Annual Financial Report
2016
This Annual Financial Report relates to the Bank of Cyprus Public Company Ltd (the ‘Company’ and together
with its subsidiaries the ‘Group’) as at 31 December 2016. The financial information referred to and/or
presented in this report is not the statutory financial statements of Bank of Cyprus Holdings Public Limited
Company for the purposes of Chapter 4 of Part 6 of the Companies Act 2014 of Ireland. Bank of Cyprus
Holdings Public Limited Company’s statutory financial statements for the purposes of Chapter 4 of Part 6 of the
Companies Act 2014 of Ireland for the period 11 July 2016 to 31 December 2016 are expected to be published
by 30 April 2017 and delivered to the Registrar of Companies of Ireland within 28 days of 30 September 2017
(as at the date of this report, such statutory financial statements have not been prepared nor have they been
reported on by the independent auditors of Bank of Cyprus Holdings Public Limited Company).
BANK OF CYPRUS GROUP
Annual Financial Report
For the year ended 31 December 2016
Annual Financial Report 2016
Contents
Board of Directors and Executives
Statement by the Members of the Board of Directors and the Company Officials
Responsible for the Drafting of the Consolidated Financial Statements
Management Report of Bank of Cyprus Public Company Ltd
Consolidated Financial Statements of Bank of Cyprus Group
Independent Auditor’s Report to the Members of
Bank of Cyprus Public Company Ltd on the Consolidated Financial Statements
Statement by the Members of the Board of Directors and the Company Officials
Responsible for the Drafting of the Financial Statements
Financial Statements of Bank of Cyprus Public Company Ltd
Independent Auditor’s Report to the Members of
Bank of Cyprus Public Company Ltd on the Financial Statements
Annual Corporate Governance Report
Additional Risk and Capital Management Disclosures
Page
1
2
3
16
185
193
194
319
327
362
BANK OF CYPRUS GROUP
Board of Directors and Executives
as at 27 March 2017
Annual Financial Report 2016
Board of Directors of
Bank of Cyprus
Public Company Ltd
Executive Committee
Prof. Dr. Josef Ackermann
CHAIRMAN
Maksim Goldman
VICE CHAIRMAN
Arne Berggren
Lyn Grobler
Dr. Michael Heger
John Patrick Hourican
Marios Kalochoritis
Dr. Christodoulos Patsalides
Michalis Spanos
Ioannis Zographakis
John Patrick Hourican
CHIEF EXECUTIVE OFFICER
Dr. Christodoulos Patsalides
DEPUTY CHIEF EXECUTIVE OFFICER AND CHIEF OPERATING OFFICER
Michalis Athanasiou
CHIEF RISK OFFICER
Nick Fahy
CHIEF EXECUTIVE OFFICER, BANK OF CYPRUS UK
Eliza Livadiotou
FINANCE DIRECTOR
Panicos Nicolaou
DIRECTOR CORPORATE BANKING
Louis Pochanis
DIRECTOR INTERNATIONAL BANKING SERVICES AND WEALTH, BROKERAGE
AND ASSET MANAGEMENT
Dr. Charis Pouangare
DIRECTOR CONSUMER AND SME BANKING
Nicolas Scott Smith
DIRECTOR RESTRUCTURING AND RECOVERIES DIVISION
Anna Sofroniou
DIRECTOR REAL ESTATE MANAGEMENT UNIT
Aristos Stylianou
EXECUTIVE CHAIRMAN, INSURANCE BUSINESSES
Internal Auditor
George Zornas
Director Group Compliance
Marios Skandalis
Company Secretary
Katia Santis
Legal Advisers
Chryssafinis & Polyviou
Independent Auditors
Ernst & Young Cyprus Ltd
Registered Office
51 Stassinos Street
Ayia Paraskevi, Strovolos
CY-2002 Nicosia, Cyprus
Telephone: +357 22122100, Telefax: +357 22336258
1
BANK OF CYPRUS PUBLIC COMPANY LTD
Statement by the Members of the Board of Directors
and the Company Officials Responsible for the Drafting
of the Consolidated Financial Statements
Annual Financial Report 2016
We, the members of the Board of Directors and the Company officials responsible for the drafting of the
consolidated financial statements of Bank of Cyprus Public Company Ltd (the ‘Company’) for the year ended 31
December 2016, the names of which are listed below, confirm that, to the best of our knowledge:
(a)
the consolidated financial statements on pages 16 to 184:
(i) have been prepared in accordance with the International Financial Reporting Standards (IFRS) as
adopted by the European Union (EU) and the requirements of the Cyprus Companies Law,
(ii) give a true and fair view of the assets, liabilities, financial position and profit or loss of the
Company and the undertakings included in the consolidated financial statements taken as a whole,
and
(b)
the Management Report provides a fair review of the developments and performance of the business
and the position of the Company and the undertakings included in the consolidated financial statements
taken as a whole, together with a description of the principal risks and uncertainties that they face.
Prof. Dr. Josef Ackermann
Chairman
Maksim Goldman
Vice Chairman
Arne Berggren
Non-executive Director
Lyn Grobler
Non-executive Director
Dr. Michael Heger
Non-executive Director
Marios Kalochoritis
Non-executive Director
Michalis Spanos
Non-executive Director
Ioannis Zographakis
Non-executive Director
John Patrick Hourican
Executive Director
Dr. Christodoulos Patsalides
Executive Director
Eliza Livadiotou
Finance Director
27 March 2017
2
BANK OF CYPRUS PUBLIC COMPANY LTD
Management Report
Annual Financial Report 2016
The Board of Directors submits to the shareholders of the Company their Report together with the audited
consolidated financial statements for the year ended 31 December 2016.
The Annual Financial Report relates to the Bank of Cyprus Public Company Ltd (the ‘Company’) and together
with its subsidiaries (the ‘Group’) which was listed on the Cyprus Stock Exchange (CSE) and the Athens
Exchange as at 31 December 2016. On 18 January 2017, Bank of Cyprus Holdings Public Limited Company
was introduced in the Group structure as the new holding company of the Group. On 19 January 2017, Bank of
Cyprus Holdings Public Limited Company was admitted to listing and trading on the London Stock Exchange and
the CSE.
The Company was the holding company of the Group as at the balance sheet date. Bank of Cyprus Holdings
Public Limited Company was incorporated on 11 July 2016 and is the new holding company of the Group as
from 18 January 2017. Further information is disclosed in Note 53.1 of the consolidated financial statements.
Activities
The principal activities of the Company and its subsidiary companies during the year continued to be the
provision of banking, financial, insurance services and management and disposal of property generally acquired
in debt satisfaction.
All Group companies and branches are set out in Note 49 of the consolidated financial statements. Acquisitions
and disposals made during the year 2016 are detailed in Note 50 of the consolidated financial statements.
Operating environment in Cyprus
Cyprus exited its economic adjustment programme at the end of March 2016 after a successful return to
markets and having utilised only about 70% of the €10 billion funding resources made available by the
European Union (EU) and the International Monetary Fund (IMF). Based on the Ministry of Finance Stability
Programme 2016-2019 (May 2016), in the area of public finances, the government carried out a strong fiscal
adjustment and the budget returned to near balance, public spending was reduced and tax collection was made
more efficient.
Unemployment dropped to 13,3% during 2016 compared to an average unemployment rate of 14,9% for 2015
and a peak of 16,5% in the fourth quarter of 2014 as per the Cyprus Statistical Service.
Real GDP rose by 2,8% in 2016 according to the Cyprus Statistical Service, compared to an increase of 1,7%
during 2015.
Consumer prices continued to decline for the fourth consecutive year, down by 1,4% in 2016, as per the Cyprus
Statistical Service.
Tourist arrivals increased by 19,8% during 2016. The index of industrial production increased by 8,7% in 2016.
In real gross value added terms, industrial output in 2016 increased by 5,9% in the first three quarters of 2016
after an increase of 2,9% in 2015 as per data by the Cyprus Statistical Service.
In the property market, the Central Bank’s residential property price index continued to decline year-on-year
but at a slowing pace. On a yearly basis the index dropped by 1,3% in the third quarter of 2016 after dropping
by 1,7% and 1,6% in the second and first quarter respectively.
Downside risks to the growth projections are associated with high levels of non-performing loans, loss of
momentum in structural reforms with associated risks for public finances, and a return of inflation. Downside
risks may also be associated with a deterioration of the external environment for Cyprus. These would involve
slower growth in the UK with a weakening of the pound following the Brexit referendum. Political uncertainty in
Europe triggered by a British exit or by the refugee crisis could also lead to increased economic uncertainty and
undermine economic confidence.
Upside risks to the outlook relate to a possible better growth performance in the EU and stronger investment
spending as property prices are stabilising and various projects especially in tourism are implemented.
3
BANK OF CYPRUS PUBLIC COMPANY LTD
Management Report
Annual Financial Report 2016
Operating environment in Cyprus (continued)
The international credit rating agencies have upgraded the rating of the country. Fitch Ratings upgraded the
rating of the Republic of Cyprus one notch to BB- with a positive outlook in October 2016, S&P Global Rating by
one notch to BB with a positive outlook in September 2016 and by one notch to BB+ with a stable outlook in
March 2017 and Moody’s Investors Service by two notches to B1 with a stable outlook in November 2015. In
November 2016 Moody’s Investors Service improved the outlook on the Republic of Cyprus from stable to
positive.
In July 2016 the Cyprus government accessed international capital markets for the third time since the start of
the economic adjustment programme to date, issuing a seven year Eurobond of €1 billion at a yield of 3,8%.
Financial results1
The main financial highlights for 2016 are set out below:
Consolidated Income Statement
€ million
Net interest income
Net fee and commission income
Net foreign exchange gains and net gains on other financial
instruments
Insurance income net of insurance claims
Gains/(losses) from revaluation and disposal of investment properties
and on disposal of stock of properties
Other income
Total income
Staff costs
Other operating expenses
Total expenses
Profit before provisions and impairments, gains on
derecognition of loans and changes in expected cash flows,
restructuring costs and discontinued operations
Provisions for impairment of customer loans, net of gains on loans
derecognition and changes in expected cash flows
Impairments of other financial and non-financial assets
Provisions for litigation, claims and regulatory matters
Share of profit from associates and joint ventures
Profit/(loss) before tax, restructuring costs and discontinued
operations
Tax
(Profit)/loss attributable to non-controlling interests
Profit/(loss) after tax and before restructuring costs,
discontinued operations and net gain on disposal of non-core
assets
Advisory, voluntary exit plan and other restructuring costs
Loss from disposal groups held for sale/discontinued operations
Net gain on disposal of non-core assets
Profit/(loss) after tax attributable to the owners of the
Company
2016
2015
686
167
48
44
6
12
963
(224)
(173)
(397)
566
(370)
(47)
(18)
8
139
(16)
(4)
119
(114)
-
59
64
842
154
31
48
(53)
18
1.040
(234)
(174)
(408)
632
(959)
(62)
(8)
6
(391)
(9)
6
(394)
(43)
(38)
37
(438)
1 The financial results relate to the Company and together with its subsidiaries, the ‘Group’ which was listed on the Cyprus Stock Exchange (CSE) and the Athens
Exchange as at 31 December 2016. On 18 January 2017, Bank of Cyprus Holdings Public Limited Company was introduced in the Group structure as the new parent
company of the Company. On 19 January 2017, the shares of Bank of Cyprus Holdings Public Limited Company were admitted to listing and trading on the London
Stock Exchange and the CSE.
4
BANK OF CYPRUS PUBLIC COMPANY LTD
Management Report
Annual Financial Report 2016
Financial results (continued)
Net interest margin
Cost to income ratio
Key Balance Sheet figures and ratios
Gross loans (€ million)
Customer deposits (€ million)
Loans to deposits ratio (net)
90+ DPD ratio
90+ DPD provision coverage ratio
Return on average assets
Return on average equity
Capital
Common Equity Tier 1 capital ratio (CET 1) (transitional)
Total capital ratio
CET1 (€ million)
Risk weighted assets (€ million)
2016
2015
3,47%
41%
3,79%
39%
31 December
2016
31 December
2015
20.130
16.510
95%
41%
54%
0,3%
2,1%
14,5%
14,6%
2.728
18.865
22.592
14.181
121%
50%
48%
-1,7%
-12,9%
14,0%
14,1%
2.748
19.666
Balance Sheet
Shareholders’ equity totalled €3.071 million at 31 December 2016. The CET1 ratio improved to 14,5% at 31
December 2016, and increased by 50 basis points during the year compared to 14,0% at 31 December 2015.
Adjusting for deferred tax assets2, the CET1 ratio on a fully-loaded basis totalled 13,9% at 31 December 2016
(31 December 2015: 13,1%). As at 31 December 2016 the Total Capital ratio stood at 14,6%, above the
minimum required as from 1 January 2017 of 13%, and adjusted to 15,7% (pro-forma)3 after including the
Tier 2 capital note issued in January 2017.
Following the enactment of the amendments in the Cypriot Banking Law in February 2017 regarding the
gradual phase-in of the Capital Conservation Buffer (CCB) and based on the Supervisory Review and Evaluation
Process (SREP) performed by the European Central Bank (ECB) in 2016, the Group’s minimum CET1 capital
ratio as from 1 January 2017 has been reduced to 9,50% compared to 10,75% fully phased-in of CCB
(minimum CET1 capital ratio at 31 December 2016: 11,75% fully phased-in of CCB), comprising of a 4,5%
Pillar I requirement, a 3,75% Pillar II requirement and a phased-in CCB of 1,25%4. The ECB has also provided
non-public guidance for an additional Pillar II CET1 buffer.
The overall Total Capital Ratio requirement as from 1 January 2017 following the amendments in the Cypriot
Banking Law in February 2017 regarding the gradual phase-in of CCB, has been reduced to 13,00% compared
to 14,25% (fully phased-in of CCB), comprising of a Pillar I requirement of 8% (of which up to 1,5% can be in
the form of Additional Tier 1 capital and up to 2,0% in the form of Tier 2 capital), a Pillar II requirement of
3,75% (in the form of CET1), as well as a phased-in CCB of 1,25%5.
The Company has returned to the debt capital markets in January 2017 with the issue of €250 million
unsecured and subordinated Tier 2 Capital Note (the Note). The Note was priced at par with a coupon of
9,25%. The Note matures on 19 January 2027. The Company has the option to redeem the Note early on 19
January 2022, subject to applicable regulatory consents. The issuance of the Note is part of the Company’s
strategy to optimise the level and composition of its capital and liabilities, enhancing the Total Capital ratio to
15,7% (pro forma).
2 The deferred tax assets adjustments relate to deferred tax assets totalling €450 million and recognised on tax losses totalling €3,6 billion and can be set off against
future profits of the Company until 2028 at a tax rate of 12,5%.
3 Based on the preliminary group financial results as at and for the year ended 31 December 2016.
4 In accordance with the legislation in Cyprus which has been set for all credit institutions through the requirements of the Capital Requirement Directive (CRR)/CRD IV.
5 See note 4.
5
BANK OF CYPRUS PUBLIC COMPANY LTD
Management Report
Annual Financial Report 2016
Financial results (continued)
Balance Sheet (continued)
At 31 December 2016, the Company’s funding from central banks totalled €850 million, comprising ELA of €200
million and ECB funding of €650 million including an amount of €600 million through the new series of
Targeted Longer Term Refinancing Operations (TLTRO II) announced by the ECB in March 2016. Post 31
December 2016, the Company has fully repaid ELA. In March 2017 the Company has borrowed an additional
amount of €230 million through the new series of TLTRO II, to be received on 29 March 2017.
Gross loans6 totalled €20.130 million at 31 December 2016 compared to €22.592 million at 31 December 2015.
The reduction is, to a large extent, driven by the restructuring activity, including debt-for-property swaps, debt-
for-equity swaps and write offs. Gross loans in Cyprus totalled €18.269 million at 31 December 2016 and
accounted for 91% of Group gross loans.
Loans in arrears for more than 90 days (90+ DPD)7 were reduced by €3,0 billion or by 27% in 2016. The
provisioning coverage ratio of 90+ DPD8 improved to 54,4% at 31 December 2016 (2015: 48,1%). When
taking into account tangible collateral at fair value, 90+ DPD loans are fully covered.
Non-performing exposures (NPEs)9 as defined by the European Banking Authority (EBA) were reduced to
€11.034 million at 31 December 2016, accounting for 55% of gross loans, compared to 62% at 31 December
2015. The provisioning coverage ratio of NPEs stood at 41% at 31 December 2016, up from 39% at 31
December 2015.
The Group has set up the Real Estate Management Unit (REMU) in late 2015, to manage properties acquired
through debt-for-property swaps and certain other properties already held for sale by the Group, and to
execute exit strategies in order to monetise these assets.
Group customer deposits totalled €16.510 million at 31 December 2016 (compared to €14.181 million at 31
December 2015), and recorded an increase of 16% since 31 December 2015. As at 31 December 2016
customer deposits accounted for 74% of total assets (2015: 61%). The loans to deposits ratio stood at 95% at
31 December 2016 (2015: 121%).
The remaining non-core overseas exposures include:
Greek net exposures of €170 million (net on-balance sheet exposure), €113 million off-balance sheet and
lending exposures to Greek entities in the normal course of business in Cyprus totalling €82 million and
lending exposures in Cyprus with collaterals in Greece totalling €107 million.
Romania net exposures of €206 million
Serbia net exposures of €42 million
Russia net exposures of €44 million
Income Statement
Net interest income (NII) and net interest margin (NIM) for 2016 amounted to €686 million (2015: €842
million) and 3,47% (2015: 3,79%) respectively.
Non-interest income for 2016 was €277 million, including net fee and commission income of €167 million
and net insurance income of €44 million.
Total income10 for 2016 was €963 million compared to €1.040 million for 2015.
6 Gross loan are reported before the fair value adjustment on initial recognition relating to loans acquired form Laiki Bank (difference between the outstanding
contractual amount and the fair value of loan acquired) amounting to €928 million at 31 December 2016 (2015: €1.207 million).
7 Loans in arrears for more than 90 days (90+ DPD) are defined as loans past-due for more than 90 days and loans that are impaired (impaired loans) are those which
are not considered fully collectable and for which a provision for impairment has been recognised on an individual basis or for which incurred losses existed at their
initial recognition or customers in Debt Recovery.
recognition and provision for off-balance sheet exposures, over 90+ DPD.
8 Provisioning coverage ratio for 90+ DPD is calculated as the sum of accumulated provisions for impairment of customer loans, fair value adjustment on initial
9 In 2014 the European Banking Authority (EBA) published its reporting standards on forbearance and non-performing exposures (NPEs). According to the EBA
standards, a loan is considered a non-performing exposure if: (i) the debtor is assessed as unlikely to pay its credit obligations in full without the realisation of the
collateral, regardless of the existence of any past due amount or of the number of days past due, for example in case of a write off, a legal action against the
borrower, or bankruptcy, or (ii) the exposures are impaired i.e. in cases where there is a specific provision, or (iii) there are material exposures which are more than
90 days past due, or (iv) there are performing forborne exposures under probation for which additional forbearance measures are extended, or (v) there are
performing forborne exposures under probation that present more than 30 days past due within the probation period.
10 Total income includes Net Interest Income and Non-Interest Income.
6
BANK OF CYPRUS PUBLIC COMPANY LTD
Management Report
Annual Financial Report 2016
Financial results (continued)
Income Statement (continued)
Total expenses for 2016 were €397 million (2015: €408 million), and the cost to income ratio was 41%
(2015: 39%).
Profit before provisions and impairments11, advisory, voluntary exit plans, other restructuring costs and
discontinued operations for 2016 was €566 million compared to €632 million for 2015.
Provisions for impairment of customer loans net of gain on derecognition of loans and advances to
customers and changes in expected cash flows for 2016 totalled €370 million (2015: €959 million). The
elevated provisioning charge for 2015 reflects the assumption changes in the Group’s provisioning
methodology, taking into account the ongoing dialogue with the regulators within the context of the SREP
at the time. The provisioning charge for 2016 accounted for 1,7%12 of gross loans, compared to 4,3% for
2015.
Impairments of other financial and non-financial assets for 2016 totalled €47 million and primarily relate to
impairment losses of stock of properties of €36 million.
Provisions for litigation, claims and regulatory matters for 2016 totalled €18 million. The increase
compared to 2015 is primarily driven by matters relating to redress charges for the UK operations.
Profit after tax excluding advisory, voluntary exit plan cost, other restructuring costs, discontinued
operations and net profit on disposal of non-core assets for 2016 totalled €119 million (2015: loss of €394
million).
Restructuring costs13 for 2016 totalled €114 million (2015: €43 million).
Loss from disposal groups held for sale/discontinued operations for 2015 was €38 million and mainly
relates to the disposal of the majority of the Russian operations.
Net gains on disposal of non-core assets for 2016 were €59 million (2015: €37 million). Net gains on
disposal of non-core assets primarily relate to the gain on disposal of the investment in Visa Europe Limited
during 2016.
Profit after tax attributable to the owners of the Company for 2016 was €64 million (2015: loss of €438
million).
Going concern
Management has made an assessment of the Group’s ability to continue as a going concern.
The conditions that existed during 2016 and the developments up to the date of approval of these consolidated
financial statements that have been considered in management’s going concern assessment include, amongst
others, the operating environment in Cyprus and of the Group (Note 4).
Management believes that the Group is taking all necessary measures to maintain its viability and the
development of its business in the current economic environment.
changes in expected cash flows.
11 Comprising provision for impairments of customer loans and impairments of other financial and non-financial assets, net of gains/(losses) on derecognition and
12 Defined as provisions for impairment of customer loans and gains/(losses) on derecognition of loans and changes in expected cash flows over average gross loans
13 Advisory, voluntary exit plan and other restructuring costs comprise mainly: 1) fees of external advisors in relation to: (i) disposal of operations and non-core assets
(ii) customer loan restructuring activities which are not part of the effective interest rate and (iii) the listing on the London Stock Exchange, 2) litigation provisions
related to the operations of Laiki Bank acquired in 2013 and 3) the voluntary exit plan cost.
(as defined in Note 43 of the consolidated financial statements).
