* Lower provisions and EPS target could pave way for bigger profits in 2018
Bank of Cyprus announced operating profits of EUR 485 mln in 2017, that were subsequently wiped out by higher provisions due to the overhang of non-performing loans, but has set a target of maintaining its profit levels this year, where it hopes to incur lower provisions, allowing for a return to higher earnings for shareholders.
Setting an earnings per share guidance of 40c for 2018, investors hope this is an indication that dividends may be issued this year, especially as efforts continue to lower the non-performing exposures that have been on a constant downward path for the past eleven quarters.
The key points highlighted in the 2017 results include continued progress on ‘balance sheet repair’,
eleven consecutive quarters of organic NPE reduction, NPEs lowered by EUR 2.2 bln (20%) year-on-year to EUR 8.8 bln (down by 41% since December 2014), an NPE ratio at 47%, NPE coverage at 48% rising to 51% after IFRS 9 First Time Adoption (FTA), and continued de-risking.
The bank said that it maintains an “adequate capital position”, with a CET1 at 12.7% and 12.2% FL, a total capital ratio at 14.2%, and, allowing for transitional arrangements, estimated capital impact of about nine basis points from IFRS 9 FTA in 2018.
The bank said it improved its funding and liquidity position last year with deposits up EUR 1.3 bln (+8%) yoy, deposits up EUR 535 mln in the fourth quarter of 2017 facilitating full compliance with liquidity requirements on 1 January 2018, and a loans-to-deposit ratio of 82%.
As regards operating performance, Bank of Cyprus said its net interest margin was up 3.02% for FY2017 with total income of EUR 907 mln and an operating profit of EUR 485 mln. However, total provisions and impairments of EUR 942 mln resulted in a EUR 552 mln loss after tax
“Our results this quarter and for the full year reflect continued delivery against our core objective of balance sheet repair. In 2018 we expect a normalised cost of risk that should result in a return to profitability and allow an organic rebuild of capital,” said Group Chief Executive John Hourican in a statement.
“We have maintained good momentum in organic NPE reduction. This was the eleventh consecutive quarter of material NPE reduction. We reduced the stock of NPEs by EUR 2.2 bln since the beginning of the year and by 41% since December 2014. During 2017 we increased coverage levels against non-performing exposures to 48%, above the EU average and in line with our medium-term target,” said the CEO who will be leaving at the end of 2018, a year he hopes the bank will have returned to steady profitability.
“EUR 1.6 bln of our residual NPE balances represent restructured exposures that are in fact performing and present zero arrears. The remaining ‘core’ NPE balance of EUR 7.2 bln carries a 54% provision coverage and represents 38% of our loan balances,” Hourican said.
“We remain confident of continuing the positive progress in reducing our NPE stock during the coming quarters. At the same time, we continue to actively explore certain structured solutions to further accelerate reduction and return the bank to a more normal position.
“Deposits increased by EUR 535 mln in the quarter and by EUR 1.3 bln in the year. The increase in our deposit base has ensured that we are now in full compliance with our regulatory liquidity requirements. However, the increase in our liquidity, coupled with the continued balance sheet de-risking, adds negative short-term pressure to the Bank’s net interest margin. We expect the profit-pressure created by this dynamic to be more than offset in 2018 by reduced provisioning, the positive contribution of new lending and the repricing of deposit rates.
“Our capital levels remain adequate and as at 31 December 2017 both the Bank’s CET1 ratio (transitional) and the Total Capital Ratio were in excess of regulatory requirements. Allowing for transitional arrangements, the estimated IFRS 9 capital impact for 2018 is c.9 bps, remaining within regulatory limits.”
Hourican cautioned that it was still no time for complacency.
“Whilst we are pleased with the progress so far in the turnaround at the bank, we are in no doubt about the amount of work we still have to do, both in respect of our legacy lending positions and also in expanding our performing business. We are proud that we have maintained and grown our leading lending position in the fast growing Cyprus economy that expanded by 3.9% during 2017. New lending in the year to 31 December 2017 was EUR 2.2 bln, exceeding new lending in 2016 by 53%, and we expect to further expand levels of new lending during the year ahead.”
“Momentum in the business is good. We enter 2018 with a clear understanding of how we will continue to execute to ensure on-going progress against our strategic objectives and delivery against our medium-term targets. Our expectations for 2018 are unchanged and, at this stage, we maintain our guidance of a return to profitability and earnings per share of 40 cents,” Hourican concluded.
