Bank of Cyprus, Cyprus's largest lender reported a higher than expected first half profits on Monday beating analyst forecasts. BOC reported EUR 148 mln in net profit for first half of 2009 compared to EUR 243.64 mln a year ago in the same period for a decline of 39.4% YoY, but was better than EUR 138 mln forecast according to a poll taken by Financial Mirror. The first half net profit were weighed by higher costs and slower loan growth.
Profit after tax and non-controlling interests for the second quarter of 2009 reached EUR85 mln recording an increase of 34% compared to the first quarter of 2009. As a result of the Group’s actions and the positive impact of the gradual de-escalation of competition on the cost of deposits, the Group’s net interest income for the second quarter 2009 reached EUR207 mln recording an increase of 14% compared to the first quarter of 2009, while the net interest margin increased by 23 basis points and reached 2.36% for the second quarter of 2009 (2.24% for the first half 2009).
The Group maintained its strong liquidity with a loans to deposits ratio of 89%. The Group enjoys strong liquidity in the two main geographic markets in which it operates, with loans to deposits ratios in Cyprus and Greece of 81% and 87% respectively at 30 June 2009.
Group return on equity was maintained at satisfactory levels (13,9%) in a particularly demanding and negative environment.
The Group maintained its efficiency, with the cost to income ratio contained at 55,9% despite the continuous adverse economic conditions and the expansion of its network in Russia, Romania, Ukraine and Greece during 2008. Specifically, the Group increased its branch network significantly, from 334 branches at 30 June 2008 to 583 at 30 June 2009. The increase is primarily due to the acquisition of Uniastrum Bank in October 2008. The significant investments for the development of the branch network will enable the Group to benefit from the opportunities that will arise when the economic environment starts improving.
In light of the overall economic conditions prevailing in the markets in which it operates, as well as the weak demand for lending, the Group recorded a limited increase in loans (1%) and deposits (2%) during the first half of 2009 compared to 31 December 2008.
The Group, placing particular emphasis on effective credit risk management, contained the non-performing loans ratio to the satisfactory level of 4,9% at 30 June 2009. The worsening of the economic environment led to the increase in the provision for impairment of loans for the first half of 2009 to EUR96 mln which corresponds to 0,76% of total loans (on an annual basis). The Group provisions coverage ratio stood at 60% at 30 June 2009. The remaining balance of non-performing loans is fully covered by tangible collateral.
The two main markets in which the Group operates, Cyprus and Greece, contributed positively to its profitability, with profit after tax reaching EUR147 mln and EUR13 mln respectively.
United Kingdom and Australia have also contributed positively to the Group’s profitability, with profit after tax for the first half of 2009 amounting to EUR6 mln and EUR1 mln, respectively. In Romania and Ukraine profit after tax for the first half of 2009 reached EUR5 mln and EUR2 mln respectively.
In Russia, taking into consideration the current market conditions, the Group placed particular emphasis on integrating Uniastrum Bank and strengthening its infrastructure following the completion of the operational merger with Bank of Cyprus Russia. The Group followed a policy of containing lending and increased provisions in order to better manage risks and shield itself. As a result, the Group’s operations in Russia recorded profit before provisions of EUR12 mln for the first half of 2009 while after increased provisions and tax, recorded a loss of EUR13 mln. The extensive branch network in Russia is expected to contribute positively to Group profitability through increased business volumes once the economic conditions improve.
Loans
At 30 June 2009 the Group’s loans amounted to EUR25,31 billion, recording an annual increase of 14%. The weak demand for lending, the prudent credit policy and the focus on proper risk management applied by the Group, given the conditions prevailing in the markets in which it operates, led to a 1% growth of loans since the end of 2008.
Non-performing loans
Despite the global financial crisis and its expected adverse impact on the loan portfolio, the Group placing particular emphasis on credit risk management, maintained the quality of its loans at relatively healthy levels. The ratio of loans in arrears for longer than three months which are not fully covered by tangible collateral (‘non-performing loans’) over total loans (non-performing loans ratio) stood at 4,9% at 30 June 2009. The corresponding ratio at 30 June 2008 and 31 December 2008 was 3,6% and 3,8%, respectively.
Deposits
The Group’s total deposits at 30 June 2009 reached EUR28,59 billion, recording an annual increase of 14% and a small increase of 2% since the end of 2008.
The strong liquidity of the Group, with a loans to deposits ratio of 89% and its minimal reliance on wholesale funding (15%), provide the Group with a strong competitive advantage, under the adverse conditions prevailing in the international money markets.
Shareholders’ funds
At 30 June 2009, the Group shareholders’ funds amounted to EUR2,22 billion. The Group’s capital adequacy ratio in accordance with Basel II was 12,1%, the tier 1 capital ratio was 8,5% and the core tier 1 ratio was 7,2%.
The Group’s tier 1 ratio increases to 11,1% and the core tier 1 ratio increases to 7,5% after the extension of the agreement with the founding shareholders of Uniastrum Bank and the increase from 15% to 35% of the percentage of tier 1 capital that can be derived from hybrid capital and without any government assistance, contrary to what happened in many European countries. On the same basis, the Group’s capital base becomes 12,4%.