7
BANK OF CYPRUS PUBLIC COMPANY LTD
Management Report
Annual Financial Report 2016
Going concern (continued)
Management, taking into consideration the factors described below and the uncertainties that existed at the
reporting date, is satisfied that the Group has the resources to continue in business for the foreseeable future
and, therefore, the going concern principle is appropriate for the reasons set out below, despite the fact that,
as disclosed in Notes 4.2.3 and 45 the Company is currently not in compliance with its liquidity regulatory
requirements with respect to its operations in Cyprus and the Group is currently not in compliance with its
regulatory liquidity requirements with respect to the Liquidity Coverage Ratio (LCR), which can be considered
as a material uncertainty as to its ability to continue as a going concern.
Τhe Group’s Common Equity Tier 1 (CET1) ratio at 31 December 2016 stands at 14,5% (transitional) and
the total capital at 14,6%, higher than the minimum required ratios (Note 4.2.1).
The improving funding structure of the Group as a result of the continuing positive customer flows in
Cyprus.
The increase in Group customer deposits by €2.329 million during 2016. Customer deposits stood at
€16.510 million at 31 December 2016.
The Emergency Liquidity Assistance (ELA) funding was repaid in full on 5 January 2017. ELA stood at €200
million at 31 December 2016 compared to €3,8 billion at 31 December 2015 and €11,4 billion at its peak
level in April 2013 (Note 4.2.3).
The improved ratings of both the Company (Fitch Ratings upgrade of Long-term Issuer Default Rating from
‘CCC’ to ‘B-’ in April 2016 with stable outlook, and Moody’s Investor Service upgrade of long-term deposit
rating from Caa3 with stable outlook to Caa3 with positive outlook in June 2016 and to Caa2 with positive
outlook in December 2016) and the Republic of Cyprus (Fitch Ratings upgrade by one notch to BB- with a
positive outlook in October 2016, S&P Global Rating by one notch to BB with a positive outlook in
September 2016 and by one notch to BB+ with a stable outlook in March 2017 and Moody’s Investors
Service by two notches to B1 with a stable outlook in November 2015. In November 2016 Moody’s
Investors Service improved the outlook on the Republic of Cyprus from stable to positive).
The Company has returned to the debt capital markets in January 2017 with the issue of unsecured and
subordinated Tier 2 Capital Note of €250 million.
Strategy and priorities
The Group remains on track for implementing its strategic objectives aiming to become a stronger, safer and a
more focused institution capable of supporting the recovery of the Cypriot economy and delivering appropriate
shareholder returns in the medium term.
The key pillars of the Group’s strategy are to:
Materially reduce the level of delinquent loans
Further improve the funding structure
Maintain an appropriate capital position by internally generating capital
Focus on the core Cyprus market and the UK operations
Achieve a lean operating model
Deliver value to shareholders and other stakeholders
With the Cypriot operations accounting for 91% of both gross loans and customer deposits, the Group’s
financial performance is highly correlated to the economic and operating conditions in Cyprus and will
consequently benefit from the country’s recovery. According to the Statistical Service of the Republic of Cyprus,
real GDP increased by 2,8% year-on year in the fourth quarter of 2016 (when seasonally adjusted), bringing
the yearly growth to 2,8% (compared with 1,7% the year before), thereby achieving the highest growth rate
since 2008. Growth drivers for the fourth quarter of 2016 continued to be the tourist and international business
services sectors on the supply side, and the gradually recovering private consumption, fixed investments and
net exports on the expenditure side. This was supported by the depreciation of the Euro against the US Dollar
and the drop in oil prices. Tourist activity was strong, with arrivals up by 19,8% in the year to October and
revenue from tourism up by 12,3% in the year to November. Fiscal developments in the crisis years have been
better than expected due to both changes in the revenue and expenditure sides of the fiscal equation.
8
BANK OF CYPRUS PUBLIC COMPANY LTD
Management Report
Annual Financial Report 2016
Strategy and priorities (continued)
The outlook for the Cyprus economy over the medium term remains positive. The recovery is broadly based,
funding conditions in the banking system have improved markedly, the stock of non-performing loans is
decreasing and the unemployment rate has been declining at a significant pace. Official forecasts by the
European Commission in its Winter 2017 Economic Forecast are for real GDP growth to remain robust but to
decelerate to 2,5% in 2017 and 2,3% in 2018.
Upside risks to the outlook relate to a longer period of low oil prices, further improvement of economic
fundamentals in the euro area and implementation of projects in tourism, energy and public projects.
Downside risks to the growth projections are associated with high levels of non-performing exposures and a
potential deterioration of the external environment. This would involve a continuation of the recession in Russia
in conditions of protracted declines in oil prices; weaker than expected growth in the euro area as a result of
worsening global economic conditions; and slower growth in the UK with a weakening of the pound as a result
of uncertainty resulting from Brexit. Consequently, the direct consequences on Cyprus of Brexit, will mostly
emanate from tourist activity. The possible loss of UK tourist arrivals may be mitigated at least in part, by
increases in arrivals of tourists from other destinations as airline connectivity improves. Political uncertainty in
Europe triggered by a British exit or by the refugee crisis could also lead to increased economic uncertainty and
undermine economic confidence.
Tackling the Group’s loan portfolio quality remains the top priority for management. The Group continues to
make steady progress across all asset quality metrics and the strong momentum in the loan restructuring
activity continues. The Group has been successful in engineering restructuring solutions at an average of
approximately €1 billion a quarter since January 2015 across the spectrum of its loan portfolio. There is a shift
of focus to the recoveries and retail portfolios, with recoveries via foreclosures to unlock solutions with
problematic cases and non-cooperative borrowers, and collections via the specialised unit Retail Arrears
Management and other available tools to ensure early and continuous engagement with clients. During 2016
the recoveries portfolio was deleveraged by €0,8 billion. Overall, the Company is responsible for approximately
two-thirds of the reduction of NPEs in Cyprus during the period from 1 January 2015 to 31 October 2016,
demonstrating the effectiveness of its strategy to tackle asset quality via a dedicated RRD division.
In order to further improve its funding structure, the Group has stepped up its efforts to maintain and increase
deposits at a lower cost, leveraging increasing customer confidence towards the Group and improving
macroeconomic conditions. During the year the Group introduced new deposit products aimed at attracting
local and international depositors. The Group’s capital position and overall improvement in its financial position
enhance its funding options. On 5 January 2017, the Group has fully repaid ELA funding. During 2016 and up to
its full repayment the Company repaid €3,8 billion of ELA. With the issuance of Tier 2 Capital Note in January
2017, the Company has returned to the debt capital markets.
The Group strategically focuses and reshapes its business model to grow in core Cypriot market through
prudent new lending and developing of the UK franchise. Growth in new lending is focused on selected
industries that are more in line with the Group’s target risk profile, such as tourism, trade, professional
services, information/communication technology, energy, education and green projects. The Group is also
aiming to pursue a focused growth strategy in the UK, targeting entrepreneurs and owner-managed
businesses.
Management is also placing emphasis on diversifying its income streams by boosting fee income from
international transaction services, wealth management and insurance. The Group’s insurance companies,
constitute a leading player in the insurance business in Cyprus, with such businesses providing a recurring
income, further diversifying the Group’s income streams. The insurance income net of insurance claims for
2016 amounted to €44 million compared to €48 million for 2015.
The Company continues to have a leading position in the Cypriot banking system, with market shares of 31,1%
of deposits and 39,4% of loans as at 31 December 2016. The Group’s strengthened capital position and its
improving liquidity, support its efforts to provide credit to promising sectors of the domestic economy through
its core operations, to support entrepreneurs in the UK through its UK subsidiary company, and to deliver value
to shareholders and other stakeholders. During 2016, the Group has provided approximately €1,5 billion of new
loans mainly to promising sectors of the domestic economy through its core operations and to entrepreneurs in
the UK through its UK subsidiary.
9
BANK OF CYPRUS PUBLIC COMPANY LTD
Management Report
Annual Financial Report 2016
Strategy and priorities (continued)
On 19 January 2017, Bank of Cyprus Holdings Public Limited Company, the Group’s new holding company as of
18 January 2017, the effective date of the Scheme of Arrangement, announced that its total issued share
capital of 446.199.933 ordinary shares of nominal value €0,10 each was admitted to the standard listing
segment of the Official List of the United Kingdom’s Financial Conduct Authority, to trading on the Main Market
for listed securities of the London Stock Exchange (’LSE’), to listing on the CSE and to trading on the Main
Market of the CSE. Bank of Cyprus Holdings Public Limited Company works towards a premium listing on the
LSE, and intends to apply for a step up to the premium segment of the LSE at a future date, with the intention
of becoming eligible for inclusion in the FTSE UK Index series.
Capital base
Shareholders’ equity totalled €3.071 million at 31 December 2016. The CET1 ratio (transitional basis) totalled
14,5% at 31 December 2016 (2015: 14,0%). Adjusting for Deferred Tax Assets, the CET1 ratio on a fully-
loaded basis totalled 13,9% at 31 December 2016 (2015: 13,1%). The Total Capital ratio, at 31 December
2016, stood at 14,6%.
Additional information on regulatory capital is disclosed in the Additional Risk and Capital Management
Disclosures which form part of this Annual Report and in the Pillar 3 Disclosures Report, www.bankofcyprus.com
(Investor Relations).
Share capital
There were no changes on the issued share capital of the Company during 2016. Information about the
changes on issued share capital after 31 December 2016 is disclosed in Note 53 of the consolidated financial
statements.
Share-based payments - share options
The Long Term Incentive Plan approved by the shareholders at the annual general meeting on 24 November
2015 as described in Note 34 of the consolidated financial statements, was replaced on 18 January 2017 by the
Share Option Plan implemented by Bank of Cyprus Holdings Public Limited Company following the introduction
of Bank of Cyprus Holdings Public Limited Company as the new holding company of the Group. The Share
Option plan is identical to the Long Term Incentive Plan except that the number of shares in Bank of Cyprus
Holdings Public Limited Company to be issued pursuant to an exercise of options under the Share Option Plan
should not exceed 8.922.945 ordinary shares of a nominal value of €0,10 each and the exercise price was set
at €5,00 per share. The exercise date was also extended from 3 years to between 4-10 years after the grant
date.
Treasury shares of the Company
Shares of the Company held by entities controlled by the Group are deducted from equity on the purchase,
sale, issue or cancellation of such shares. No gain or loss is recognised in the consolidated income statement.
During 2016 all treasury shares other than those held by the life insurance subsidiary of the Group have been
disposed of.
The life insurance subsidiary, as at 31 December 2016, held a total of 2.889 thousand (2015: 2.889 thousand)
shares of the Company, as part of its financial assets which are invested for the benefit of insurance
policyholders (Note 24). The cost of acquisition of these shares was €25.333 thousand (2015: €25.333
thousand).
Change of control
There are no significant agreements to which the Company is a party and which take effect following a change
of control of the Company, but the Company is party to a number of agreements that may allow the
counterparties to alter or terminate the agreements following a change of control. Other than the matters
referred to below, these are not deemed to be significant in terms of their potential effect on the Group as a
whole.
The Group also has agreements which provide for termination if, upon a change of control of the Company, the
Company’s creditworthiness is materially worsened.
10
BANK OF CYPRUS PUBLIC COMPANY LTD
Management Report
Annual Financial Report 2016
Other information
During 2016 and 2015 there were no restrictions on the transfer of the Company’s ordinary shares other than
the provisions of the Banking Law of Cyprus which requires Central Bank of Cyprus (CBC) approval prior to
acquiring shares of the Company in excess of certain thresholds and the requirements of the Directive on
Insider Dealing and Market Manipulation, which relates to transactions with related parties.
Shares of the Company held by the life insurance subsidiary of the Group as part of its financial assets which
are invested for the benefit of insurance policyholders carry no voting rights, pursuant to the insurance law.
The Company does not have any shares in issue which carry special control rights.
Shareholders holding more than 5% of the share capital of the Company
As at 31 December 2016 the following shareholders held more than 5% of the share capital at the Company:
Cyprus Popular Bank Public Co Ltd
Lamesa Holdings S.A. (affiliate of Renova Group)
TD Asset Management
European Bank for Reconstruction and Development
31 December
2016
9,62%
9,27%
5,24%
5,02%
As at 27 March 2017 all the shares of the Company are held by Bank of Cyprus Holdings Public Limited
Company (Note 53.1).
Dividends
The Company is currently under a regulatory dividend distribution prohibition and therefore no dividend was
declared or paid during years 2016 and 2015.
Events after the reporting date
New holding company and listing on the London Stock Exchange
Bank of Cyprus Holdings Public Limited Company was incorporated in the Republic of Ireland on 11 July 2016
for the purposes of the Group’s listing on the London Stock Exchange (LSE). The Republic of Ireland was
considered to be the most suitable jurisdiction as it is a FTSE eligible Eurozone country, has a common law
legal system similar to that of Cyprus and is a commonly adopted jurisdiction for companies wishing to apply
for listing on the LSE. The Company’s headquarters, management and operations remain in Cyprus. Bank of
Cyprus Holdings Public Limited Company is tax resident in Cyprus.
The Extraordinary General Meeting (EGM) of the shareholders of the Company held on 13 December 2016
approved the scheme of arrangement between the Company, Bank of Cyprus Holdings Public Limited Company
and the shareholders of the Company. The scheme of arrangement introduces Bank of Cyprus Holdings Public
Limited Company as the new holding company of the Group. Additionally the EGM authorised the directors of
the Company to take all actions necessary or appropriate to carry the scheme of arrangement into effect.
The EGM also approved:
(i)
the reduction in the issued share capital of the Company from €892.294.453,30 divided into
8.922.944.533 ordinary shares of a nominal value of €0,10 each to nil by cancelling all the shares
comprising the issued share capital of the Company (the Existing Shares) resulting in the creation of a
capital reduction reserve in the accounts of the Company, equal to the aggregate nominal value of the
Existing Shares so cancelled, and which shall be retained as a non-distributable capital reserve in
accordance with the provisions of subsection (e) of section 64 of the Companies Law, Cap. 113 (the
‘Reduction of Capital’);
(ii) the increase in the authorised share capital of the Company to €4.767.759.272,00 divided into
47.677.592.720 ordinary shares with a nominal value of €0,10 each through the creation of 8.922.944.533
new but unissued ordinary shares with a nominal value of €0,10 each, each of which shall have the same
rights and shall rank pari passu with the existing ordinary shares of the Company;
11
BANK OF CYPRUS PUBLIC COMPANY LTD
Management Report
Annual Financial Report 2016
Events after the reporting date (continued)
New holding company and listing on the London Stock Exchange (continued)
(iii) to apply the reserve arising in the books of account of the Company as a result of the cancellation of the
Existing Shares in paying up in full at par 8.922.944.533 new ordinary shares with a nominal value of
€0,10 each in the capital of the Company, which shall be issued and allotted, credited as fully paid, to Bank
of Cyprus Holdings Public Limited Company or its nominee(s) in accordance with the Scheme; and
(iv) the authorization of the directors of the Company to give effect to this special resolution.
The scheme of arrangement was sanctioned by the District Court of Nicosia on 21 December 2016 and the
Existing Shares of the Company were suspended from trading on the CSE and Athens Exchange (ATHEX) with
effect from and including 10 January 2017.
Following the submission of the Court Order to the Registrar of Companies and the Registration, by the latter,
of the reduction of capital, the scheme of arrangement became effective on 18 January 2017. As a result, all of
the shares comprising the issued share capital of the Company were cancelled and the Company issued and
allotted 8.922.944.533 new ordinary shares of nominal value €0,10 each, credited as fully paid to Bank of
Cyprus Holdings Public Limited Company; and Bank of Cyprus Holdings Public Limited Company issued and
allotted New Shares and procured the issue of Depositary Interests representing New Shares, in accordance
with the terms of the scheme of arrangement. Each one New Share or one Depository Interest represents one
New Share for each individual holding of 20 Existing Shares.
On 19 January 2017 the total issued share capital of 446.199.933 ordinary shares of nominal value €0,10 each
of Bank of Cyprus Holdings Public Limited Company was admitted to the standard listing segment of the official
list of the United Kingdom’s Financial Conduct Authority, to trading on the Main Market for listed securities of
the LSE, under the ticker symbol “BOCH”, to listing on the CSE and to trading on the Main Market of the CSE
under the ticker symbol “BOCH/ΤΡΚΗ”, with ISIN IE00BD5B1Y92.
Share - based payments – share options
The Long Term Incentive Plan approved by the shareholders at the annual general meeting on 24 November
2015 as described in Note 34 of the consolidated financial statements, was replaced on 18 January 2017 by the
Share Option Plan implemented by Bank of Cyprus Holdings Public Limited Company following the introduction
of Bank of Cyprus Holdings Public Limited Company as the new holding company of the Group. The Share
Option plan is identical to the Long Term Incentive Plan except that the number of shares in Bank of Cyprus
Holdings Public Limited Company to be issued pursuant to an exercise of options under the Share Option Plan
should not exceed 8.922.945 ordinary shares of a nominal value of €0,10 each and the exercise price was set
at €5,00 per share. The exercise date was also extended from 3 years to between 4-10 years after the grant
date.
Full repayment of ELA
ELA was fully repaid on 5 January 2017. All ELA collateralised loans have subsequently been released, but ELA
pledged properties remain pledged as of 27 March 2017.
Issue of Tier 2 Capital
In January 2017, the Company issued €250 million unsecured and subordinated Tier 2 Capital Note (Note)
under the Company’s EMTN Programme. The Note was priced at par with a coupon of 9,25%. The Note
matures on 19 January 2027. The Company has the option to redeem the Note early on 19 January 2022,
subject to applicable regulatory consents.
Funding through the new series of TLTRO II
In March 2017 the Company has borrowed an additional amount of €230 million through the new series of
TLTRO II, to be received on 29 March 2017.
12
BANK OF CYPRUS PUBLIC COMPANY LTD
Management Report
Annual Financial Report 2016
Risk management
Like other financial organisations, the Group is exposed to risks, the most significant of which are credit risk,
liquidity risk, market risk (arising from adverse movements in exchange rates, interest rates and security
prices) and insurance risk. The Group monitors and manages these risks through various control mechanisms.
Detailed information relating to Group risk management is set out in Notes 43 to 46 of the consolidated
financial statements and in the Additional Risk and Capital Management Disclosures which form part of this
2016 Annual Financial Report.
Additionally, the Group is exposed to the risk on changes in the fair value of property which is held either for
own use or as stock of property or as investment property. Stock of property is generally acquired in debt
satisfaction and is intended to be disposed of in line with the Group’s strategy. Further information is disclosed
in Notes 22, 25 and 27.
In addition, details of the significant judgements, estimates and assumptions which may have a material impact
on the Group’s financial performance and position are set out in Note 5 of the consolidated financial
statements.
The Pillar 3 disclosures required by the Capital Requirements Regulation (EU) No 575/2013 are published on
the Group’s website www.bankofcyprus.com (Investor Relations).
Preparation of periodic reporting
The Board is responsible for ensuring that the management maintains an appropriate system of internal
controls which provides assurance of effective operations, internal financial controls and compliance with rules
and regulations. It has the overall responsibility for the Group and approves and oversees the implementation
of the Group’s strategic objectives, risk strategy and internal governance.
The Group has appropriate internal control mechanisms, including sound administrative and accounting
procedures, Information Technology (‘IT’) systems and controls. The governance framework is subject to
review at least once a year.
The Group has in place an effective financial statement closing process by which transactions and events
reflected in the Group’s accounting records are processed to produce the financial statements, related
disclosures and other financial reports. Internal control system also ensures that the integrity of the accounting
and financial reporting systems, including financial and operational controls and compliance with legal and
supervisory requirements and relevant standards, is adequate.
Policies and procedures have been designed in accordance with the nature, scale and complexity of the Group’s
operations in order to provide reasonable but not absolute assurance against material misstatements, errors,
losses, fraud or breaches of laws and regulations.
The Board, through the Audit Committee, conducts reviews on a frequent basis, regarding the effectiveness of
the Group’s internal control systems, as well as in relation to the procedures used to ensure the accuracy,
completeness and validity of the information provided to investors. The reviews cover all systems of internal
controls, including financial, operational and compliance controls, as well as risk management systems. The role
of the Audit Committee is to ensure the financial integrity and accuracy of the Company’s financial reporting.
Corporate Governance Statement
In April 2014 the CSE issued the 4th Edition (Revised) of the Corporate Governance Code (the CSE Code).
Listed companies have an obligation to include in their Annual Financial Report, a Report by the Board of
Directors on Corporate Governance. In the first part of the Report, companies should report whether they
comply with the CSE Code and the extent to which they implement its principles. In the second part of the
Report, companies should confirm that they have complied with the CSE Code provisions and in the event that
they have not, they should give adequate explanation.
The Company has also chosen to comply with the UK Corporate Governance Code 2014 published by the
Financial Reporting Council in the UK (the UK Code) following the decision to proceed with a Listing on the
London Stock Exchange.
13
BANK OF CYPRUS PUBLIC COMPANY LTD
Management Report
Annual Financial Report 2016
Corporate Governance Statement (continued)
Regarding the first part of the Report, as a company listed on the CSE, the Company has adopted the CSE Code
and implements its principles.
Regarding the second part of the Report, the Company complies with the provisions of the CSE Code.
Throughout the Corporate Governance Report for 2016 a narrative statement is provided on how the principles
of the CSE Code have been applied.
The narrative also covers principles of the UK Code and how these have been applied throughout the year.
The rules governing the composition of the Board of Directors and the appointment and replacement of its
members are set out in section 1 of the Corporate Governance Report for 2016. The powers of the executive
and supervisory bodies of the Group are also set out in the Corporate Governance Report.
Any amendment or addition to the Articles of Association of the Company is only valid if approved by a special
resolution at a shareholders’ meeting.
The Board of Directors may issue share capital if there is sufficient authorised share capital and as long as the
new shares to be issued are offered first to existing shareholders, pro-rata to their percentage shareholding. In
the event that a share capital increase requires an increase in the authorised share capital or if the new shares
are not offered to existing shareholders, the approval of the shareholders in a general meeting must be
obtained. Under Cyprus Companies Law, the Board of Directors also has the right to propose to the general
meeting of shareholders a share buyback scheme.
Details of restrictions in voting rights and special control rights in relation to the shares of the Company are set
out in the section on ‘Other information’ above.
The Corporate Governance Report for 2016 is included within this Annual Financial Report.
Service termination agreements
The service contract of one of the executive directors in office as at 31 December 2016 includes a clause for
termination, by service of four months’ notice to that effect upon the executive director, without cause but at
the Company’s sole discretion. In such a case, the Company shall have the obligation to pay the executive
director in lieu of notice for immediate termination. The terms of employment of the other executive director
are mainly based on the provisions of the collective agreement in place, which provides for notice or
compensation based on years of service.
