in the Group’s loans in Greece reached 24%, with total loans reaching EUR 9.39 bln at 30 September 2008 and the market share standing at 3.9% in July 2008 (latest available data) compared to 3.7% in July 2007. The Group’s total loans in Greece represent 40% of its total loan portfolio.
In the new markets, Russia, Romania and Ukraine the Group’s loan portfolio at 30 September 2008 reached EUR 840 mln noting an increase of 146% from 31 December 2007. The Group’s total loans in the new markets amount to 3.6% of its total loan portfolio.
Non-Performing Loans
The ratio of loans in arrear for longer than three months which are not fully covered by collateral (“non performing loans”) to total Group loans at 30 September 2008 was 3.4% compared to 4.3% at 30 September 2007 and 3,8% at 31 December 2007.
In parallel, the Group maintained the coverage ratio (provisions/NPLs) at 73% at 30 September 2008. The remaining balance of NPLs is fully covered by tangible collateral.
The quality of the loan portfolio in Cyprus registered a significant improvement with the relevant indicator improving to 4.1% at 30 September 2008 compared to 6.0% one year ago. The Group’s NPL ratio in Greece stood at 3.3% at 30 September 2008
(30 September 2007: 3.1%).
Group Deposits
Group’s total deposits increased annually by 15% reaching EUR 27.13 bn at 30 September 2008, enhancing its liquidity. It is noted that as at 30 September 2008 80% of Group assets were funded by customer deposits whereas only 11% were funded from the wholesale market.
In Cyprus, the annual rate of increase in Group deposits was 10% with total deposits reaching
EUR 15.08 bln at 30 September 2008. The Group has the leading market share (30.2%) of total deposits of commercial banks and credit cooperatives.
Group deposits in foreign currency in Cyprus increased by 16% compared to 2Q08 and amount to 38% of total deposits in Cyprus, with the Bank’s market share in this sector among commercial banks standing at 42.1% in September 2008.
Group deposits in Greece increased at an annual rate of 24%, reaching EUR 10.34 bln at 30 September 2008. At the end of July 2008 (latest available data) the Group’s market share in deposits in Greece stood at 3.8% compared to 3.6% in July 2007.
Shareholders’ Funds
At 30 September 2008, the Group shareholders’ funds amounted to EUR 2,13 bln, recording a significant year on year increase of 11%. The Group capital adequacy ratio as per Basel II requirements, taking into account the repayment of EUR 200 mln tier 2 capital on 3 October 2008 as well as the acquisition of the Russian Uniastrum Bank on 31 October 2008, is estimated at about 11%.