Board of Directors
The members of the Board of Directors of the Company as at the date of this Report are listed on page 1. All
Directors were members of the Board throughout the year and up to the date of this Report except from Dr.
Michael Heger who was appointed as a member of the Board of Directors following ECB approval on 10 June
2016 and Ms Lyn Grobler who was appointed as Director following ECB approval on 7 February 2017. Mr Wilbur
L. Ross Jr. submitted his resignation from his position as member and Vice Chairman of the Board of Directors
on 1 March 2017. The Board of Directors have accepted Mr Ross’ resignation and expressed their warmest
thanks for his valuable contribution to the Group which he has served since 2014. On the same date, the Board
of Directors decided to appoint Mr James B. Lockhart III as a member of the Board of Directors. His
appointment is subject to approval by the ECB.
The Articles of Association of the Company provides for one third of the Directors to retire and offer themselves
for re-election. The Articles of Association of the Company will be amended prior to the next Annual General
Meeting so that henceforth all Directors will retire every year and offer themselves for re-election if they wish.
The remuneration of the Board of Directors is disclosed in Note 48 of the consolidated financial statements.
14
BANK OF CYPRUS PUBLIC COMPANY LTD
Management Report
Annual Financial Report 2016
Board of Directors (continued)
The interest in the share capital of the Company held by each member of the Board of Directors at 31
December 2016 is presented in the table below:
31 December 2016
Non-executives
Prof. Dr. Josef Ackermann
Wilbur L. Ross Jr.
Maksim Goldman
Arne Berggren
Dr. Michael Heger
Marios Kalochoritis
Michalis Spanos
Ioannis Zographakis
Executives
John Patrick Hourican
Dr. Christodoulos Patsalides
%
0,03
1,63
-
0,01
-
-
0,01
-
-
-
1,68
As from 18 January 2017, the date that the Scheme of Arrangement became effective as disclosed in Note 53.1
of the consolidated financial statements. As at 27 March 2017, none of the members of the Board of Directors
held any interest in the share capital of the Company.
Prof. Dr. Josef Ackermann
Chairman
27 March 2017
15
Consolidated Financial Statements
16
BANK OF CYPRUS GROUP
Consolidated Financial Statements - Contents
For the year ended 31 December 2016
Annual Financial Report 2016
6. Segmental analysis
Interest income
7.
Interest expense
8.
Fee and commission income and expense
9.
10. Net foreign exchange gains
11. Net gains on financial instrument transactions
12. Insurance income net of claims and commissions
13. Other income
14. Staff costs
15. Other operating expenses
16. Impairment of financial and non-financial
instruments and gain on derecognition of loans
and advances to customers and changes in
expected cash flows
17. Income tax
18. Earnings per share
19. Cash, balances with central banks and loans and
Page
55
63
63
63
64
64
65
66
67
73
74
75
79
advances to banks
80
80
20. Investments
86
21. Derivative financial instruments
22. Fair value measurement
88
23. Loans and advances to customers 100
24. Life insurance business assets attributable to
policyholders
100
102
25. Property and equipment
104
26. Intangible assets
106
27. Stock of property
28. Prepayments, accrued income and other assets
107
29. Non-current assets and disposal group held for sale 107
108
30. Funding from central banks
109
31. Customer deposits
110
32. Insurance liabilities
111
33. Accruals, deferred income and other liabilities
112
34. Share capital
114
35. Dividends
114
36. Accumulated losses
114
37. Fiduciary transactions
114
38. Contingent liabilities and commitments
121
39. Net cash flow from operating activities
122
40. Cash and cash equivalents
41. Operating leases – The Group as lessee
123
42. Analysis of assets and liabilities
by expected maturity
43. Risk management – Credit risk
44. Risk management – Market risk
45. Risk management – Liquidity risk and funding
46. Risk management – Insurance risk
47. Capital management
48. Related party transactions
49. Group companies
50. Acquisitions and disposals
51. Investments in associates and joint ventures
52. Country by country reporting
53. Events after the reporting date 183
124
125
153
158
168
169
170
173
176
180
182
Contents
Page
Consolidated Income Statement
Consolidated Statement
of Comprehensive Income
Consolidated Balance Sheet
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
Notes to the Consolidated Financial Statements
1. Corporate information
2. Summary of significant accounting policies
2.1 Basis of preparation
2.2 Changes in accounting policies
and disclosures
2.3 Standards and Interpretations
18
19
20
21
23
24
24
24
24
that are issued but not yet effective
27
30
2.4 Basis of consolidation
2.5 Business combinations
31
2.6 Investments in associates and joint ventures 31
32
2.7 Foreign currency translation
32
2.8 Segmental reporting
32
2.9 Turnover
33
2.10 Revenue recognition
33
2.11 Retirement benefits
34
2.12 Tax
35
2.13 Financial instruments
2.14 Derecognition of financial assets and
financial liabilities
2.15 Impairment of financial assets
2.16 Hedge accounting
2.17 Offsetting financial instruments
2.18 Cash and cash equivalents
2.19 Insurance business
2.20 Repurchase and reverse repurchase
agreements
2.21 Finance leases – The Group as lessor
2.22 Operating leases
2.23 Property and equipment
2.24 Investment properties
2.25 Stock of property
2.26 Non-current assets held for sale and
37
38
39
40
40
41
42
42
42
42
43
43
discontinued operations
2.27 Intangible assets
2.28 Share capital
2.29 Treasury shares
2.30 Provisions
2.31 Financial guarantees
2.32 Comparative information
44
44
45
45
45
45
45
46
3. Going concern
4. Operating environment
46
5. Significant judgements, estimates and assumptions 49
17
BANK OF CYPRUS GROUP
Consolidated Income Statement
for the year ended 31 December 2016
Annual Financial Report 2016
Continuing operations
Turnover
Interest income
Interest expense
Net interest income
Fee and commission income
Fee and commission expense
Net foreign exchange gains
Net gains on financial instrument transactions
Insurance income net of claims and commissions
Gains/(losses) from revaluation and disposal of investment properties
Gains on disposal of stock of property
Other income
Staff costs
Other operating expenses
Gain on derecognition of loans and advances to customers and changes
in expected cash flows
Provisions for impairment of loans and advances to customers and other
customer credit losses
Impairment of other financial instruments
Impairment of non-financial instruments
Profit/(loss) before share of profit from associates and joint
ventures
Share of profit from associates and joint ventures
Profit/(loss) before tax from continuing operations
Income tax
Profit/(loss) after tax from continuing operations
Discontinued operations
Loss after tax from discontinued operations
Profit/(loss) for the year
Attributable to:
Owners of the Company-continuing operations
Owners of the Company-discontinued operations
Total profit/(loss) attributable to the owners of the Company
Non-controlling interests-continuing operations
Non-controlling interests-discontinued operations
Total profit/(loss) attributable to non-controlling interests
Profit/(loss) for the year
Basic and diluted earnings/(losses) per share (cent)
attributable to the owners of the Company-continuing
operations
Basic and diluted earnings/(losses) per share (cent)
attributable to the owners of the Company
Notes
2.9
7
8
9
9
10
11
12
22
13
14
15
16
16
16
16
51
17
6
18
18
2016
€000
2015
€000
1.234.098
886.582
(200.400)
686.182
176.865
(10.207)
43.471
63.373
44.432
4.974
1.361
14.905
1.025.356
(287.172)
(242.955)
495.229
1.425.989
1.122.105
(279.665)
842.440
162.557
(9.100)
38.367
47.129
47.905
(53.080)
882
16.725
1.093.825
(233.631)
(225.038)
635.156
63.315
305.089
(433.609)
(1.264.554)
(11.293)
(36.220)
(43.503)
(18.103)
77.422
(385.915)
8.194
85.616
(18.385)
67.231
5.923
(379.992)
(9.203)
(389.195)
-
67.231
(65.107)
(454.302)
63.656
-
63.656
3.575
-
3.575
67.231
0,7
0,7
(382.513)
(55.839)
(438.352)
(6.682)
(9.268)
(15.950)
(454.302)
(4,3)
(4,9)
18
BANK OF CYPRUS GROUP
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2016
Annual Financial Report 2016
Profit/(loss) for the year
67.231
(454.302)
Notes
2016
€000
2015
€000
Other comprehensive income (OCI)
OCI to be reclassified in the consolidated income
statement in subsequent periods
Foreign currency translation reserve
(Loss)/profit on translation of net investments in foreign
branches and subsidiaries
Profit/(loss) on hedging of net investments in foreign
branches and subsidiaries
Transfer to the consolidated income statement on
dissolution/disposal of foreign operations
Available-for-sale investments
Net gains from fair value changes before tax
Share of net gains/(losses) from fair value changes of
associates
Transfer to the consolidated income statement on
impairment
Transfer to the consolidated income statement on sale
OCI not to be reclassified in the consolidated
income statement in subsequent periods
Property revaluation
Fair value loss before tax
Share of fair value gain of associates
Tax
Actuarial (losses)/gains on the defined benefit
plans
Remeasurement (losses)/gains on defined benefit plans
Other comprehensive (loss)/income after tax
17
14
(43.763)
19.597
21
53.408
(22.860)
(3.958)
5.687
842
1.677
839
(47.960)
(44.602)
(38.915)
-
-
219
219
(14.255)
(14.036)
(52.951)
21.020
17.757
52.056
(2.060)
1.515
(3.016)
48.495
66.252
(4.795)
4
3.923
(868)
2.328
1.460
67.712
Total comprehensive income/(loss) for the year
14.280
(386.590)
Attributable to:
Owners of the Company
Non-controlling interests
Total comprehensive income/(loss) for the year
15.321
(1.041)
(378.679)
(7.911)
14.280
(386.590)
19
BANK OF CYPRUS GROUP
Consolidated Balance Sheet
as at 31 December 2016
Annual Financial Report 2016
Assets
Notes
Cash and balances with central banks
Loans and advances to banks
Derivative financial assets
Investments
Investments pledged as collateral
Loans and advances to customers
Life insurance business assets attributable to policyholders
Prepayments, accrued income and other assets
Stock of property
Investment properties
Property and equipment
Intangible assets
Investments in associates and joint ventures
Deferred tax assets
Non-current assets and disposal group held for sale
Total assets
Liabilities
Deposits by banks
Funding from central banks
Repurchase agreements
Derivative financial liabilities
Customer deposits
Insurance liabilities
Accruals, deferred income and other liabilities
Debt securities in issue
Deferred tax liabilities
Non-current liabilities and disposal group held for sale
Total liabilities
Equity
Share capital
Share premium
Capital reduction reserve
Revaluation and other reserves
Accumulated losses
Equity attributable to the owners of the Company
Non-controlling interests
Total equity
19
19
21
20
20
23
24
28
27
22
25
26
51
17
29
30
21
31
32
33
17
29
34
34
34
36
2016
€000
1.506.396
1.087.837
20.835
373.879
299.765
15.649.401
499.533
269.911
1.427.272
38.059
280.893
146.963
109.339
450.441
11.411
22.171.935
434.786
850.014
257.367
48.625
16.509.741
583.997
335.925
-
45.375
-
19.065.830
892.294
552.618
1.952.486
218.678
(544.930)
3.071.146
34.959
3.106.105
2015
€000
1.422.602
1.314.380
14.023
588.255
421.032
17.191.632
475.403
281.780
515.858
34.628
264.333
133.788
107.753
456.531
48.503
23.270.501
242.137
4.452.850
368.151
54.399
14.180.681
566.925
282.831
712
40.807
3.677
20.193.170
892.294
552.618
1.952.486
258.709
(601.152)
3.054.955
22.376
3.077.331
Total liabilities and equity
22.171.935
23.270.501
Prof. Dr. J. Ackermann Chairman
Mr. J. P. Hourican Chief Executive Officer
Mr. I. Zographakis Director
Mrs. E. Livadiotou Finance Director
20
BANK OF CYPRUS GROUP
Consolidated Statement of Changes in Equity
for the year ended 31 December 2016
Annual Financial Report 2016
Attributable to the owners of the Company
Share
capital
(Note 34)
Share
premium
(Note 34)
Capital
reduction
reserve
(Note 34)
Treasury
shares
(Note 34)
Accumulated
losses
(Note 36)
Property
revaluation
reserve
Revaluation
reserve of
available-for-
sale
investments
Other
reserves
Life insurance
in-force
business
reserve
Foreign
currency
translation
reserve
Reserve of
disposal
group
and assets
held for sale
(Note 29)
Non-
controlling
interests
Total
Total equity
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
1 January 2016
892.294
552.618
1.952.486
(41.301)
(601.152)
99.218
47.125
6.059
99.050
30.939
17.619
3.054.955
22.376
3.077.331
63.656
-
-
(14.255)
219
(39.986)
49.401
219
(39.986)
Profit for the year
Other comprehensive
(loss)/income after tax
for the year
Total comprehensive
income/(loss) for the
year
Increase in value of in-
force life insurance
business
Tax on increase in
value of in-force life
insurance business
Transfer of realised
profits on disposal of
properties
Disposal of subsidiary
(Note 50.2.1)
Acquisition of subsidiary
(Note 50.1.1)
Disposals of treasury
shares
Change in presentation
of life insurance
subsidiary’s treasury
shares
Increase in
shareholding of
subsidiary
Dividends paid to non-
controlling interests
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(4.680)
479
-
-
8.501
(8.501)
17.619
-
-
-
-
-
-
-
41.301
(40.560)
(25.333)
25.333
-
-
129
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4.680
(479)
-
-
-
-
-
-
-
-
5.687
5.687
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(17.619)
-
-
-
-
-
63.656
3.575
67.231
(48.335)
(4.616)
(52.951)
15.321
(1.041)
14.280
-
-
-
-
-
741
-
-
-
-
-
-
-
-
-
18.753
18.753
-
-
741
-
-
129
(129)
-
(5.000)
(5.000)
31 December 2016
892.294
552.618
1.952.486
(25.333)
(544.930)
90.936
7.139
6.059
103.251
36.626
- 3.071.146
34.959
3.106.105
21
BANK OF CYPRUS GROUP
Consolidated Statement of Changes in Equity
for the year ended 31 December 2016
Annual Financial Report 2016
Share
capital
(Note 34)
Share
premium
(Note 34)
Capital
reduction
reserve
(Note 34)
Shares
subject to
interim orders
Treasury
shares
(Note 34)
Accumulated
losses
(Note 36)
Property
revaluation
reserve
Revaluation
reserve of
available-for-
sale
investments
Other
reserves
Life
insurance
in-force
business
reserve
Foreign
currency
translation
reserve
Reserve of
disposal groups
and assets
held for sale
(Note 29)
Non-
controlling
interests
Total
equity
Total
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
Attributable to the owners of the Company
1 January 2015
892.238
552.539
1.952.486
441
(88.051)
(79.021)
98.211
2.226
6.059
97.698
22.929
7.737
3.465.492
15.555
3.481.047
(438.352)
-
-
2.328
(906)
44.899
(436.024)
(906)
44.899
-
-
(438.352)
(15.950)
(454.302)
(15.307)
28.659
59.673
8.039
67.712
(15.307)
28.659
(378.679)
(7.911)
(386.590)
Loss for the year
Other comprehensive
income/(loss) after tax for
the year
Total comprehensive
(loss)/income for the year
-
-
-
-
-
-
Issue of shares
56
79
Acquisition of non-
controlling interest
Disposal of subsidiaries
(Note 50.4.1)
Increase in shareholding of
subsidiary (Note 49)
Debt capitalisation for
subsidiary non-controlling
interests
Dividend paid to non-
controlling interests
Transfer of realised losses
on disposal of property
Increase in value of in-
force life insurance
business
Tax on increase in value of
in-force life insurance
business
Disposals of treasury
shares
Reclassification from assets
held-for-sale
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
31 December 2015
892.294
552.618
1.952.486
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(68)
6.805
(37.094)
(9.293)
-
-
-
-
-
-
-
(1.565)
1.641
(1.499)
147
-
-
-
(441)
46.750
(43.540)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1.499
(147)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
11.693
-
-
-
-
-
-
-
-
-
(76)
-
-
-
-
-
135
(68)
-
68
135
-
(6.805)
-
(18.112)
(18.112)
(25.401)
25.401
(9.293)
9.293
-
-
-
-
-
-
2.769
(1.918)
(1.918)
-
-
-
-
-
-
-
-
2.769
-
-
-
272
11.624
(11.896)
-
(41.301)
(601.152)
99.218
47.125
6.059
99.050
30.939
17.619
3.054.955
22.376
3.077.331
22
BANK OF CYPRUS GROUP
Consolidated Statement of Cash Flows
for the year ended 31 December 2016
Annual Financial Report 2016
Annual Financial Report 2015
Net cash flow from operating activities
39
3.162.625
2.359.442
Cash flows from investing activities
Purchases of debt securities and equity securities
(213.032)
(32.670)
Notes
2016
€000
2015
€000
Proceeds on disposal/redemption of investments:
- debt securities
- equity securities
Interest received from debt securities
Dividend income from equity securities
Dividend income from associates
Proceeds on disposal of subsidiaries and operations
Proceeds on disposal of joint ventures
466.640
1.551.748
50.143
28.084
343
4.939
26.500
-
4.446
14.937
900
2.641
3.396
89.011
(8.709)
343
Purchases of property and equipment
25
(12.096)
Proceeds on disposals of property and equipment and intangible assets
210
Purchases of intangible assets
26
(16.363)
(15.045)
Proceeds on disposals of investment properties and investment properties
held for sale
Net cash flow from investing activities
Cash flows from financing activities
Proceeds from the issue of shares
14.076
30.996
349.444
1.641.994
-
135
Net repayment of funding from central banks
(3.602.836)
(3.830.923)
Redemption of debt securities in issue
Interest on debt securities in issue
Interest on funding from central banks
Proceeds from disposal of treasury shares
Dividend paid by subsidiaries to non-controlling interests
(712)
(1.733)
-
(25)
(29.656)
(78.187)
741
2.769
(5.000)
(1.918)
Net cash flow used in financing activities
(3.637.463)
(3.909.882)
Net (decrease)/increase in cash and cash equivalents for the year
(125.394)
91.554
Cash and cash equivalents
1 January
Foreign exchange adjustments
Net (decrease)/increase in cash and cash equivalents for the year
2.347.408
2.238.601
9.014
(125.394)
17.253
91.554
31 December
40
2.231.028
2.347.408
Details on the non-cash transactions are presented in Note 39.
23
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
1.
Corporate information
Bank of Cyprus Public Company Ltd (the Company) was the holding company of the Bank of Cyprus Group (the
Group) during 2016 and as at the balance sheet date. The principal activities of the Company and its subsidiary
companies during the year continued to be the provision of banking, financial, insurance services and
management and disposal of property generally acquired in debt satisfaction.
The Company is a limited liability company incorporated in 1930 under the Cyprus Companies Law. As at the
balance sheet date the Company had a primary listing on the Cyprus Stock Exchange (CSE) and a secondary
listing on the Athens Exchange (ATHEX). Its shares were suspended from trading on the CSE and ATHEX with
effect from and including 10 January 2017 and were subsequently cancelled pursuant to a Scheme of
Arrangement that became effective on 18 January 2017. On the same date Bank of Cyprus Holdings Public
Limited Company became the sole shareholder of the Company, and on 19 January 2017 Bank of Cyprus
Holdings Public Limited Company was admitted to listing and trading on the London Stock Exchange (LSE) and
the CSE. Further information is disclosed in Note 53.1. The Company remains a public company for the
purposes of the Cyprus Income Tax Laws.
The consolidated financial statements are available at the Bank of Cyprus Public Company Ltd Registered Office
(51 Stassinos Street, Ayia Paraskevi, Strovolos, P.O. Box 24884, 1398 Nicosia, Cyprus) and on the Group’s
website www.bankofcyprus.com (Investor Relations).
Consolidated financial statements
The consolidated financial statements of Bank of Cyprus Public Company Ltd for the year ended 31 December
2016 were authorised for issue by a resolution of the Board of Directors on 27 March 2017.
2.
Summary of significant accounting policies
2.1
Basis of preparation
The consolidated financial statements have been prepared on a historical cost basis, except for properties held
for own use and investment properties, available-for-sale investments, derivative financial instruments and
financial assets at fair value through profit or loss, that have been measured at fair value, non-current assets
held for sale measured at fair value less costs to sell and stock of property measured at net realisable value
where this is lower than cost. The carrying values of recognised assets and liabilities that are hedged items in
fair value hedges, and otherwise carried at cost, are adjusted to record changes in fair value attributable to the
risks that are being hedged.
Presentation of consolidated financial statements
The consolidated financial statements are presented in Euro (€) and all amounts are rounded to the nearest
thousand, except where otherwise indicated. A dot is used to separate thousands and a comma is used to
separate decimals.
The Group presents its balance sheet broadly in order of liquidity. An analysis regarding expected recovery or
settlement of financial assets and liabilities within twelve months after the balance sheet date and more than
twelve months after the balance sheet date is presented in Note 42.
Statement of compliance
The consolidated financial statements have been prepared in accordance with the International Financial
Reporting Standards (IFRSs) as adopted by the EU and the requirements of the Cyprus Companies Law, Cap.
113.
2.2
Changes in accounting policies and disclosures
The accounting policies adopted are consistent with those of the previous financial year, except for the adoption
of new and amended standards and interpretations as explained in Note 2.2.1 below.
24
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
2.
2.2
Summary of significant accounting policies (continued)
Changes in accounting policies and disclosures (continued)
2.2.1 New and amended standards and interpretations
The Group applied for the first time certain standards and amendments, which are effective for annual periods
beginning on or after 1 January 2016. The Group has not early adopted any other standard, interpretation or
amendment that has been issued but is not yet effective.
The nature and the effect of these changes are disclosed below. Although these new standards and
amendments were applied for the first time in 2016, they did not have a material impact on the consolidated
financial statements of the Group. The nature of each new standard or amendment is described below:
International Accounting Standard (IAS) 16 Property, Plant & Equipment and IAS 38 Intangible assets
(Amendment): Clarification of Acceptable Methods of Depreciation and Amortisation
This amendment clarifies the principle in IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets
that revenue reflects a pattern of economic benefits that are generated from operating a business (of which the
asset is part) rather than the economic benefits that are consumed through use of the asset. As a result, the
ratio of revenue generated to total revenue expected to be generated cannot be used to depreciate property,
plant and equipment and may only be used in very limited circumstances to amortise intangible assets. This
amendment did not result in any changes in the Group financial statements.
IFRS 11 Joint arrangements: Accounting for Acquisitions of Interests in Joint Operations
IFRS 11 addresses the accounting for interests in joint ventures and joint operations. The amendment adds new
guidance on how to account for the acquisition of an interest in a joint operation that constitutes a business in
accordance with IFRS and specifies the appropriate accounting treatment for such acquisitions. This
amendment did not have an impact on the Group financial statements.
IAS 27 Separate Financial Statements
This amendment allows entities to use the equity method to account for investments in subsidiaries, joint
ventures and associates in their separate financial statements and helps some jurisdictions move to IFRS for
separate financial statements, reducing compliance costs without reducing the information available to
investors. This amendment did not have an impact on the Group financial statements.
IAS 1Disclosure Initiative (Amendment)
The amendments to IAS 1 Presentation of Financial Statements further encourage companies to apply
professional judgment in determining what information to disclose and how to structure it in their financial
statements. The narrow-focus amendments to IAS 1 clarify, rather than significantly change, existing IAS 1
requirements. The amendments relate to materiality, order of the notes, subtotals and disaggregation,
accounting policies and presentation of items of OCI arising from equity accounted investments. This
amendment did not result in any changes in the Group financial statements.
Annual Improvements IFRSs 2012-2014 Cycle
The International Accounting Standards Board (IASB) has issued the Annual Improvements IFRSs 2012-2014
Cycle which is a collection of amendments to IFRSs. These did not have an impact on the Group financial
statements. They include:
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations: The amendment clarifies that
changing from one of the disposal methods to the other (through sale or through distribution to the
owners) should not be considered to be a new plan of disposal, but rather as a continuation of the original
plan. There is therefore no interruption of the application of the requirements in IFRS 5. The amendment
also clarifies that changing the disposal method does not change the date of classification.
IFRS 7 Financial Instruments - Disclosures: The amendment clarifies that a servicing contract that includes
a fee can constitute continuing involvement in a financial asset. Also, the amendment clarifies that the
IFRS 7 disclosures relating to the offsetting of financial assets and financial liabilities are not required in
the condensed interim financial report.
IAS 19 Employee Benefits: The amendment clarifies that market depth of high quality corporate bonds is
assessed based on the currency in which the obligation is denominated, rather than the country where the
obligation is located. When there is no deep market for high quality corporate bonds in that currency,
government bond rates must be used.
25
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
2.
2.2
Summary of significant accounting policies (continued)
Changes in accounting policies and disclosures (continued)
2.2.1 New and amended standards and interpretations (continued)
Annual Improvements IFRSs 2012-2014 Cycle (continued)
IAS 34 Interim Financial Reporting: The amendment clarifies that the required interim disclosures must
either be in the interim financial statements or incorporated by cross-reference between the interim
financial statements and wherever they are included within the greater interim financial report (e.g. in the
management commentary or risk report). The IASB specified that the other information within the interim
financial report must be available to users on the same terms as the interim financial statements and at
the same time. If users do not have access to the other information in this manner, then the interim
financial report is incomplete.
IAS 19 Employee benefits (Amended): Employee Contributions
The amendment applies to contributions from employees or third parties to defined benefit plans. The objective
of the amendment is to simplify the accounting for contributions that are independent of the number of years of
employee service, for example, employee contributions that are calculated according to a fixed percentage of
salary. This amendment did not have an impact on the Group’s results and financial position.
Annual Improvements IFRSs 2010–2012 Cycle
The IASB has issued the Annual Improvements IFRSs 2010–2012 Cycle, which is a collection of amendments to
IFRSs. These did not have an impact on the Group financial statements, with the exception of IAS 24 Related
Party Disclosures, which resulted in additional disclosures in the consolidated financial statements. They
include:
IFRS 2 Share-based Payment: This improvement amends the definitions of 'vesting condition' and 'market
condition' and adds definitions for 'performance condition' and 'service condition' (which were previously
part of the definition of 'vesting condition').
IFRS 3 Business combinations: This improvement clarifies that contingent consideration in a business
acquisition that is not classified as equity is subsequently measured at fair value through profit or loss
whether or not it falls within the scope of IFRS 9 Financial Instruments.
IFRS 8 Operating Segments: This improvement requires an entity to disclose the judgements made by
management in applying the aggregation criteria to operating segments and clarifies that an entity shall
only provide reconciliations of the total of the reportable segments' assets to the entity's assets if the
segment assets are reported regularly.
IFRS 13 Fair Value Measurement: This improvement in the Basis of Conclusion of IFRS 13 clarifies that
issuing IFRS 13 and amending IFRS 9 and IAS 39 did not remove the ability to measure short-term
receivables and payables with no stated interest rate at their invoice amounts without discounting if the
effect of not discounting is immaterial.
IAS 16 Property Plant & Equipment: The amendment clarifies that when an item of property, plant and
equipment is revalued, the gross carrying amount is adjusted in a manner that is consistent with the
revaluation of the carrying amount.
IAS 24 Related Party Disclosures: The amendment clarifies that an entity providing key management
personnel services to the reporting entity or to the parent of the reporting entity is a related party of the
reporting entity.
IAS 38 Intangible Assets: The amendment clarifies that when an intangible asset is revalued the gross
carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount.
26
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
2.
2.3
Summary of significant accounting policies (continued)
Standards and Interpretations that are issued but not yet effective
2.3.1 Standards and Interpretations issued by the IASB and adopted by the EU
IFRS 9 Financial Instruments
IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement and
introduces new requirements for classification and measurement, impairment, and hedge accounting. The
standard is effective for annual periods beginning on or after 1 January 2018 with early adoption permitted.
Classification and measurement
The classification and measurement of financial assets will depend on the entity’s business model for their
management and their contractual cash flow characteristics and result in financial assets being measured at
amortised cost, fair value through other comprehensive income (FVOCI) or fair value through profit or loss. The
combined effect of the application of the business model and the contractual cash flow characteristics tests may
result in some differences in the population of financial assets measured at amortised cost or fair value
compared with IAS 39. The classification of financial liabilities is essentially unchanged, except that, for certain
liabilities measured at fair value, gains or losses relating to changes in the entity’s own credit risk are to be
included in other comprehensive income.
Impairment
The impairment requirements apply to financial assets measured at amortised cost and FVOCI, lease
receivables, certain loan commitments and financial guarantee contracts. At initial recognition, allowance (or
provision in the case of commitments and guarantees) is required for expected credit losses (ECL) resulting
from default events that are possible within the next 12 months (12 month ECL). In the event of a significant
increase in credit risk, allowance (or provision) is required for ECL resulting from all possible default events over
the expected life of the financial instrument (lifetime ECL).
The assessment of whether credit risk has increased significantly since initial recognition is performed for each
reporting period by considering the change in the risk of default occurring over the remaining life of the
financial instrument.
Hedge accounting
IFRS 9 includes an accounting policy choice to remain with IAS 39 hedge accounting. The standard does not
explicitly address macro hedge accounting strategies, which are being considered in a separate project. To
remove the risk of any conflict between existing macro hedge accounting practice and the new general hedge
accounting requirements, the standard includes an accounting policy choice to remain with IAS 39 hedge
accounting.
Transition
The classification, measurement and impairment requirements are applied retrospectively by adjusting the
balance sheet at the date of initial application, with no requirement to restate comparative periods. Hedge
accounting is generally applied prospectively from that date.
IFRS 9 implementation project
An IFRS 9 implementation project is currently under way by the Group. The project is headed by the Group
Chief Risk Officer and a Steering Committee was set up to monitor the project, comprising of members of the
Executive Management team.
The project covers all aspects of IFRS 9 out of which the majority of the effort is consumed by the development
of methodologies for the calculation of impairment of customer loans and advances based on expected credit
losses, since IFRS 9 moves away from the current incurred loss model to an expected credit loss model, which
requires more judgment in considering information for current and future provisioning. The expected credit
losses model will result in earlier recognition of credit losses and thus a higher provision charge because it
includes not only credit losses already incurred, but also losses that are expected in the future. The credit loss
expense is also likely to be more volatile as expectations and judgements may change. It is also expected that
there will be additional movements within the three stages stipulated by the standard and, thus, further
volatility in the provisioning charge. The assessment of the impact of IFRS9 is ongoing and may significantly
change upon its full application reflecting business models and balance sheet dynamics at the time, therefore
making it not practical to quantify any potential effect at present.
27
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
2.
2.3
Summary of significant accounting policies (continued)
Standards and Interpretations that are issued but not yet effective (continued)
2.3.1
Standards and Interpretations issued by the IASB and adopted by the EU (continued)
IFRS 9 Financial Instruments (continued)
IFRS 9 implementation project (continued)
Changes in business models or policies, including as a result of choices made by the Group, could have a
material adverse effect on the Group's reported results of operations and financial condition and may have a
corresponding material adverse effect on capital ratios. The European Commission has proposed that the capital
impact of IFRS 9 is phased-in over a five-year period. The Group will disclose reliable financial impact estimates
once it is practicable, which will be no later than in the Annual Financial Report of 2017.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 was issued in May 2014 and establishes a five-step model that will apply to revenue earned from a
contract with a customer (with limited exceptions), regardless of the type of revenue transaction or the
industry. The standard’s requirements will also apply to the recognition and measurement of gains and losses
on the sale of some non-financial assets that are not an output of the entity’s ordinary activities (e.g., sales of
property, plant and equipment or intangibles). Extensive disclosures will be required, including disaggregation
of total revenue; information about performance obligations; changes in contract asset and liability account
balances between periods and key judgements and estimates. Either a full retrospective application or a
modified retrospective application is required for annual periods beginning on or after 1 January 2018. Early
adoption is permitted. The Group is in the process of assessing the impact of this standard on its results and
financial position.
2.3.2 Standards and Interpretations issued by the IASB but not yet adopted by the EU
IFRS 15 Revenue from Contracts with Customers (Clarifications)
The objective of the Clarifications is to clarify the IASB’s intentions when developing the requirements in IFRS
15 Revenue from Contracts with Customers, particularly the accounting of identifying performance obligations
amending the wording of the ‘separately identifiable’ principle, of principal versus agent considerations including
the assessment of whether an entity is a principal or an agent as well as applications of control principle and of
licensing providing additional guidance for accounting of intellectual property and royalties. The Clarifications
also provide additional practical expedients for entities that either apply IFRS 15 fully retrospectively or that
elect to apply the modified retrospective approach. The Clarifications apply for annual periods beginning on or
after 1 January 2018 with earlier application permitted. The Group is in the process of assessing the impact of
this standard on its results and financial position.
IFRS 16 Leases
The standard is effective for annual periods beginning on or after 1 January 2019. IFRS 16 sets out the
principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract,
i.e. the customer (lessee) and the supplier (lessor). The new standard requires lessees to recognise most leases
on their financial statements. Lessees will have a single accounting model for all leases, with certain
exemptions. Lessor accounting is substantially unchanged. The Group is in the process of assessing the impact
of this standard on its results and financial position. Existing operating lease commitments are disclosed in
Note 41.
Amendment in IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint
Ventures: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
The amendments address an acknowledged inconsistency between the requirements in IFRS 10 and those in
IAS 28, in dealing with the sale or contribution of assets between an investor and its associate or joint venture.
The main consequence of the amendments is that a full gain or loss is recognised when a transaction involves a
business (as defined in IFRS3). A partial gain or loss is recognised when a transaction involves assets that do
not constitute a business. In December 2015, the IASB postponed the effective date of this amendment
indefinitely pending the outcome of its research project on the equity method of accounting. The Group does
not expect these amendments to have a material impact on its results and financial position.
28
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
2.
2.3
Summary of significant accounting policies (continued)
Standards and Interpretations that are issued but not yet effective (continued)
2.3.2
Standards and Interpretations issued by the IASB but not yet adopted by the EU (continued)
Amendments to IAS 12 Income Taxes: Recognition of Deferred Tax Assets for Unrealised Losses
The objective of the amendments is to clarify the requirements of deferred tax assets for unrealised losses in
order to address diversity in practice in the application of IAS 12 Income Taxes. The specific issues where
diversity in practice existed relate to the existence of a deductible temporary difference upon a decrease in fair
value, to recovering an asset for more than its carrying amount, to probable future taxable profit and to
combine versus separate assessment. The Group does not expect these amendments to have a material impact
on its results and financial position. The amendments are effective for annual periods beginning on or after 1
January 2017, with early application permitted.
Amendments to IAS 7: Disclosure Initiative
The objective of the amendments is to provide disclosures that enable users of financial statements to evaluate
changes in liabilities arising from financing activities, including both changes arising from cash flows and non-
cash changes. The amendments specify that one way to fulfil the disclosure requirement is by providing a
tabular reconciliation between the opening and closing balances in the statement of financial position for
liabilities arising from financing activities, including changes from financing cash flows, changes arising from
obtaining or losing control of subsidiaries or other businesses, the effect of changes in foreign exchange rates,
changes in fair values and other changes. The Group expects this to give rise to additional disclosures. There is
no impact on its results and financial position. These amendments are effective for annual periods beginning on
or after 1 January 2017, with earlier application permitted.
Amendments IFRS 2: Classification and Measurement of Share based Payment Transactions
The amendments provide requirements on the accounting for the effects of vesting and non-vesting conditions
on the measurement of cash-settled share-based payments, for share-based payment transactions with a net
settlement feature for withholding tax obligations and for modifications to the terms and conditions of a share-
based payment that changes the classification of the transaction from cash-settled to equity-settled. The
amendments are effective for annual periods beginning on or after 1 January 2018 with earlier application
permitted. The Group is in the process of assessing the impact of these amendments on its results and
financial position.
IAS 40: Transfers to Investment Property (amendments)
The amendments clarify when an entity should transfer property, including property under construction or
development into, or out of investment property. The amendments state that a change in use occurs when the
property meets, or ceases to meet, the definition of investment property and there is evidence of the change in
use. A mere change in management’s intentions for the use of a property does not provide evidence of a
change in use. The amendments are effective for annual periods beginning on or after 1 January 2018 with
earlier application permitted. The Group does not expect these amendments to have a material impact on its
results and financial position.
International Financial Reporting Interpretations Committee (IFRIC) Interpretation 22: Foreign Currency
Transactions and Advance Consideration
The interpretation clarifies the accounting for transactions that include the receipt or payment of advance
consideration in a foreign currency. The interpretation covers foreign currency transactions when an entity
recognises a non-monetary asset or a non-monetary liability arising from the payment or receipt of advance
consideration before the entity recognises the related asset, expense or income. The interpretation states that
the date of the transaction, for the purpose of determining the exchange rate, is the date of initial recognition
of the non-monetary prepayment asset or deferred income liability. If there are multiple payments or receipts
in advance, then the entity must determine a date of the transactions for each payment or receipt of advance
consideration. The interpretation is effective for annual periods beginning on or after 1 January 2018 with
earlier application permitted. The Group does not expect this interpretation to have a material impact on its
results and financial position.
29
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
2.
2.3
Summary of significant accounting policies (continued)
Standards and Interpretations that are issued but not yet effective (continued)
2.3.2
Standards and Interpretations issued by the IASB but not yet adopted by the EU (continued)
Annual Improvements IFRSs 2014–2016 Cycle
The IASB has issued the Annual Improvements to IFRSs 2014–2016 Cycle, which is a collection of amendments
to IFRSs. The amendments are effective for annual periods beginning on or after 1 January 2017 for IFRS 12
Disclosure of Interests in Other Entities and on or after 1 January 2018 for IFRS 1 First-time Adoption of IFRS
and for IAS 28 Investments in Associates and Joint Ventures. Earlier application is permitted for IAS 28
Investments in Associates and Joint Ventures. The Group does not expect these to have material impact on its
results and financial position.
IFRS 1 First-time Adoption of IFRS: This improvement deletes the short-term exemptions regarding
disclosures about financial instruments, employee benefits and investment entities, applicable for first time
adopters.
IAS 28 Investments in Associates and Joint Ventures: The amendments clarify that the election to measure
at fair value through profit or loss an investment in an associate or a joint venture that is held by an entity
that is venture capital organisation, or other qualifying entity, is available for each investment in an
associate or joint venture on an investment-by-investment basis, upon initial recognition.
IFRS 12 Disclosure of Interests in Other Entities: The amendments clarify that the disclosure requirements
in IFRS 12, other than those of summarised financial information for subsidiaries, joint ventures and
associates, apply to an entity’s interest in a subsidiary, a joint venture or an associate that is classified as
held for sale, as held for distribution, or as discontinued operations in accordance with IFRS 5.
2.4
Basis of consolidation
The consolidated financial statements comprise the consolidated financial statements of the Group as at and for
the year ended 31 December 2016. The financial statements of the subsidiaries are prepared as of the same
reporting date as that of the Company, using consistent accounting policies.
Subsidiaries are fully consolidated from the date on which control is transferred to the Group. Control is
achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee
and has the ability to affect those returns through its power over the investee. Specifically, the Group controls
an investee if, and only if, the Group has:
Power over an investee (i.e. existing rights that give it the current ability to direct the relevant activities of
the investee).
Exposure, or rights, to variable returns from its involvement with the investee.
The ability to use its power over the investee to affect its returns.
Generally, there is a presumption that a majority of voting rights results in control. To support this
presumption and when the Group has less than a majority of the voting rights of an investee, the Group
considers all relevant facts and circumstances in assessing whether it has power over an investee including the
contractual arrangement with the other vote holders, rights arising from other contractual arrangements, and
the Group’s voting and potential voting rights.
The Group re-assesses whether or not it controls an investee if facts indicate that there are changes to any of
the three elements of control.
Assets, liabilities, income and expenses of subsidiaries acquired or disposed of during the year are included in
the consolidated financial statements from the date of acquisition or up to the date of disposal, respectively.
Profit or loss and each component of OCI are attributed to the equity holders of the parent of the Group and to
the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. Non-
controlling interests represent the portion of profit or loss and net assets not held by the Group, directly or
indirectly. The non-controlling interests are presented separately in the consolidated income statement and
within equity from the Company owners’ equity.
All intra-group balances and transactions are eliminated on consolidation.
30
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
2.
2.4
Summary of significant accounting policies (continued)
Basis of consolidation (continued)
A change in the ownership interest of a subsidiary, without loss of control, is accounted for as a transaction
between the owners, which affects equity. As a result, no goodwill arises nor any gain/loss is recognised in the
income statement from such transactions. The foreign exchange differences which relate to the share of non-
controlling interests being sold/acquired are reclassified between the foreign currency reserve and non-
controlling interests.
2.5
Business combinations
Business combinations are accounted for using the purchase method. The cost of an acquisition is measured as
the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any
non-controlling interests in the acquiree. For each business combination the Group elects whether to measure
the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s
identifiable net assets. Any excess of the cost of acquisition over the Group’s share of the fair values of the
identifiable net assets acquired, is recognised as goodwill on the consolidated balance sheet. Where the
Group’s share of the fair values of the identifiable net assets are greater than the cost of acquisition (i.e.
negative goodwill), the difference is recognised directly in the consolidated income statement in the year of
acquisition. Acquisition related costs are expensed as incurred and included in other operating expenses.
If the business combination is achieved in stages, the previously held equity interest is remeasured at fair value
and any resulting gain or loss is recognised in the consolidated income statement.
When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate
classification and designation in accordance with contractual terms, economic circumstances and pertinent
conditions as at the acquisition date.
2.6
Investments in associates and joint ventures
An associate is an entity over which the Group has significant influence. Significant influence is the power to
participate in the financial and operating policy decisions of the investee, but is not control or joint control over
those policies.
A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement
have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of
an arrangement, which exists only when decisions about the relevant activities require unanimous consent of
the parties sharing control.
The considerations made in determining significant influence or joint control are similar to those necessary to
determine control over subsidiaries.
In the consolidated financial statements, the Group’s investments in associates and joint ventures are
accounted for using the equity method of accounting.
Under the equity method, the investment in an associate or a joint venture is carried in the consolidated
balance sheet at cost plus post-acquisition changes in the Group’s share of the net assets of the associate or
joint venture. The Group’s share of the results of the associate or joint venture is included in the consolidated
income statement. Losses of the associate or joint venture in excess of the Group’s cost of the investment are
recognised as a liability only when the Group has incurred obligations on behalf of the associate or joint
venture. Goodwill relating to an associate or joint venture is included in the carrying amount of the investment
and is not amortised. Any excess of the Group’s share of the net fair value of the associate’s or joint venture’s
identifiable assets over the cost of the investment (i.e. negative goodwill) is included as income in the
determination of the Group’s share of the associate’s or joint venture’s profit or loss in the period in which the
investment is acquired. The aggregate of the Group’s share of profit or loss of an associate or a joint venture is
shown on the face of the consolidated income statement outside operating profit and represent profit or loss
after tax.
31
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
2.
2.6
Summary of significant accounting policies (continued)
Investments in associates and joint ventures (continued)
The Group recognises its share of any changes in the equity of the associate or the joint venture through the
consolidated statement of changes in equity. Profits and losses resulting from transactions between the Group
and the associate or the joint venture are eliminated to the extent of the Group’s interest in the associate or the
joint venture.
The financial statements of the associates or joint ventures are prepared as of the same reporting date as that
of the Company, using consistent accounting policies.
After application of the equity method, the Group determines whether it is necessary to recognise an
impairment loss on its investments in associates or joint ventures.
2.7
Foreign currency translation
The consolidated financial statements are presented in Euro (€), which is the functional and presentation
currency of the Company and its subsidiaries in Cyprus. Each overseas branch or subsidiary of the Group
determines its own functional currency and items included in the financial statements of each entity are
measured using that functional currency. The Group uses the direct method of consolidation and has elected to
recycle in the consolidated statement of comprehensive income the gain or loss that arises from using this
method.
2.7.1
Transactions and balances
Transactions in foreign currencies are recorded using the functional currency rate of exchange ruling at the date
of the transaction.
Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency
rate of exchange ruling at the reporting date. All differences are taken to ‘Net foreign exchange gains/losses’ in
the consolidated income statement, with the exception of differences on foreign currency liabilities that provide
a hedge against the net investments in subsidiaries and overseas branches. These differences are recognised
in other comprehensive income in the ‘Foreign currency translation reserve’ until the disposal or liquidation of
the net investment, at which time the cumulative amount is reclassified to the consolidated income statement.
Non-monetary items that are measured at historic cost in a foreign currency are translated using the exchange
rates ruling as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign
currency are translated using the exchange rates ruling at the date when the fair value is determined.
2.7.2
Subsidiary companies and branches
At the reporting date, the assets and liabilities of subsidiaries (including special purpose entities that the Group
consolidates) and branches whose functional currency is other than the Group’s presentation currency are
translated into the Group’s presentation currency at the rate of exchange ruling at the reporting date, and their
income statements are translated using the average exchange rates for the year.
Foreign exchange differences arising on translation are recognised in other comprehensive income in the
‘Foreign currency translation reserve’. On disposal or liquidation of a subsidiary or branch, the cumulative
amount of the foreign exchange differences relating to that particular overseas operation, is reclassified to the
consolidated income statement as part of the profit/loss on disposal/dissolution of subsidiaries.
2.8
Segmental reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief
operating decision-maker. The chief operating decision-maker is the person or group of persons that allocate
resources to and assess the performance of the operating segments.
The chief operating decision-maker is the Group Executive Committee.
2.9
Turnover
Group turnover comprises interest income, fee and commission income, foreign exchange gains, gross
insurance premiums, gains/losses of investment properties and stock of properties, turnover of property and
hotel business and other income.
32
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
2.
Summary of significant accounting policies (continued)
2.10
Revenue recognition
Revenue is recognised when it is probable that economic benefits will flow to the Group and the revenue can be
reliably measured. The following specific recognition criteria must also be met before revenue is recognised:
2.10.1 Interest income
For all financial assets measured at amortised cost and interest bearing financial assets classified as available-
for-sale investments or at fair value through profit or loss, interest income is recognised using the effective
interest rate method. The effective interest rate is the rate that exactly discounts estimated future cash receipts
or payments through the expected life of the financial instruments, or where appropriate a shorter period, to
the carrying amount of the financial instruments. Interest income is recognised on the recoverable portion of
impaired loans.
The carrying amount of a financial asset or liability is adjusted if the Group revises its estimates of payments or
receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change
in carrying amount is recorded in ‘Net gains on financial instrument transactions for debt securities’, or ‘Gain on
derecognition of loans and advances to customers and changes in expected cash flows’ for loans and advances
to customers.
2.10.2 Fee and commission income
Fee and commission income is generally recognised on the basis of work done so as to match the cost of
providing the service, whereas fees and commissions in respect of loans and advances are recognised using the
effective interest rate method as part of interest income.
2.10.3 Dividend income
Dividend income is recognised in the consolidated income statement when the Group’s right to receive payment
is established i.e. upon approval by the general meeting of the shareholders.
2.10.4 Rental income
Rental income from investment properties and stock of property is accounted for on a straight-line basis over
the period of the lease and is recognised in the consolidated income statement in ‘Other income’.
2.10.5 Gains from the disposal of investment property
Gains on disposal of investment property are recognised in the consolidated income statement in
‘Gains/(losses) from revaluation and disposal of investment properties’ when the buyer accepts delivery and the
transfer of risks and rewards to the buyer is completed.
2.10.6 Gains on the disposal of stock of property
Net gains on disposal of stock of property are recognised in the consolidated income statement when the buyer
accepts delivery and the transfer of risks and rewards to the buyer is completed.
2.11 Retirement benefits
The Group operates several defined contribution and defined benefit retirement plans.
Defined contribution plans
The Group recognises obligations, in respect of the accounting period in the consolidated income statement.
Any unpaid contributions at the reporting date are included as a liability.
Defined benefit plans
The cost of providing benefits for defined benefit plans is estimated separately for each plan using the Projected
Unit Credit Method of actuarial valuation.
33
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
2.
Summary of significant accounting policies (continued)
2.11 Retirement benefits (continued)
Defined benefit plans (continued)
The defined benefit asset or liability comprises the present value of the defined benefit obligations (using a
discount rate based on high quality corporate bonds), reduced by the fair value of plan assets out of which the
obligations are to be settled. Plan assets are assets that are held by a funded plan or qualifying insurance
policies. Any net defined benefit surplus is limited to the present value of available refunds and reductions in
future contributions to the plan. Fair value is based on market price information and in the case of quoted
securities it is the published bid price.
The net charge to the consolidated income statement mainly comprises the service costs and the net interest
on the net defined benefit asset or liability, and is presented in staff costs. Service costs comprise current
service costs, past-service costs, gains and losses or curtailments and non-routine settlements. Re-
measurements, comprising actuarial gains and losses, the effect of the asset ceiling (excluding net interest),
and the return on plan assets (excluding net interest), are recognised immediately on the consolidated balance
sheet with a corresponding debit or credit in other comprehensive income. Re-measurements are not
reclassified to profit or loss in subsequent periods.
Actuarial gains and losses comprise experience adjustments (the effects of differences between the previous
actuarial assumptions and what has actually occurred), as well as the effects of changes in actuarial
assumptions.
2.12
Tax
Current income tax and deferred tax
Tax on income is provided in accordance with the fiscal regulations and rates which apply in the countries
where the Group operates and is recognised as an expense in the period in which the income arises. Deferred
tax is provided using the liability method. Current income tax assets and liabilities are measured at the amount
expected to be recovered from or paid to the tax authorities. Current income tax and deferred tax relating to
items recognised directly in equity is recognised directly in equity.
Deferred tax liabilities are recognised for all taxable temporary differences between the tax basis of assets and
liabilities and their carrying amounts at the reporting date, which will give rise to taxable amounts in future
periods. Deferred tax liabilities are recognised for all taxable temporary differences associated with investments
in subsidiary and associate companies and branches except where the timing of the reversal of the temporary
differences can be controlled and it is probable that the temporary differences will not reverse in the
foreseeable future.
Deferred tax assets are recognised for all deductible temporary differences and carry-forward of unutilised tax
losses to the extent that it is probable that taxable profit will be available, against which the deductible
temporary differences and carry-forward of unutilised tax losses can be utilised. The carrying amount of
deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable
that sufficient taxable profit will be available to utilise all or part of the deductible temporary differences or tax
losses. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the
extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the amount that is expected to be paid to or recovered from
the tax authorities, after taking into account the tax rates and legislation that have been enacted or
substantially enacted by the reporting date.
Current and deferred tax assets and liabilities are offset when they arise from the same tax reporting entity and
relate to the same tax authority and when the legal right to offset exists.
34
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
2.
Summary of significant accounting policies (continued)
2.12
Tax (continued)
Indirect Tax Value Added Tax (VAT)
Expenses and assets are recognised net of the amount of VAT, except:
• when the VAT incurred on a purchase of assets or services is not recoverable from the Tax authorities, in
which case, the VAT suffered is recognised as part of the cost of acquisition of the asset or as part of the
expense item, as applicable.
• when receivables and payables are stated with the amount of VAT charged. The amount of VAT
recoverable from, or payable to the Tax authorities, is included as part of receivables or payables in the
consolidated balance sheet.
2.13
Financial instruments
2.13.1 Date of recognition
All financial assets and liabilities are initially recognised on the trade date. Purchases or sales of financial
assets, where delivery is required within a time frame established by regulations or by market convention, are
also recognised on the trade date, i.e. the date that the Group commits to purchase or sell the asset.
Derivatives are also recognised on a trade date basis. ‘Balances with central banks’, ‘Funding from central
banks’, ‘Deposits by banks’, ‘Customer deposits’, ‘Loans and advances to banks’ and ‘Loans and advances to
customers’ are recognised when cash is received by the Group or advanced to the borrowers.
2.13.2 Initial recognition and measurement of financial instruments
The classification of financial instruments on initial recognition depends on the purpose for which the financial
instruments were acquired and their characteristics. All financial instruments are measured initially at their fair
value plus, in the case of financial assets and liabilities not measured at fair value through profit or loss, any
directly attributable incremental costs of acquisition or issue.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
2.13.3 Derivative financial instruments
Derivatives are recorded at fair value and classified as assets when their fair value is positive and as liabilities
when their fair value is negative. Subsequently, derivatives are measured at fair value. Revaluations of trading
derivatives are included in the consolidated income statement in ‘Net foreign exchange gains’ in the case of
currency derivatives and in ‘Net gains on financial instrument transactions’ in the case of all other derivatives.
Interest income and expense are included in the corresponding captions in the consolidated income statement.
Derivatives embedded in other financial instruments, such as the conversion option in an acquired convertible
bond, are treated as separate derivatives and recorded at fair value if their economic characteristics and risks
are not closely related to those of the host contract, and the host contract is not itself measured at fair value
with revaluation recognised in the consolidated income statement. The embedded derivatives separated from
the host are carried at fair value, with revaluations recognised in ‘Net gains on financial instrument transactions’
in the consolidated income statement.
2.13.4 Financial assets or financial liabilities held for trading
Financial assets or financial liabilities held for trading represent assets and liabilities acquired or incurred
principally for the purpose of selling or repurchasing them in the near term and are recognised in the
consolidated balance sheet at fair value. Changes in the fair value are recognised in ‘Net gains on financial
instrument transactions’ in the consolidated income statement. Interest income and expense are included in the
corresponding captions in the consolidated income statement according to the terms of the relevant contract,
while dividend income is recognised in ‘Other income’ when the right to receive payment has been established.
35
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
2.
Summary of significant accounting policies (continued)
2.13
Financial instruments (continued)
2.13.5 Financial assets or financial liabilities designated upon initial recognition at fair value
through profit or loss
Financial assets and financial liabilities classified in this category are designated by management on initial
recognition when the following criteria are met: (a) the designation eliminates or significantly reduces the
inconsistency that would otherwise arise from the measurement of the assets or liabilities or the recognition of
gains or losses on them on a different basis, or (b) the assets and liabilities are part of a group of financial
assets, financial liabilities or both which are managed and their performance is evaluated on a fair value basis,
in accordance with a documented risk management or investment strategy, or (c) the financial instrument
contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows
of the instrument or it is clear, with little or no analysis, that the embedded derivative could not be separated.
These assets do not form part of the trading portfolio because no recent pattern of short-term profit taking
exists. They include listed debt securities economically hedged by derivatives, and not designated for hedge
accounting, as well as unlisted equities which are managed on a fair value basis.
Financial assets and financial liabilities designated upon initial recognition at fair value through profit or loss are
recognised in the consolidated balance sheet at fair value. Changes in fair value are recognised in ‘Net gains on
financial instrument transactions’ in the consolidated income statement. Interest income and expense are
included in the corresponding captions in the consolidated income statement according to the terms of the
relevant contract, while dividend income is recognised in ‘Other income’ when the right to receive payment has
been established.
2.13.6 Held-to-maturity investments
Held-to-maturity investments are those with fixed or determinable payments and fixed maturities and which
the Group has the intention and ability to hold to maturity. After initial measurement, held-to-maturity
investments are subsequently measured at amortised cost using the effective interest rate method. Amortised
cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral
part of the effective interest rate. The amortisation is included in ‘Interest income’ in the consolidated income
statement. Losses arising from impairment of such investments are recognised in ‘Impairment of other
financial instruments’ in the consolidated income statement. If, as a result of a change in intention or ability, it
is no longer appropriate to classify an investment as held-to-maturity, it shall be reclassified as available-for-
sale and remeasured at fair value, and the difference between its carrying amount and fair value shall be
accounted for, accordingly.
2.13.7 Loans and receivables
Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active
market. They are not entered into with the intention of immediate or short-term resale and are not classified
as ‘Trading investments’, ‘Investments available-for-sale’ or ‘Investments at fair value through profit or loss’.
This accounting policy covers the captions ‘Loans and advances to banks’, ‘Reverse repurchase agreements’,
‘Loans and advances to customers’ and ‘Investments classified as loans and receivables’ in the consolidated
balance sheet. After their initial recognition, loans and receivables are subsequently measured at amortised
cost using the effective interest rate method, less any provision for impairment. The losses arising from
impairment are recognised in the consolidated income statement in ‘Provisions for impairment of loans and
advances and other customer credit losses’ in the case of loans and advances to customers and in ‘Impairment
of other financial instruments’ for all other instruments.
36
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
2.
Summary of significant accounting policies (continued)
2.13
Financial instruments (continued)
2.13.7 Loans and receivables (continued)
Renegotiated loans
A loan that is renegotiated is derecognised if the existing agreement is cancelled and a new agreement made
on substantially different terms, or if the terms of an existing agreement are modified, such that the
renegotiated loan is substantially a different financial instrument.
2.13.8 Available-for-sale investments
Available-for-sale investments are those which are designated as such or do not qualify for classification as
‘Investments at fair value through profit or loss’, ‘Investments held-to-maturity’ or ‘Loans and receivables’.
These investments can be sold in response to changes in market risks or liquidity requirements and include
equity securities and debt securities.
After initial recognition, available-for-sale investments are measured at fair value. Unrealised gains and losses
from changes in fair value are recognised directly in other comprehensive income in the ‘Available-for-sale
investments’ caption. When the investment is disposed of, the cumulative gain or loss previously recognised in
other comprehensive income is transferred to the consolidated income statement in ‘Net gains on financial
instrument transactions’.
Where the Group holds more than one investment in the same security, they are deemed to be disposed of on
a weighted average cost basis. Interest income from available-for-sale debt securities is recorded in ‘Interest
income’ using the effective interest rate method. Dividend income from available-for-sale equity securities is
recognised in the consolidated income statement in ‘Other income’ when the right to receive payment has been
established. Impairment losses on available-for-sale investments are recognised in the consolidated income
statement in ‘Impairment of other financial instruments’ caption.
2.13.9 Other financial liabilities at amortised cost
Other financial liabilities include ‘Customer deposits’, ‘Deposits by banks’ and ‘Funding from central banks’.
Financial liabilities are recognised when the Group enters into the contractual provisions of the arrangements
with counterparties, which is generally on trade date, and initially measured at fair value, which is normally the
consideration received, net of directly attributable transaction costs incurred. Subsequent measurement of
deposits by customers, funding from central banks and due to banks is at amortised cost, using the effective
interest rate method.
2.14 Derecognition of financial assets and financial liabilities
2.14.1 Financial assets
A financial asset is derecognised when: (a) the contractual rights to receive cash flows from the asset have
expired, or (b) the Group has transferred its contractual rights to receive cash flows from the asset or (c) has
assumed an obligation to pay the received cash flows in full to a third party and has: either (a) transferred
substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all
the risks and rewards of the asset, but has transferred control of the asset.
2.14.2 Financial liabilities
A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expired.
37
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
2.
Summary of significant accounting policies (continued)
2.15
Impairment of financial assets
2.15.1 Loans and receivables
The Group assesses at each reporting date whether there is any objective evidence that a financial asset or a
group of financial assets is impaired. A financial asset or a group of financial assets is impaired if there is
objective evidence of impairment as a result of one or more events that have occurred after the initial
recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the
estimated future cash flows of the financial asset or the group of financial assets, that can be reliably
estimated. Objective evidence of impairment may include indications that the borrower or group of borrowers
is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the
probability that the borrower might be declared bankrupt or proceed with a financial restructuring and where
observable data indicate that there is a measurable decrease in the estimated future cash flows, such as
changes in arrears or the economic conditions that correlate with defaults. There is objective evidence that a
loan is impaired when it is probable that the Group will not be able to collect all amounts due, according to the
original contract terms.
For loans and advances to customers carried at amortised cost, the Group first assesses individually whether
objective evidence of impairment exists for loans and advances that are individually significant. Furthermore, a
collective impairment assessment is made for loans and advances that are not individually significant and for
losses that have been incurred but are not yet identified relating to loans and advances that have been
assessed individually and for which no provision has been made.
Provisions for impairment of loans are determined using the ‘incurred loss’ model as required by IFRS, which
requires recognition of impairment losses that arose from past events and prohibits recognition of impairment
losses that could arise from future events, no matter how likely those events are.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as
the difference between the carrying amount of the loan and the present value of the estimated future cash
flows including the cash flows which may arise from guarantees and tangible collaterals. The collectability of
individually significant loans and advances is evaluated based on the customer’s overall financial condition,
resources and payment record, the prospect of support from creditworthy guarantors and the realisable value
of any collateral.
The present value of the estimated future cash flows is calculated using the loan’s original effective interest
rate. If a loan bears a variable interest rate, the discount rate used for measuring any impairment loss is the
current reference rate plus the margin specified in the initial contract.
For the purposes of a collective evaluation of impairment, loans are grouped based on similar credit risk
characteristics taking into account the type of the loan, geographic location, past-due days and other relevant
factors.
Future cash flows for a group of loans and advances that are collectively evaluated for impairment are
estimated on the basis of historical loss experience for loans with similar credit risk characteristics to those of
the group. Historical loss experience is adjusted on the basis of current observable data to reflect the impact of
current conditions that did not affect the period on which the historical loss experience is based and to remove
the impact of conditions in the historical period that do not currently apply. The methodology and assumptions
used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates
and actual loss experience.
38
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
2.
Summary of significant accounting policies (continued)
2.15
Impairment of financial assets (continued)
2.15.1 Loans and receivables (continued)
The carrying amount of the loan is reduced through the use of a provision account and the amount of the loss is
recognised in the consolidated income statement. Loans together with the associated provisions are written off
when there is no realistic prospect of future recovery. Partial write-offs, including non contractual write-offs,
may also occur when it is considered that there is no realistic prospect for the recovery of the contractual cash
flows. If, in a subsequent period, the amount of the estimated impairment loss decreases and the decrease is
due to an event occurring after the impairment was recognised, when the creditworthiness of the customer has
improved to such an extent that there is reasonable assurance that all or part of the principal and interest
according to the original contract terms of the loan will be collected timely, the previously recognised
impairment loss is reduced by adjusting the impairment provision account. If a previously written-off loan is
subsequently recovered, any amounts previously charged are credited to ‘Provisions for impairment of loans
and advances and other customer credit losses’ in the consolidated income statement.
2.15.2 Investments classified as held-to-maturity and loans and receivables
For held-to-maturity investments and loans and receivables investments, the Group assesses at each reporting
date whether there is objective evidence of impairment. If there is objective evidence that an impairment loss
has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount
and the present value of estimated future cash flows (excluding future credit losses not yet incurred). The
carrying amount of the asset is reduced and the amount of the loss is recognised in ‘Impairment of other
financial instruments’ caption in the consolidated income statement.
If, in a subsequent period, the amount of the estimated impairment loss decreases because of an event
occurring after the impairment was recognised, the impairment loss previously recognised is reversed and the
reversal is credited to the ‘Impairment of other financial instruments’ caption in the consolidated income
statement.
2.15.3 Available-for-sale investments
For available-for-sale investments, the Group assesses whether there is objective evidence of impairment at
each reporting date.
In the case of equity securities classified as available-for-sale, objective evidence would include a significant or
prolonged decrease, in the fair value of the investment below cost. Where there is evidence of impairment, the
cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any
impairment loss on that investment previously recognised in the consolidated income statement – is deducted
from the ‘Revaluation reserve of available-for-sale investments’ in other comprehensive income and recognised
in ‘Impairment of other financial instruments’ caption in the consolidated income statement. Impairment losses
on equity securities are not reversed through the consolidated income statement. Increases in their fair value
after impairment are recognised in the ‘Revaluation of available-for-sale investments’ in other comprehensive
income.
In the case of debt securities classified as available-for-sale, impairment is assessed based on the same criteria
applicable to financial assets carried at amortised cost. If, in a subsequent period, the impairment loss
decreases and the decrease can be objectively related to an event occurring after the impairment loss was
recognised, the impairment loss previously recognised is reversed through ‘Impairment of other financial
instruments’ caption in the consolidated income statement.
2.16 Hedge accounting
The Group uses derivative financial instruments to hedge exposures to interest rate and foreign exchange risks
and in the case of the hedge of net investments, the Group uses also non-derivative financial liabilities. The
Group applies hedge accounting for transactions which meet the specified criteria.
At inception of the hedging relationship, the Group formally documents the relationship between the hedged
item and the hedging instrument, including the nature of the risk and the objective and strategy for
undertaking the hedge. The method that will be used to assess the effectiveness both at the inception and at
ongoing basis, of the hedging relationship also forms part of the Group’s documentation.
39
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
2.
Summary of significant accounting policies (continued)
2.16 Hedge accounting (continued)
At inception of the hedging relationship and at each hedge effectiveness assessment date, a formal assessment
is undertaken to ensure that the hedging relationship is highly effective regarding the offsetting of the changes
in fair value or the cash flows attributable to the hedged risk. A hedge is regarded as highly effective if the
changes in fair value or cash flows attributable to the hedged risk of the hedging instrument and the hedged
item during the period for which the hedge is designated, are expected to offset in a range of 80% to 125%. In
the case of cash flow hedges where the hedged item is a forecast transaction, the Group assesses whether the
transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect
the consolidated income statement.
2.16.1 Fair value hedges
In the case of fair value hedges that meet the criteria for hedge accounting, the change in the fair value of a
hedging instrument is recognised in the consolidated income statement in ‘Net gains on financial instrument
transactions’. The change in the fair value of the hedged item attributable to the risk hedged is recorded as
part of the carrying value of the hedged item and is also recognised in the consolidated income statement in
‘Net gains on financial instrument transactions’.
If the hedging instrument expires or is sold, terminated or exercised, or where the hedge no longer meets the
criteria for hedge accounting, the hedging relationship is discontinued prospectively. For hedged items recorded
at amortised cost, the difference between the carrying value of the hedged item on termination and the face
value is amortised to the consolidated income statement, over the remaining term of the original hedge. If the
hedged item is derecognised, the unamortised fair value adjustment is recognised immediately in the
consolidated income statement.
2.16.2 Cash flow hedges
In the case of cash flow hedges that meet the criteria for hedge accounting, the effective portion of the gain or
loss on the hedging instrument is recognised directly in other comprehensive income in the ‘Cash flow hedge
reserve’. The ineffective portion of the gain or loss on the hedging instrument is recognised in ‘Net gains on
financial instrument transactions’ in the consolidated income statement.
When the hedged cash flows affect the consolidated income statement, the gain or loss previously recognised in
the ‘Cash flow hedge reserve’ is transferred to the consolidated income statement.
2.16.3 Hedges of net investments in foreign operations
Hedges of net investments in overseas branches or subsidiaries are accounted for in a way similar to cash flow
hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognised
in other comprehensive income while gains or losses relating to the ineffective portion are recognised in ‘Net
foreign exchange gains’ in the consolidated income statement.
On disposal or liquidation of an overseas branch or subsidiary, the cumulative gains or losses recognised in
other comprehensive income are transferred in the consolidated income statement within profit/(loss) on
disposal/dissolution of subsidiaries.
2.17
Offsetting financial instruments
Financial assets and financial liabilities are offset and the net amount reported in the consolidated balance sheet
if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle
on a net basis, or to realise the asset and settle the liability simultaneously.
2.18
Cash and cash equivalents
Cash and cash equivalents for the purposes of the consolidated statement of cash flows consist of cash, non-
obligatory balances with central banks, loans and advances to banks and other securities that are readily
convertible into known amounts of cash or are repayable within three months of the date of their acquisition.
40
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
2.
Summary of significant accounting policies (continued)
2.19
Insurance business
The Group undertakes both life insurance and general insurance business and issues insurance and investment
contracts. An insurance contract is a contract under which one party (the insurer) accepts significant insurance
risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain
future event (the insured event) adversely affects the policyholder. Investment contracts are those contracts
that transfer financial risk.
Investment contracts can, however, be reclassified as insurance contracts after inception if insurance risk
becomes significant.
Once a contract has been classified as an insurance contract, it remains an insurance contract until expiry or
until all of the rights and obligations under the contract have been fulfilled, even if the insurance risk has been
significantly reduced during its term.
2.19.1 Life insurance business
Premium income from unit-linked insurance contracts is recognised when received and when the units have
been allocated to policyholders. Premium income from non-linked insurance contracts is recognised when due,
in accordance with the terms of the relevant insurance contracts.
Fees and other expenses chargeable to the long-term assurance funds in accordance with the terms of the
relevant insurance contracts, as well as the cost of death cover, are recognised in a manner consistent with the
recognition of the relevant insurance premiums.
Claims are recorded as an expense when they are incurred. Life insurance contract liabilities are determined on
the basis of an actuarial valuation and for unit-linked insurance contracts they include the fair value of units
allocated to policyholders on a contract by contract basis.
2.19.2 Life insurance in-force business
The Group recognises as an intangible asset the value of in-force business in respect of life insurance contracts.
The asset represents the present value of the shareholders’ interest in the profits expected to emerge from
those contracts written at the reporting date, using appropriate economic and actuarial assumptions, similar to
the calculation of the respective life insurance contract liabilities. The change in the present value is determined
on a post-tax basis. For presentation purposes, the change in value is grossed up at the underlying rate of tax.
2.19.3 General insurance business
Premiums are recognised in the consolidated income statement in the period in which insurance cover is
provided. Unearned premiums relating to the period of risk after the reporting date are deferred to subsequent
reporting periods.
An increase in liabilities arising from claims is made for the estimated cost of claims notified but not settled and
claims incurred but not notified at the reporting date. The increase in liabilities for the cost of claims notified
but not settled is made on a case by case basis after taking into consideration all known facts, the cost of
claims that have recently been settled and assumptions regarding the future development of outstanding cases.
Similar statistical techniques are used to determine the increase in liabilities for claims incurred but not notified
at the reporting date.
2.19.4 Investment contracts
The Group offers deposit administration funds which provide a guaranteed investment return on members’
contributions. Policies are written to employees of companies, which define the benefits to be received. Any
shortfalls are covered by the companies which employ the staff being insured. The Group has no liability for
any actuarial deficit.
41
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
2.
Summary of significant accounting policies (continued)
2.19
Insurance business (continued)
2.19.5 Liability adequacy test
At each reporting date, liability adequacy tests are performed to ensure the adequacy of insurance contract
liabilities. In performing these tests, current best estimates of discounted future contractual cash flows and
claims, expenses and investment returns are used. Any deficiency is charged to the consolidated income
statement.
2.20
Repurchase and reverse repurchase agreements
Securities sold under agreements to repurchase (repos) at a specific future date are not derecognised from the
consolidated balance sheet. The corresponding cash received, including accrued interest, is recognised on the
consolidated balance sheet as ‘Repurchase agreements’, reflecting its economic substance as a loan to the
Group. The difference between the sale price and repurchase price is treated as interest expense and is
accrued over the life of the agreement using the effective interest rate method. Repos outstanding at the
reporting date relate to agreements with financial institutions. The investments pledged as security for the
repurchase agreements can be sold or repledged by the counterparty. When the counterparty has the right to
sell or repledge the securities, the Group reclassifies those securities in its consolidated balance sheet to
‘Investments pledged as collateral’.
Securities purchased under agreements to resell (reverse repos) at a specific future date, are recorded as
reverse repo transactions. The difference between the purchase and the resale price is treated as interest
income and is accrued over the life of the agreement using the effective interest rate method. Reverse repos
outstanding at the reporting date relate to agreements with banks. The investments received as security under
reverse repurchase agreements can either be sold or repledged by the Group.
2.21
Finance leases – The Group as lessor
Finance leases, where the Group transfers substantially all the risks and rewards incidental to ownership of the
leased item to the lessee, are included in the consolidated balance sheet in ‘Loans and advances to customers’.
A receivable is recognised over the lease period of an amount equal to the present value of the lease payments
using the implicit rate of interest and including any guaranteed residual value. Finance income is recognised in
‘Interest income’ in the consolidated income statement.
2.22
Operating leases
2.22.1 Group as lessee
Leases that do not transfer to the Group substantially all the risks and benefits incidental to ownership of the
leased items are operating leases. Operating lease payments are recognised as an expense in the consolidated
income statement on a straight line basis over the lease term in ‘Other operating expenses’.
2.22.2 Group as lessor
Leases in which the Group does not transfer substantially all the risks and rewards of ownership of an asset are
classified as operating leases.
2.23
Property and equipment
Owner-occupied property is property held by the Group for use in the supply of services or for administrative
purposes. Investment property is property held by the Group to earn rentals and/or for capital appreciation. If
a property of the Group includes a portion that is owner-occupied and another portion that is held to earn
rentals or for capital appreciation, the classification is based on whether or not these portions can be sold
separately. Otherwise, the whole property is classified as owner-occupied property unless the owner-occupied
portion is insignificant. The classification of property is reviewed on a regular basis to account for major
changes in its use.
42
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
2.
Summary of significant accounting policies (continued)
2.23
Property and equipment (continued)
Owner-occupied property is initially measured at cost and subsequently measured at fair value less
accumulated depreciation and impairment. Valuations are carried out periodically between 3 to 5 years,
depending on the property, (but more frequent revaluations may be performed where there are significant and
volatile movement in values), by independent qualified valuers or by the internal qualified valuers of the Group
applying a valuation model recommended by the International Valuation Standards Council. Depreciation is
calculated on the revalued amount less the estimated residual value of each building on a straight line basis
over its estimated useful life. Gain or losses from revaluations are recognised in other comprehensive income
in ‘Property revaluation’.
The ‘Property revaluation reserve’ includes revaluation of property initially used by the Group for its operations
which was subsequently transferred to ‘Investment properties’. Useful life is in the range of 30 to 67 years.
Freehold land is not depreciated. On disposal of freehold land and buildings, the relevant revaluation reserve
balance is transferred to ‘Accumulated losses’.
The cost of adapting/improving leasehold property is amortised over 5 years.
Equipment is measured at cost less accumulated depreciation. Depreciation of equipment is calculated on a
straight line basis over its estimated useful life of 5 to 10 years.
At the reporting date, when events or changes in circumstances indicate that the carrying value may not be
recovered, property and equipment is assessed for impairment. Where the recoverable amount is less than the
carrying amount, equipment is written down to its recoverable amount.
2.24
Investment properties
Investment properties are measured initially at cost, including transaction costs. Subsequent to initial
recognition, investment properties are measured at fair value, as at the reporting date. Gains or losses arising
from changes in the fair values of investment properties are included in ‘Gains/(losses) from revaluation and
disposal of investment properties’ in the consolidated income statement. Valuations are carried out by
independent qualified valuers or by the internal qualified valuers of the Group applying a valuation model
recommended by the International Valuation Standards Council.
Transfers are made to (or from) investment property only when there is a change in use. For a transfer from
owner-occupied property to investment property, the Group accounts for such property in accordance with the
policy described in Note 2.23 ‘Property and equipment’ up to the date of change in use. For a transfer from
investment property to stock of property, the property’s deemed cost for subsequent accounting is its fair value
at the date of change in use.
2.25
Stock of property
The Group in its normal course of business acquires properties in debt satisfaction, which are held either
directly or by entities set up and controlled by the Group for the sole purpose of managing these properties with
an intention to be disposed of. These properties are recognised in the Group’s consolidated financial statements
as stock of property, reflecting the substance of these transactions.
The stock of property is measured at the lower of cost and net realisable value. Net realisable value is the
estimated selling price, less the estimated costs necessary to make the sale.
If net realisable value is below the cost of the stock of property, impairment is recognised in ‘Impairment of
non-financial instruments’ in the consolidated income statement.
43
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
2.
Summary of significant accounting policies (continued)
2.26 Non-current assets held for sale and discontinued operations
The Group classifies non-current assets and disposal groups as held for sale if their carrying amounts will be
recovered principally through a sale or distribution rather than through continuing use.
The condition is regarded as met only when the sale is highly probable and the asset or disposal group is
available for immediate sale in its present condition. Actions required to complete the sale should indicate that
it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Management
must be committed to the sale, which should be expected to qualify for recognition as a completed sale within
one year from the date of classification.
Such non-current assets and disposal groups held for sale are measured at the lower of their carrying amount
and fair value less costs to sell, except for those assets and liabilities that are not within the scope of the
measurement requirements of IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’ such as
deferred taxes, financial instruments, investment properties measured at fair value, insurance contracts and
assets and liabilities arising from employee benefits. These are measured in accordance with the Group’s
relevant accounting policies described elsewhere in this note.
Immediately before the initial classification as held for sale, the carrying amount of the asset (or assets and
liabilities in the disposal group) is measured in accordance with applicable IFRSs. On subsequent
remeasurement of a disposal group, the carrying amounts of the assets and liabilities noted above that are not
within the scope of the measurement requirements of IFRS 5 are remeasured in accordance with applicable
IFRSs before the fair value less costs to sell of the disposal group is determined.
If fair value less costs to sell of the disposal group is below the aggregate carrying amount of all of the assets
and liabilities included in the disposal group, the disposal group is written down. The impairment loss is
recognised in the income statement for the year. Where an impairment loss is recognised (or reversed) for a
disposal group, it is allocated between the scoped-in non–current assets using the order of allocation set out in
IAS 36 and no element of the adjustment is allocated to the other assets and liabilities of the disposal group.
In case that the carrying amount of scoped-in non-current assets is less than the amount by which a disposal
group’s carrying amount exceeds its fair value less costs to sell, the excess is not recognised.
Property and equipment and intangible assets are not depreciated or amortised once classified as held for sale.
Assets and liabilities classified as held for sale are presented separately in the consolidated balance sheet.
A disposal group qualifies as discontinued operation if an entity or a component of an entity has been disposed
of or is classified as held for sale and a) represents a separate major line of business or geographical area of
operations, b) is part of a single co-ordinated plan to dispose of a separate major line of business or
geographical area of operations, or c) is a subsidiary acquired exclusively with a view to resale. Net loss/profit
from discontinued operations includes the net total of operating profit and loss before tax from discontinued
operations (including net gain or loss on sale before tax and gain or loss on measurement to fair value less cost
to sell of a disposal group constituting a discontinued operation) and discontinued operations tax expense.
Discontinued operations are excluded from the results of continuing operations and are presented as a single
amount as profit or loss after tax from discontinued operations in the consolidated income statement.
Additional disclosures are provided in Note 6. All other notes to the financial statements include amounts from
continuing operations, unless otherwise stated.
2.27
Intangible assets
Intangible assets include among others computer software and acquired insurance portfolio customer lists.
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets
acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition,
intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment
losses.
44
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
2.
Summary of significant accounting policies (continued)
2.27
Intangible assets (continued)
Amortisation is calculated on a straight line basis over the estimated useful life of the assets which is 3 to 8
years for computer software. For the accounting policy of in-force life insurance business, refer to Note 2.19.2.
Intangible assets are reviewed for impairment when events relating to changes to circumstances indicate that
the carrying value may not be recoverable. If the carrying amount exceeds the recoverable amount then the
intangible assets are written down to their recoverable amount.
2.28
Share capital
Any difference between the issue price of share capital and the nominal value is recognised as share premium.
The costs incurred attributable to the issue of share capital are deducted from equity.
2.29
Treasury shares
Own equity instruments which are acquired by the Company or by any of its subsidiaries are presented as
treasury shares at their acquisition cost. Treasury shares are deducted from equity until they are cancelled or
reissued. No gain or loss is recognised in the consolidated income statement on the purchase, sale, issue or
cancellation of the Company’s own equity shares.
2.30
Provisions
2.30.1 Provisions for pending litigation, claims and regulatory matters
Provisions for pending litigation, claims and regulatory matters against the Group are made when: (a) there is a
present obligation (legal or constructive) arising from past events, (b) the settlement of the obligation is
expected to result in an outflow of resources embodying economic benefits, and (c) a reliable estimate of the
amount of the obligation can be made.
2.30.2 Provisions for undrawn loan commitments
Provisions are made for undrawn loan commitments if it is probable that the facility will be drawn and result in
the recognition of an asset at an amount less than the amount advanced.
2.31
Financial guarantees
The Group issues financial guarantees to its customers, consisting of letters of credit, letters of guarantee and
acceptances. Financial guarantees are initially recognised in the consolidated financial statements at fair value,
in ‘Accruals, deferred income and other liabilities’. Subsequently, the Group’s liability under each guarantee is
measured at the higher of: (a) the amount initially recognised reduced by the cumulative amortised premium
which is periodically recognised in the consolidated income statement in ‘Fee and commission income’ in
accordance with the terms of the guarantee, and (b) the best estimate of the expenditure required to settle any
financial obligation arising as a result of the guarantee.
Any increase in the liability relating to financial guarantees is recognised in the consolidated income statement
in ‘Provisions for impairment of loans and advances to customers and other customer credit losses’. The
balance of the liability for financial guarantees that remains is recognised in ‘Fee and commission income’ in the
consolidated income statement when the guarantee is fulfilled, cancelled or expired.
2.32
Comparative information
Comparatives have been reclassified to reflect the change in presentation of ‘Gains on disposal of stock of
property’ within the consolidated income statement, previously included within ‘Other income’. This change in
presentation did not have any impact on the profit for the year.
In addition reclassifications to comparative information were made to conform to current year presentation.
Such reclassification did not have an impact on the profit for the year or equity of the Group.
45
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
3.
Going concern
Management has made an assessment of the Group’s ability to continue as a going concern.
The conditions that existed during 2016 and the developments up to the date of approval of these consolidated
financial statements that have been considered in management’s going concern assessment include, amongst
others, the operating environment in Cyprus and of the Group (Note 4).
Management believes that the Group is taking all necessary measures to maintain its viability and the
development of its business in the current economic environment.
Management, taking into consideration the factors described below and the uncertainties that existed at the
reporting date, is satisfied that the Group has the resources to continue in business for the foreseeable future
and, therefore, the going concern principle is appropriate for the reasons set out below, despite the fact that, as
disclosed in Notes 4.2.3 and 45 the Company is currently not in compliance with its liquidity regulatory
requirements with respect to its operations in Cyprus and the Group is currently not in compliance with its
regulatory liquidity requirements with respect to the Liquidity Coverage Ratio (LCR), which can be considered as
a material uncertainty as to its ability to continue as a going concern.
Τhe Group’s Common Equity Tier 1 (CET1) ratio at 31 December 2016 stands at 14,5% (transitional) and
the total capital at 14,6%, higher than the minimum required ratios (Note 4.2.1).
The improving funding structure of the Group, as a result of the continuing positive customer flows in
Cyprus.
The increase in Group customer deposits by €2.329 million during 2016. Customer deposits stood at
€16.510 million at 31 December 2016.
The Emergency Liquidity Assistance (ELA) funding, was repaid in full on 5 January 2017. ELA stood at €200
million at 31 December 2016 compared to €3,8 billion at 31 December 2015 and €11,4 billion at its peak
level in April 2013 (Note 4.2.3).
The improved ratings of both the Company (Fitch Ratings upgrade of Long-term Issuer Default Rating from
‘CCC’ to ‘B-’ in April 2016 with stable outlook, and Moody’s Investor Service upgrade of long-term deposit
rating from Caa3 with stable outlook to Caa3 with positive outlook in June 2016 and to Caa2 with positive
outlook in December 2016) and the Republic of Cyprus (Fitch Ratings upgrade by one notch to BB- with a
positive outlook in October 2016, S&P Global Rating by one notch to BB with a positive outlook in
September 2016 and by one notch to BB+ with a stable outlook in March 2017 and Moody’s Investors
Service by two notches to B1 with a stable outlook in November 2015. In November 2016 Moody’s
Investors Service improved the outlook on the Republic of Cyprus from stable to positive).
The Company has returned to the debt capital markets in January 2017 with the issue of unsecured and
subordinated Tier 2 Capital Note of €250 million.
4.
4.1
Operating environment
Cyprus
Cyprus exited its economic adjustment programme at the end of March 2016 after a successful return to
markets and having utilised only about 70% of the €10 billion funding resources made available by the
European Union (EU) and the International Monetary Fund (IMF). Based on the Ministry of Finance Stability
Programme 2016-2019 (May 2016), in the area of public finances, the government carried out a strong fiscal
adjustment and the budget returned to near balance, public spending was reduced and tax collection was made
more efficient.
Unemployment dropped to 13,3% during 2016 compared to an average unemployment rate of 14,9% for 2015
as a whole and a peak of 16,5% in the fourth quarter of 2014 as per the Cyprus Statistical Service.
Real GDP rose by 2,8% in 2016 according to the Cyprus Statistical Service, compared to an increase of 1,7%
during 2015.
Consumer prices continued to decline for the fourth consecutive year, down by 1,4% in 2016, as per the Cyprus
Statistical Service.
Tourist arrivals increased by 19,8% during 2016. The index of industrial production increased by 8,7% in 2016.
In real gross value added terms, industrial output in 2016 increased by 5,9% in the first three quarters of 2016
after an increase of 2,9% in 2015 as per data by the Cyprus Statistical Service.
46
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
4.
4.1
Operating environment (continued)
Cyprus (continued)
In the property market, the Central Bank’s residential property price index continued to decline year-on-year
but at a slowing pace. The index dropped by 1,3% in the third quarter of 2016 after dropping by 1,7% and
1,6% in the second and first quarter respectively.
Downside risks to the growth projections are associated with high levels of non-performing loans, loss of
momentum in structural reforms with associated risks for public finances, and a return of inflation. Downside
risks may also be associated with a deterioration of the external environment for Cyprus. These would involve
slower growth in the UK with a weakening of the pound following the Brexit referendum. Political uncertainty in
Europe triggered by a British exit or by the refugee crisis could also lead to increased economic uncertainty and
undermine economic confidence.
Upside risks to the outlook relate to a possible better growth performance in the EU and stronger investment
spending as property prices are stabilising and various projects especially in tourism are implemented.
The international credit rating agencies have upgraded the rating of the country. Fitch Ratings upgraded the
rating of the Republic of Cyprus one notch to BB- with a positive outlook in October 2016, S&P Global Rating by
one notch to BB with a positive outlook in September 2016 and by one notch to BB+ with a stable outlook in
March 2017 and Moody’s Investors Service by two notches to B1 with a stable outlook in November 2015. In
November 2016 Moody’s Investors Service improved the outlook on the Republic of Cyprus from stable to
positive.
In July 2016 the Cyprus government accessed international capital markets for the third time since the start of
the economic adjustment programme to date, issuing a seven year Eurobond of €1 billion at a yield of 3,8%.
4.2
The Group
4.2.1 Regulatory capital ratios
The CET1 ratio of the Group at 31 December 2016 stands at 14,5% (transitional) and the total capital at
14,6%.
The minimum Pillar I total capital requirement is 8,0% and may be met, in addition to the 4,5% CET1
requirement, with up to 1,5% by Additional Tier 1 capital and with up to 2,0% by Tier 2 capital.
The Group is also subject to additional capital requirements for risks which are not covered by the Pillar I
capital requirements (Pillar II add-ons). Following the enactment of the amendments in the Cypriot Banking
Law in February 2017 regarding the gradual phase-in of the Capital Conservation Buffer (CCB) and based on
the Supervisory Review and Evaluation Process (SREP) performed by the European Central Bank (ECB) in 2016,
the Group’s minimum CET1 capital ratio as from 1 January 2017 has been reduced to 9,50% compared to
10,75% fully phased-in of CCB (minimum CET1 capital ratio at 31 December 2016: 11,75% fully phased-in of
CCB), comprising of a 4,5% Pillar I requirement, a 3,75% Pillar II requirement and a phased-in CCB of 1,25%.
The ECB has also provided non-public guidance for an additional Pillar II CET1 buffer.
The overall Total Capital Ratio requirement as from 1 January 2017 following the amendments in the Cypriot
Banking Law in February 2017 regarding the gradual phase-in of CCB, has been reduced to 13,00% compared
to 14,25% (fully phased-in of CCB), comprising of a Pillar I requirement of 8% (of which up to 1,5% can be in
the form of Additional Tier 1 capital and up to 2,0% in the form of Tier 2 capital), a Pillar II requirement of
3,75% (in the form of CET1), as well as a phased-in CCB of 1,25%.
The minimum CET1 requirement including Pillar II, applicable for the year 2016 was determined by the ECB at
11,75% in November 2015 and includes CCB on a fully loaded basis.
The Group's capital position at 31 December 2016 exceeds both its Pillar I and its Pillar II add-on capital
requirements. However, the Group's Pillar II add-on capital requirements are a point-in-time assessment and
therefore are subject to change over time.
47
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
4.
4.2
Operating environment (continued)
The Group (continued)
4.2.2 Asset quality
The Group’s loans that are individually impaired or past due for more than 90 days (90+ DPD) have decreased
by 27% during 2016 and totalled €8.309 million at 31 December 2016, representing 41% of gross loans before
fair value adjustment on initial recognition (Note 43). The provisioning coverage ratio improved to 54% at 31
December 2016 compared to 48% at 31 December 2015. The Group non-performing exposures (NPEs), as
defined by the European Banking Authority (EBA), totalled €11.034 million at 31 December 2016 and accounted
for 55% of gross loans. The provisioning coverage ratio of NPEs totalled 41% at 31 December 2016 compared
to 39% at 31 December 2015.
The Group addresses the asset quality challenge through the operation of the Restructuring and Recoveries
Division which is actively seeking to find innovative solutions to manage distressed exposures. The Group has
been successful in engineering restructuring solutions across the spectrum of its loan portfolio. 90+ DPD have
decreased by 36% since their peak of €13.003 million as at 31 December 2013. NPEs have decreased by 27%
since their peak of €15.175 million as at 31 December 2013.
4.2.3 Liquidity
The Group’s funding position continues to improve with customer deposits increasing by €2.329 million or 16%
in the year ended 31 December 2016.
Group customer deposits totalled €16.510 million at 31 December 2016 compared to €14.181 million at 31
December 2015. Customer deposits in Cyprus reached €15.043 million at 31 December 2016 from €12.691
million at 31 December 2015. Customer deposits stood at 74% of total assets as at 31 December 2016
(compared to 61% at 31 December 2015 and a low of 48% at 31 March 2014). The net loans to deposit ratio
stood at 95% as at 31 December 2016 (compared to 121% at 31 December 2015).
The level of ELA funding at 31 December 2016 amounted to €200 million (Note 30), down from €3,8 billion at
31 December 2015 and its peak level of €11,4 billion in April 2013. ELA was fully repaid on 5 January 2017.
ELA is available to solvent Euro area credit institutions and although the Company has received no specific
assurance, management expects that the Company will continue to have access to the central bank liquidity
facilities, in line with applicable rules if it were to face a ‘stress event’ that gave rise to temporary liquidity
problems. If a stress event were to occur in the future, the Company would seek to utilise ELA funding,
assuming it has sufficient available eligible collateral at the time.
It is noted that the Group’s Restructuring Plan approved in 2013 by the Central Bank of Cyprus (CBC) included
ELA funding throughout the Restructuring Plan period (2013-2017).
The Council of Ministers and the Committee on Financial and Budgetary Affairs of the House of Representatives
had approved in January 2014 the issuance of up to €2,9 billion of guarantees for bonds/loans issued by credit
institutions under the ‘Granting of Government Guarantees for Loans and/or issuance of Bonds by Credit
Institutions Law of 2012’. The European Commission announced in June 2016 the eighth extension of the bank
guarantee scheme, which continued until 31 December 2016. Based on the prevailing conditions, the Ministry of
Finance has not applied for a further extension of the bank guarantee scheme.
The credit ratings of the Republic of Cyprus by the main credit rating agencies albeit improving, continue to be
below investment grade. As a result, the ECB is not able to include Cyprus Government bonds in its asset
purchase programme, or as eligible collateral for Eurosystem monetary operations, as was the case when the
waiver for collateral eligibility due to the country being under an economic adjustment programme existed.
In January 2017 the Company issued €250 million unsecured and subordinated Tier 2 Capital Note under the
Company’s EMTN Programme. The note was priced at par, with a coupon of 9,25% (Note 53.4).
The Company is currently not in compliance with the regulatory liquidity requirements with respect to its
operations in Cyprus and the Group is currently not in compliance with its regulatory liquidity requirements with
respect to the LCR and is therefore dependent on continuing regulatory forbearance. Additional information on
liquidity and details on certain liquidity ratios are disclosed in Note 45.
48
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
4.
4.2
Operating environment (continued)
The Group (continued)
4.2.4 Pending litigation, claims and regulatory matters
The management has considered the potential impact of pending litigation and claims, investigations and
regulatory matters against the Group. The Group has obtained legal advice in respect of these claims.
Despite the novelty of many of the claims such as the bail-in of depositors and the absorption of losses by the
holders of equity and debt instruments of the Company and the uncertainties inherent in a unique situation,
based on the information available at present and on the basis of the law as it currently stands, management
considers that the said claims as well as other pending litigation, claims and regulatory matters are unlikely to
have a material adverse impact on the financial position and capital adequacy of the Group (Note 38).
5.
Significant judgements, estimates and assumptions
The preparation of the consolidated financial statements requires the Company’s Board of Directors and
management to make judgements, estimates and assumptions that can have a material impact on the amounts
recognised in the consolidated financial statements and the accompanying disclosures, as well as the
disclosures of contingent liabilities. Uncertainty about these assumptions and estimates could result in
outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future
periods.
The key assumptions concerning the future and other key sources of estimation of uncertainty at the reporting
date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and
liabilities are described below. The Group based its assumptions and estimates on parameters available when
the consolidated financial statements were prepared. Existing circumstances and assumptions about future
developments may, however, change due to market changes or circumstances beyond the control of the Group.
Such changes are reflected in the assumptions when they occur.
5.1
Provision for impairment of loans and advances to customers
The Group reviews its loans and advances to customers to assess whether a provision for impairment should be
recorded in the consolidated income statement. In particular, management is required to estimate the amount
and timing of future cash flows in order to determine the amount of provision required and the calculation of
the impairment allowance involves the use of judgement. Such estimates are based on assumptions about a
number of factors and therefore actual impairment losses may differ.
The carrying amount of the loan is reduced through the use of a provision account and the amount of the loss is
recognised in the consolidated income statement. Loans together with the associated provisions are written off
when there is no realistic prospect of future recovery. Partial write-offs, including non contractual write-offs,
may also occur when it is considered that there is no realistic prospect for the recovery of the contractual cash
flows. In addition, write-offs may reflect restructuring activity with customers and are part of the terms of the
agreement and subject to satisfactory performance.
The Group may change certain estimates from period to period, however it is impracticable to estimate the
effect of such individual estimates due to interdependencies between estimates and as the profile of the
population of loans changes from period to period.
A very important factor for the estimation of provisions is the timing and net recoverable amount from
repossession or realisation of collaterals which mainly comprise real estate assets.
Assumptions have been made about the future changes in property values, as well as the timing for the
realisation of the collateral and for taxes and expenses on the repossession and subsequent sale of the
collateral. Indexation has been used to estimate updated market values of properties, while assumptions were
made on the basis of a macroeconomic scenario for future changes in property values. The timing of recovery
from real estate collaterals has been estimated to be on average 3 years, with the exception of specific cases
for which, based on specific facts and circumstances, a different period has been used and for customers in
Debt Recovery where an average 6 year period has been used. In accordance with the Loan Impairment and
Provisioning Procedures Directives of 2014 and 2015 of the CBC, the cumulative average future change in
property values during the year has been capped to zero.
49
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
5.
Significant judgements, estimates and assumptions (continued)
5.1
Provision for impairment of loans and advances to customers (continued)
The average liquidity haircut and selling expenses used in the provisions calculation is 10% of the current
market value of the property for those collaterals for which the increase in their value is capped to zero and
10% of the projected market value of the property for those collaterals for which their value is expected to
drop.
The above assumptions are also influenced by the ongoing regulatory dialogue the Company maintains with its
lead regulator, the ECB, and other regulatory guidance and interpretations issued by various regulatory and
industry bodies such as the ECB and EBA, which provide guidance and expectations as to relevant definitions
and the treatment/classification of certain parameters/assumptions used in the estimation of provisions.
Any changes in these assumptions or difference between assumptions made and actual results could result in
significant changes in the amount of required provisions for impairment of loans and advances.
For individually significant assets, impairment allowances are calculated on an individual basis and all relevant
considerations that have a bearing on the expected future cash flows are taken into account (for example, the
business prospects for the customer, the realisable value of collateral, the Group’s position relative to other
claimants, the reliability of customer information and the likely cost and duration of the work-out process). The
level of the impairment allowance is the difference between the value of the discounted expected future cash
flows (discounted at the loan’s original effective interest rate) and its carrying amount. Subjective judgements
are made in the calculation of future cash flows. Furthermore, judgements change with time as new
information becomes available or as work-out strategies evolve, resulting in frequent revisions to the
impairment allowance as individual decisions are taken. Changes in these estimates would result in a change in
the allowances and have a direct impact on the impairment charge.
In addition to provisions for impairment on an individual basis, the Group also makes collective impairment
provisions. The Group adopts a formulaic approach for collective provisions, which includes assigning
probabilities of default and loss given default for portfolios of loans. This methodology is subject to estimation
uncertainty, partly because it is not practicable to identify losses on an individual loan basis because of the
large number of loans in each portfolio. In addition, the use of historical information for probabilities of default
and loss rates is supplemented with significant management judgement to assess whether current economic
and credit conditions are such that the actual level of incurred losses is likely to be greater or less than that
suggested by historical experience.
Impairment assessment also includes off-balance sheet credit exposures represented by guarantees given and
by irrevocable commitments to disburse funds. Off-balance sheet credit exposures of the individually assessed
assets require assumptions on the probability, timing and amount of cash outflows; otherwise the provision is
calculated on a collective basis, taking into account the probability of loss for the portfolio in which the
customer is included for on-balance sheet exposures impairment assessment. The Group may change certain
estimates from period to period, however it is impracticable to estimate the effect of such individual estimates
due to interdependencies between estimates and as the profile of the population of off-balance sheet exposure
changes from period to period.
In normal circumstances, historical experience provides the most objective and relevant information from which
to assess inherent loss within each portfolio. In certain circumstances, historical loss experience provides less
relevant information about the incurred loss in a given portfolio at the reporting date, for example, where there
have been changes in economic, regulatory or behavioural conditions such that the most recent trends in the
portfolio risk factors are not fully reflected. In these circumstances, such risk factors are taken into account
when calculating the appropriate levels of impairment allowances, by adjusting the provision for impairment
derived solely from historical loss experience.
The total amount of the Group’s provision for impairment of loans and advances is inherently uncertain because
it is highly sensitive to changes in economic and credit conditions across a number of geographical areas.
50
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
5.
Significant judgements, estimates and assumptions (continued)
5.1
Provision for impairment of loans and advances to customers (continued)
Loans subject to collective impairment assessment whose terms have been renegotiated are no longer
considered past due, but are treated as up to date loans for measurement purposes. Loans subject to collective
impairment assessment whose terms have been renegotiated are taken into account in determining the inputs
for collective impairment calculation. Loans subject to individual impairment assessment, whose terms have
been renegotiated, are subject to ongoing review to determine whether they remain impaired. The carrying
amounts of loans that have been classified as renegotiated retain this classification in accordance with the rules
of the technical standard of the EBA.
Economic and credit conditions within geographical areas are influenced by many factors with a high degree of
interdependency so that there is no one single factor to which the Group’s loan impairment provisions as a
whole are particularly sensitive. Different factors are applied in each country to reflect the local economic
conditions, laws and regulations and the assumptions underlying this judgement are highly subjective. The
methodology and the assumptions used in calculating impairment losses are reviewed regularly. It is possible
that the actual results could be different from the assumptions made, resulting in a material adjustment to the
carrying amount of loans and advances.
Further details on impairment allowances and related credit information are set out in Note 43.
5.2
Fair value of investments and derivatives
The best evidence of fair value is a quoted price in an actively traded market. If the market for a financial
instrument is not active, a valuation technique is used. The majority of valuation techniques employed by the
Group use only observable market data and so the reliability of the fair value measurement is relatively high.
However, certain financial instruments are valued on the basis of valuation techniques that feature one or more
significant inputs that are not observable. Valuation techniques that rely on non-observable inputs require a
higher level of management judgement to calculate a fair value than those based wholly on observable inputs.
Valuation techniques used to calculate fair values include comparisons with similar financial instruments for
which market observable prices exist, discounted cash flow analysis and other valuation techniques commonly
used by market participants. Valuation techniques incorporate assumptions that other market participants
would use in their valuations, including assumptions about interest rate yield curves, exchange rates, volatilities
and default rates. When valuing instruments by reference to comparable instruments, management takes into
account the maturity, structure and rating of the instrument with which the position held is being compared.
The Group only uses models with unobservable inputs for the valuation of certain unquoted equity investments.
In these cases, estimates are made to reflect uncertainties in fair values resulting from a lack of market data
inputs, for example, as a result of illiquidity in the market. Inputs into valuations based on unobservable data
are inherently uncertain because there is little or no current market data available from which to determine the
level at which an arm’s length transaction would occur under normal business conditions. Unobservable inputs
are determined based on the best information available.
Further details on the fair value of assets and liabilities are disclosed in Note 22.
5.3
Impairment of available-for-sale investments
Available-for-sale investments in equity securities are impaired when there has been a significant or prolonged
decline in their fair value below cost. The determination of what is significant or prolonged requires judgement
by management. Management has assessed that a loss of 25% or more is considered significant, except in the
cases of investment companies where higher limits are set. Prolonged has been assessed by management to
be a period of 12 months or more. The factors which are evaluated include the expected volatility in share
prices. In addition, impairment may be appropriate when there is evidence that significant adverse changes
have taken place in the technological, market, economic or legal environment in which the investee operates.
51
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
5.
Significant judgements, estimates and assumptions (continued)
5.3
Impairment of available-for-sale investments (continued)
Available-for-sale investments in debt securities are impaired when there is objective evidence of impairment
as a result of one or more events that occurred after the initial recognition of the investment and the event (or
events) has an impact on the estimated future cash flows of the investment. Such impairment review takes
into account a number of factors such as the financial condition of the issuer, any breach of contract, the
probability that the issuer will enter bankruptcy or other financial reorganisation, which involves a high degree
of judgement, as well as changes in the fair value of individual instruments such as when their fair value at the
reporting date falls below 90% of the instruments’ amortised cost.
Further details on impairment of available-for-sale investments are presented in Notes 16 and 20.
5.4
Retirement benefits
The cost of defined benefit pension plans is determined using actuarial valuations. The actuarial valuations
involve making assumptions about discount rates, the expected rate of return on plan assets, future salary
increases, mortality rates as well as future pension increases where necessary. The Group’s management sets
these assumptions based on market expectations at the reporting date using its best estimates for each
parameter covering the period over which the obligations are to be settled. In determining the appropriate
discount rate, management considers the yield curve of high quality corporate bonds. In determining other
assumptions, a certain degree of judgement is required. Future salary increases are based on expected future
inflation rates for the specific country plus a margin to reflect the best possible estimate relating to parameters
such as productivity, workforce maturity and promotions. The expected return on plan assets is based on the
composition of each fund’s plan assets, estimating a different rate of return for each asset class. Estimates of
future inflation rates on salaries and expected rates of return of plan assets represent management’s best
estimates for these variables. These estimates are derived after consultation with the Group’s advisors, and
involve a degree of judgement. Due to the long-term nature of these plans, such estimates are inherently
uncertain.
Further details on retirement benefits are disclosed in Note 14.
5.5
General insurance business
The Group is engaged in the provision of general insurance services. Risks under these policies usually cover a
period of 12 months.
The liabilities for outstanding claims arising from insurance contracts issued by the Group are calculated based
on case estimates by loss adjusters and facts known at the reporting date. With time, these estimates are
reconsidered and any adjustments are recognised in the financial statements of the period in which they arise.
The principal assumptions underlying the estimates for each claim are based on past experience and market
trends, and take into consideration claim handling costs. Other external factors that may affect the estimate of
claims, such as recent court rulings and the introduction of new legislation are also taken into consideration.
Provision is also made for claims incurred but not reported (IBNR) by the reporting date. Past experience as to
the number and amount of claims reported after the reporting date is taken into consideration in estimating the
IBNR provision.
Insurance contract liabilities are sensitive to changes in the above key assumptions. The sensitivity of certain
assumptions, such as the introduction of new legislation and the rulings of certain court cases, are very difficult
to quantify. Furthermore, the delays that arise between the occurrence of a claim and its subsequent
notification and eventual settlement increase the uncertainty existing at the reporting date.
Further information on general insurance business is disclosed in Note 12.
52
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
5.
Significant judgements, estimates and assumptions (continued)
5.6
Life insurance business
The Group is engaged in the provision of life insurance services. Whole life insurance plans (life plans) relate to
plans associated with assets where the amount payable in the case of death is the greater of the sum insured
and the value of investment units. Simple insurance or temporary term plans (term plans) relate to fixed term
duration plans for protection against death. In case of death within the coverage period, the insured sum will
be paid. Endowment insurance (investment plans/mortgage plans/horizon plans) refer to specific duration
plans linked to investments, to create capital through systematic investment in association with death insurance
coverage whereby the higher of the sum insured and the value of investment units is payable on death within
the contract term.
Further information on life insurance business is disclosed in Note 12.
5.6.1
Value of in-force business
The value of the in-force business asset represents the present value of future profits expected to arise from
the portfolio of in-force life insurance. The valuation of this asset requires assumptions to be made about
future economic and operating conditions which are inherently uncertain and changes could significantly affect
the value attributed to these assets. The methodology used and the key assumptions that have been made in
determining the carrying value of the in-force business asset at 31 December 2016, are set out in Note 24.
5.6.2
Insurance liabilities
The calculation of liabilities and the choice of assumptions regarding insurance contracts require the
management of the Group to make significant estimates.
The assumptions underlying the estimates for each claim are based on past experience, internal factors and
conditions, as well as external factors which reflect current market prices and other published information. The
assumptions and judgements are determined at the date of valuation of liabilities and are assessed
systematically so that the reliability and realistic position can be ensured.
Estimates for insurance contracts are made in two stages. Initially, at the start of the contract, the Group
determines the assumptions regarding future deaths, voluntary terminations, investment returns and
administration expenses. Subsequently, at each reporting date, an actuarial valuation is performed which
assesses whether liabilities are adequate according to the most recent estimates.
The assumptions with the greatest influence on the valuation of insurance liabilities are presented below:
Mortality and morbidity rates
Assumptions are based on standard national tables of mortality and morbidity, according to the type of
contract. In addition, a study is performed based on the actual experience (actual deaths) of the insurance
company for comparison purposes and if sufficient evidence exists which is statistically reliable, the results are
incorporated in these tables. An increase in mortality rates will lead to a larger number of claims (or claims
could occur sooner than anticipated), which will increase the expenditure and reduce profits for shareholders.
Investment return and discount rate
The weighted average rate of return is derived based on assets that are assumed to back liabilities, consistent
with the long-term investment strategy of the Group. These estimates are based on current market returns as
well as expectations about future economic and financial developments. An increase in investment returns
would lead to an increase in profits for shareholders.
Management expenses
Assumptions are made for management fees and contract maintenance as well as for general expenses, and
are based on the actual costs of the Group. An assumption is also made for the rate of increase in expenses in
relation to the annual inflation rate. An increase in the level of expenses would reduce profits for shareholders.
53
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
5.
Significant judgements, estimates and assumptions (continued)
5.6
Life insurance business (continued)
5.6.2
Insurance liabilities (continued)
Lapses
Each year an analysis of contract termination rates is performed, using actual data from the insurance company
incorporation until the immediate preceding year. Rates vary according to the type and duration of the plan.
According to the insurance legislation of Cyprus, no assumption is made for policy termination rates in the
actuarial valuation.
Further details on insurance liabilities are disclosed in Note 32.
5.7
Tax
The Group operates and is therefore subject to tax in various countries. Estimates are required in determining
the provision for taxes at the reporting date. The Group recognises income tax liabilities for transactions and
assessments whose tax treatment is uncertain. Where the final tax is different from the amounts initially
recognised in the consolidated income statement, such differences will impact the income tax expense, the tax
liabilities and deferred tax assets or liabilities of the period in which the final tax is agreed with the relevant tax
authorities.
Deferred tax assets are recognised by the Group in respect of tax losses to the extent that it is probable that
future taxable profits will be available against which the losses can be utilised. Judgement is required to
determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of
future taxable profits, together with future tax-planning strategies. These variables have been established on
the basis of significant management judgement and are subject to uncertainty. It is possible that the actual
future events could be different from the assumptions made, resulting in a material adjustment to the carrying
amount of deferred tax assets.
The assumptions with greater influence on deferred tax are disclosed in Note 17.
5.8
Classification of properties
The Group determines whether a property is classified as investment property or stock of property as follows:
Investment properties comprise land and buildings that are not occupied for use by, or in the operations
of, the Group, nor for sale in the ordinary course of business, but are held primarily to earn rental income
and capital appreciation. These buildings are substantially rented to tenants and not intended to be sold in
the ordinary course of business.
Stock of property comprises real estate assets held with an intention to be disposed of. This principally
relates to properties acquired through debt-for-property swaps and properties acquired through the
acquisition of certain operations of Laiki Bank in 2013. The Group has set up the ‘Real Estate Management
Unit (REMU) in late 2015, to manage these assets (including selective investments and development) and
to execute exit strategies in order to monetise these assets.
5.9
Fair value of properties held for own use and investment properties
The Group’s accounting policy for property held for own use, as well as for investment property requires that it
is measured at fair value. In the case of property held for own use, valuations are carried out periodically so
that the carrying value is not materially different from the fair value, whereas in the case of investment
properties, the fair value is established at each reporting date. Valuations are carried out by qualified valuers
by applying valuation models recommended by the Royal Institution of Chartered Surveyors and the
International Valuation Standards Council.
In arriving at their estimates of the fair values of properties, the valuers used their market knowledge and
professional judgement and did not rely solely on historical transactional comparables, taking into consideration
that there is a greater degree of uncertainty than that which exists in a more active market. Depending on the
nature of the underlying asset and available market information, the determination of the fair value of property
may require the use of estimates such as future cash flows from assets and discount rates applicable to those
assets. All these estimates are based on local market conditions existing at the reporting date.
Further information on inputs used is disclosed in Note 22.
54
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
5.
Significant judgements, estimates and assumptions (continued)
5.10 Stock of property – estimation of net realisable value
Stock of property is measured at the lower of cost and net realisable value. The net realisable value is
determined with reference to the fair value of properties adjusted for any impact of specific circumstances on
the sale process of each property. Depending on the value of the underlying asset and available market
information, the determination of costs to sell may require professional judgement which involves a large
degree of uncertainly due to the relatively low level of market activity.
More details on the stock of property are presented in Note 27.
5.11 Provisions
The accounting policy for provisions is described in Note 2.30.1. Judgement is involved in determining whether
a present obligation exists and in estimating the probability, timing and amount of any outflows. Provisions for
pending litigations, claims and regulatory matters usually require a higher degree of judgement than other
types of provisions. It is expected that the Group will continue to have a material exposure to litigation and
regulatory proceedings and investigations relating to legacy issues in the medium term. The matters for which
the Group determines that the probability of a future loss is more than remote will change from time to time, as
will the matters as to which a reliable estimate can be made and the estimated possible loss for such matters.
Actual results may prove to be significantly higher or lower than the estimate of possible loss in those matters,
where an estimate was made. In addition, loss may be incurred in matters with respect to which the Group
believed the probability of loss was remote.
For a detailed description of the nature of uncertainties and assumptions and the effect on the amount and
timing of pending litigation, claims and regulatory matters refer to Note 38.
5.12
Exercise of significant influence
The Group determines whether it exercises significant influence on companies in which it has shareholdings of
less than 20% if other factors exist that demonstrate significant influence. In performing this assessment it
considers its representation in the Board of Directors which gives rise to voting rights of more than 20% and
participation in policy-making processes, including participation in decisions about dividends and other
distributions.
6.
Segmental analysis
The Group is organised into operating segments based on the geographic location of each unit. The main
geographical location that the Group operates is Cyprus. In addition, the Cyprus segment is further organised
into operating segments based on the line of business.
The remaining Group’s activities in Greece, United Kingdom, Romania and Russia are separate operating
segments for which information is provided to management but, due to their size, have been grouped for
disclosure purposes into one segment, namely ‘Other countries’.
The Group’s activities in Cyprus and other countries include mainly the provision of banking, financial and
insurance services, as well as management of properties either held as stock or as investment property.
Management monitors the operating results of each business segment separately for the purposes of
performance assessment and resource allocation. Segment performance is evaluated based on profit after tax
and non-controlling interests. Inter-segment transactions and balances are eliminated on consolidation and are
made on an arm’s length basis.
Operating segment disclosures are provided as presented to the Group Executive Committee.
The loans and advances to customers, the customer deposits and the related income and expense are generally
included in the segment where the business is originated, instead of the segment where the transaction is
recorded. Loans and advances to customers which are originated in countries where the Group does not have
operating entities are included in the segment where they are managed.
55
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
6.
Segmental analysis (continued)
The disposal of the majority of the Russian operations was completed in September 2015 and the results of the
Russian operations which have been disposed of are presented as discontinued operations in the comparative
period. The results of the remaining Russian operations, being the management of a distressed loan portfolio,
are presented within continuing operations of the ‘Other countries’ segment.
In September 2015, the Group also completed the disposal of 65% of the shares of Aphrodite group. The
results of the Aphrodite group acquired in November 2014 and disposed of in September 2015 are presented as
discontinued operations in the comparative period.
Continuing operations
2016
Net interest income
Net fee and commission income
Net foreign exchange gains
Net gains on financial instrument transactions
Insurance income net of claims and commissions
Gains/(losses) from revaluation and disposal of
investment properties
Gains/(losses) on disposal of stock of property
Other income
Staff costs (excluding voluntary exit plan and other
termination benefits) (Note 14)
Staff costs – voluntary exit plan and other
termination benefits (Note 14)
Other operating expenses (excluding advisory and
other restructuring costs) (Note 15)
Other operating expenses - advisory and other
restructuring costs (Note 15)
Gain on derecognition of loans and advances to
customers and changes in expected cash flows
Provisions for impairment of loans and advances to
customers and other customer credit losses
(Impairment)/reversal of impairment of other
financial instruments
Cyprus
€000
Other
countries
€000
Total
€000
643.259
159.181
28.013
63.204
43.713
5.315
2.050
12.530
42.923
7.477
15.458
169
719
(341)
(689)
2.375
686.182
166.658
43.471
63.373
44.432
4.974
1.361
14.905
957.265
68.091
1.025.356
(207.045)
(17.380)
(224.425)
(62.521)
(226)
(62.747)
(150.074)
(41.339)
(191.413)
(48.579)
(2.963)
(51.542)
489.046
6.183
495.229
63.258
57
63.315
(379.984)
(53.625)
(433.609)
(12.316)
1.023
(11.293)
Impairment of non-financial instruments
(23.087)
(13.133)
(36.220)
Share of profit from associates and joint ventures
8.194
-
Profit/(loss) before tax
145.111
(59.495)
8.194
85.616
Income tax
Profit/(loss) after tax
Non-controlling interests-profit
Profit/(loss) after tax attributable to the
owners of the Company
(18.230)
(155)
(18.385)
126.881
(59.650)
(3.575)
-
67.231
(3.575)
123.306
(59.650)
63.656
56
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
6.
Segmental analysis (continued)
Continuing operations (continued)
2015
Net interest income
Net fee and commission income
Cyprus
€000
Other
countries
€000
Total
€000
788.389
146.636
54.051
842.440
6.821
153.457
Net foreign exchange gains/(losses)
48.021
(9.654)
38.367
Net gains/(losses) on financial instrument
transactions
48.205
(1.076)
47.129
Insurance income net of claims and commissions
46.961
944
47.905
Losses from revaluation and disposal of investment
properties
Gains/(losses) on disposal of stock of property
Other income
Staff costs
Other operating expenses (excluding advisory and
other restructuring costs) (Note 15)
Other operating expenses – advisory and other
restructuring costs (Note 15)
Gain on derecognition of loans and advances to
customers and changes in expected cash flows
Provisions for impairment of loans and advances to
customers and other customer credit losses
(14.900)
(38.180)
(53.080)
1.000
7.303
(118)
9.422
882
16.725
1.071.615
22.210
1.093.825
(218.057)
(15.574)
(233.631)
(164.950)
(16.958)
(181.908)
(38.357)
(4.773)
(43.130)
650.251
(15.095)
635.156
298.752
6.337
305.089
(1.145.460)
(119.094)
(1.264.554)
Impairment of other financial instruments
(29.757)
(13.746)
(43.503)
Impairment of non-financial instruments
(11.326)
(6.777)
(18.103)
Share of profit from associates and joint ventures
5.923
-
5.923
Loss before tax
Income tax
Loss after tax
(231.617)
(148.375)
(379.992)
(5.695)
(3.508)
(9.203)
(237.312)
(151.883)
(389.195)
Non-controlling interests-loss
794
5.888
6.682
Loss after tax attributable to the owners of
the Company
(236.518)
(145.995)
(382.513)
57
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
6.
Segmental analysis (continued)
Discontinued operations
2015
Net interest income
Net fee and commission income
Net foreign exchange gains
Losses from revaluation and disposal of investment
properties
Losses on disposal of stock of property
Other income
Staff costs
Russia
Subsidiary
acquired with
the view to
sale
Total
€000
€000
€000
16.353
8.108
1.537
(160)
(66)
1.222
26.994
-
-
-
-
-
18.833
18.833
16.353
8.108
1.537
(160)
(66)
20.055
45.827
(17.010)
(5.433)
(22.443)
Other operating expenses
(17.147)
(7.954)
(25.101)
(7.163)
5.446
(1.717)
Provisions for impairment of loans and advances to
customers and other customer credit losses
Impairment upon re-measurement of disposal group
at fair value less costs to sell
(42.665)
(3.288)
-
-
(42.665)
(3.288)
(Loss)/profit on disposal of discontinued operations
(23.032)
5.640
(17.392)
(Loss)/profit before tax
(76.148)
11.086
(65.062)
Income tax
(45)
-
(45)
(Loss)/profit after tax
(76.193)
11.086
(65.107)
Non-controlling interests – loss/(profit)
10.630
(1.362)
9.268
(Loss)/profit after tax attributable to the
owners of the Company
(65.563)
9.724
(55.839)
58
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
6.
Segmental analysis (continued)
Analysis of total revenue
Total revenue includes net interest income, net fee and commission income, net foreign exchange gains, net gains
on financial instrument transactions, insurance income net of claims and commissions, net gains/(losses) from
revaluation and disposal of investment properties, net gains/(losses) on disposal of stock of property and other
income.
Continuing operations
2016
Cyprus
€000
Other
countries
€000
Total
€000
Total revenue from third parties
941.929
83.427
1.025.356
Inter-segment revenue/(expense)
15.336
(15.336)
-
Total revenue
957.265
68.091
1.025.356
2015
Total revenue from third parties
1.055.559
37.242
1.092.801
Inter-segment revenue/(expense)
16.056
(15.032)
1.024
Total revenue
1.071.615
22.210
1.093.825
The revenue for Cyprus operating segment is further analysed in analysis by business line in this note.
The revenue for Other countries segment mainly relates to banking and financial services for both 2016 and
2015.
Discontinued operations
2015
Russia
Subsidiary
acquired
with the
view to sale
Total
€000
€000
€000
Total revenue from third parties
28.018
18.833
46.851
Inter-segment expenses
Total revenue
(1.024)
-
(1.024)
26.994
18.833
45.827
The revenue of Russia operating segment relates mainly to banking and financial services. The revenue of the
subsidiary acquired with the view to sale relates to property and hotel business.
59
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
6.
Segmental analysis (continued)
Analysis of assets
2016
Assets
Inter-segment assets
Total assets
2015
Assets
Inter-segment assets
Total assets
Analysis of liabilities
2016
Liabilities
Inter-segment liabilities
Total liabilities
2015
Liabilities
Inter-segment liabilities
Total liabilities
Cyprus
€000
Other
countries
€000
Total
€000
20.851.999
2.412.982 23.264.981
(1.093.046)
22.171.935
21.666.656
2.746.202 24.412.858
(1.142.357)
23.270.501
Cyprus
€000
Other
countries
€000
Total
€000
17.577.993
2.584.262 20.162.255
(1.096.425)
19.065.830
18.665.209
2.672.612 21.337.821
(1.144.651)
20.193.170
Segmental analysis of customer deposits and loans and advances to customers is presented in Notes 31 and
43, respectively.
Analysis by business line
In addition to monitoring operations by geographical location, management also monitors the operating results
of each business line for the Cyprus segment of the Group, and such information is presented to the Group
Executive Committee.
Income and expenses directly associated with each business line are included in determining the line’s
performance. Transfer pricing methodologies are applied between the business lines to present their results on
an arm’s length basis. Total other operating income includes net foreign exchange gains, net gains on financial
instrument transactions, insurance income net of claims and commissions, gains/(losses) from revaluation and
disposal of investment properties, gains on disposal of stock of property and other income. Total other
operating income, staff costs and other operating expenses incurred directly by the business lines are allocated
to the business lines as incurred. Indirect other operating income and indirect other operating expenses are
allocated to the head office function. Notional tax at the 12,5% Cyprus tax rate is charged/credited on profit or
loss before tax of each business line.
The business line ‘Other’ includes Group and head office functions such as treasury, finance, risk management,
compliance, legal, corporate affairs and human resources. Head office functions provide services to the
operating segments. From 2016 onwards, following the establishment of REMU in December 2015, its results
are presented as a separate business line as REMU is considered a separate operating segment and reported as
such to management. No comparative information has been disclosed for the results of this new business line
as this was only set up in December 2015.
60
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
6.
Segmental analysis (continued)
Analysis by business line (continued)
2016
Corporate
€000
Small and
medium-
sized
enterprises
€000
Retail
Restructuring
and
recoveries
International
banking
services
Wealth
management
REMU
Insurance
Other
Total
Cyprus
€000
€000
€000
€000
€000
€000
€000
€000
Net interest income/(expense)
81.408
61.547
246.923
201.743
Net fee and commission income/(expense)
Total other operating income
9.959
559
8.825
602
45.832
4.637
12.105
506
62.292
65.072
7.403
91.926
70.974
297.392
214.354
134.767
(11.475)
(11.490)
(117.175)
(32.959)
(23.365)
10.861
(12.757)
417
(9.175)
643.259
2.032
4.146
17.039
(4.409)
-
(4.366)
19.722
159.181
4.124
(8.633)
44.470
40.521
88.378
154.825
98.925
957.265
(9.253)
(14.461)
(132.532)
(357.119)
(968)
(1.139)
(22.930)
(8.237)
(4.468)
(224)
(97)
(3.269)
(21.189)
(62.521)
Restructuring costs–other operating expenses
(18)
(6)
(253)
(14.473)
(65)
(8)
(4.548)
-
(29.208)
(48.579)
79.465
58.339
157.034
158.685
106.869
12.398
(22.531)
22.791
(84.004)
489.046
3.049
4.030
11.710
41.423
1.953
859
30.083
(14.690)
7.370
(393.740)
(8.006)
(1.965)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(19.542)
-
-
-
-
-
-
234
63.258
964
(379.984)
(12.316)
(12.316)
(3.545)
(23.087)
8.194
8.194
Income tax
(14.075)
(5.960)
(22.014)
24.204
(12.602)
112.597
47.679
176.114
(193.632)
100.816
11.292
(1.412)
(42.073)
22.791
(90.473)
145.111
5.259
(2.992)
11.362
(18.230)
Profit/(loss) after tax
98.522
41.719
154.100
(169.428)
88.214
9.880
(36.814)
19.799
(79.111)
126.881
Non-controlling interests-profit
Profit/(loss) after tax attributable to the
owners of the Company
-
-
-
-
-
-
-
-
(3.575)
(3.575)
98.522
41.719
154.100
(169.428)
88.214
9.880
(36.814)
19.799
(82.686)
123.306
61
Staff costs and other operating expenses
Restructuring costs–voluntary exit plan and
other termination benefits
Gain on derecognition of loans and advances
to customers and changes in expected cash
flows
Reversal of provisions/(provisions) for
impairment of loans and advances to
customers and other customer credit losses
Impairment of other financial instruments
Impairment of non-financial instruments
Share of profit from associates and joint
ventures
Profit/(loss) before tax
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
6.
Segmental analysis (continued)
Analysis by business line (continued)
2015
Corporate
Small and
medium-
sized
enterprises
Retail
Restructuring
and recoveries
International
banking
services
Wealth
management
Insurance
Other
Total Cyprus
€000
€000
€000
€000
€000
€000
€000
€000
€000
Net interest income
Net fee and commission income/(expense)
Total other operating income
76.307
68.833
243.461
7.953
627
9.154
54.146
615
4.511
285.823
14.774
345
62.145
47.020
7.579
6.576
1.806
3.956
670
44.574
788.389
(2.951)
14.734
146.636
47.651
71.306
136.590
Staff costs and other operating expenses
(10.709)
(12.250)
(120.618)
(32.673)
(22.629)
(5.159)
(15.510)
(163.459)
(383.007)
Restructuring costs – other operating expenses
-
-
-
-
-
-
-
(38.357)
(38.357)
84.887
78.602
302.118
300.942
116.744
12.338
45.370
130.614
1.071.615
74.178
66.352
181.500
268.269
94.115
7.179
29.860
(71.202)
650.251
Gain on derecognition of loans and advances to
customers and changes in expected cash flows
Reversal of provisions/(provisions) for
impairment of loans and advances to customers
and other customer credit losses
Impairment of other financial instruments
Impairment of non-financial instruments
Share of profit from associates and joint ventures
Income tax
Profit/(loss) after tax
Non-controlling interests-loss
Profit/(loss) after tax attributable to the
owners of the Company
35.676
30.336
65.537
152.863
2.725
1.797
9.930
(7.020)
(33.706)
(1.098.916)
(11.665)
(3.863)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(14.973)
(11.209)
(26.666)
84.723
(10.647)
104.811
78.459
186.665
(593.061)
74.528
-
-
-
-
-
-
-
-
-
-
9.818
298.752
(220)
(1.145.460)
(29.757)
(29.757)
(11.326)
(11.326)
5.923
5.923
29.860
(96.764)
(231.617)
(1.522)
(24.762)
(5.695)
28.338
(121.526)
(237.312)
-
794
794
-
-
-
5.113
(639)
4.474
-
104.811
78.459
186.665
(593.061)
74.528
4.474
28.338 (120.732)
(236.518)
Profit/(loss) before tax
119.784
89.668
213.331
(677.784)
85.175
In addition loans and advances to customers and deposits of the above business lines are reported to the Group Executive Committee. Such an analysis is disclosed
in Notes 43 and 31 respectively.
62
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2015
7.
Interest income
Loans and advances to customers
Loans and advances to banks and central banks
Investments available-for-sale
Investments classified as loans and receivables
Trading investments
Derivative financial instruments
Other investments at fair value through profit or loss
2016
€000
2015
€000
853.906
1.009.766
5.356
10.905
11.209
4.534
13.664
88.456
881.376
1.116.420
12
4.557
637
148
4.798
739
886.582
1.122.105
Interest income from loans and advances to customers includes interest on the recoverable amount of impaired
loans and advances as defined in Note 43 amounting to €201.604 thousand (2015: €215.145 thousand).
8.
Interest expense
Customer deposits
Funding from central banks and deposits by banks
Repurchase agreements
Derivative financial instruments
9.
Fee and commission income and expense
Fee and commission income
Credit-related fees and commissions
Other banking commissions
Mutual funds and asset management fees
Brokerage commissions
Other commissions
2016
€000
2015
€000
137.973
154.796
39.588
6.476
95.633
7.583
184.037
258.012
16.363
21.653
200.400
279.665
2016
€000
2015
€000
80.755
75.300
2.524
819
82.161
64.277
2.262
1.183
17.467
12.674
176.865
162.557
Mutual funds and asset management fees include income of €2.342 thousand (2015: €1.964 thousand) relating
to fiduciary and other similar activities.
63
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
9.
Fee and commission income and expense (continued)
Fee and commission expense
Banking commissions
Mutual funds and asset management fees
Brokerage commissions
2016
€000
2015
€000
9.825
8.731
128
254
184
185
10.207
9.100
10.
Net foreign exchange gains
Net foreign exchange gains comprise the conversion of monetary assets in foreign currency at the reporting
date, realised exchange gains/(losses) from transactions in foreign currency settled during the year and the
revaluation of foreign exchange derivatives.
11.
Net gains on financial instrument transactions
Trading portfolio:
- equity securities
- debt securities
- derivative financial instruments
Other investments at fair value through profit or loss:
- debt securities
- equity securities
Net gains/(losses) on disposal of available-for-sale investments:
- equity securities
- debt securities
Net gains on disposal/repayment of loans and receivables:
- debt securities
Realised gains on disposal of loans
Revaluation of financial instruments designated as fair value hedges:
- hedging instruments
- hedged items
Loss on dissolution of subsidiaries (Note 49)
Gain on disposal of joint ventures
2016
€000
2015
€000
(273)
14
998
(400)
283
58.368
22
710
24
(13.145)
466
26
1.075
(9)
8.419
49.513
64
35
3.889
9.746
(3.910)
(11.317)
(4.101)
-
63.373
-
10.005
47.129
64
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
11.
Net gains on financial instrument transactions (continued)
The gains on disposal of available-for-sale equity securities for 2016, primarily relate to gain on sale of shares
held in Visa Europe Limited following the approved purchase of Visa Europe Limited by Visa Inc.
The gains on disposal of debt securities classified as loans and receivables for 2016, related to the Company’s
participation in the Cyprus Government buyback process of Cyprus government bonds.
In the comparative period, the gain on disposal of joint ventures mainly related to the disposal of Marfin
Diversified Strategy Fund Plc (MDSF) in April 2015 and represents the recycling of the related foreign currency
reserves into the consolidated income statement.
12.
Insurance income net of claims and commissions
2016
2015
Income
Claims
and
commissions
Insurance
income net
of claims
and
commissions
Income
Claims and
commissions
Insurance
income net
of claims
and
commissions
€000
€000
€000
€000
€000
€000
104.261
(80.257)
24.004
89.575
(63.759)
25.816
39.341
(18.913)
20.428
37.664
(15.575)
22.089
143.602
(99.170)
44.432
127.239
(79.334)
47.905
2016
2015
Life
insurance
General
insurance
Life
insurance
General
insurance
€000
€000
€000
€000
83.951
60.215
85.212
64.828
(14.671)
(27.544)
(14.399)
(36.927)
69.280
32.671
70.813
27.901
Life insurance
business
General insurance
business
Income
Gross premiums
Reinsurance premiums
Net premiums
Change in the provision for unearned premiums
-
(1.589)
-
613
Total net earned premiums
Investment income and other income
69.280
31.082
25.324
8
Commissions from reinsurers and other income
4.977
8.251
70.813
12.167
5.096
28.514
18
9.132
Change in value of in-force business before tax
(Note 26)
99.581
39.341
88.076
37.664
4.680
-
1.499
-
104.261
39.341
89.575
37.664
65
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
12.
Insurance income net of claims and commissions (continued)
Claims and commissions
2016
2015
Life
insurance
€000
General
insurance
€000
Life
insurance
€000
General
insurance
€000
Gross payments to policyholders
(59.168)
(25.864)
(63.912)
(28.175)
Reinsurers’ share of payments to policyholders
8.858
12.004
Gross change in insurance contract liabilities
Reinsurers’ share of gross change in insurance
contract liabilities
Commissions paid to agents and other direct selling
costs
Changes in equalisation reserve
(19.346)
931
10.376
3.340
14.423
5.562
(2.017)
(1.845)
(5.147)
(4.019)
(8.584)
(4.143)
(8.416)
(3.373)
-
4
-
7
(80.257)
(18.913)
(63.759)
(15.575)
In addition to the above, the following income and expense items related to the insurance operations have been
recognised in the consolidated income statement:
Net (expense)/income from non-linked insurance
business assets
Net gains/(losses) on financial instrument
transactions and other non-linked insurance
business income
2016
2015
Life
insurance
General
insurance
Life
insurance
General
insurance
€000
€000
€000
€000
(78)
342
(145)
16
(31)
(455)
478
78
Staff costs
(4.560)
(4.170)
(4.830)
(5.098)
Staff costs – restructuring costs
(1.874)
(1.395)
-
-
Other operating expenses
(4.186)
(2.049)
(3.973)
(2.295)
13.
Other income
Profit on disposal of disposal group held for sale (Notes 29 and 50.2.1)
Dividend income
Loss on sale and write-off of property and equipment and intangible assets
Rental income from investment properties
Rental income from stock of property
Profit from hotel activities
Other income
2016
€000
2015
€000
2.545
343
(67)
1.626
1.460
646
8.352
14.905
-
885
(50)
889
-
2.353
12.648
16.725
66
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
14.
Staff costs
Salaries
Employer’s contributions to state social insurance
Retirement benefit plan costs
2016
€000
2015
€000
181.175
184.797
27.154
16.096
28.759
20.075
224.425
233.631
Restructuring costs – voluntary exit plans and other termination benefits
62.747
-
287.172
233.631
The number of persons employed by the Group as at 31 December 2016 was 4.284 (2015: 4.605). In February
and June 2016 the Group proceeded with voluntary exit plans for its employees in Cyprus, the cost of which is
included in staff costs and amounted to €62.521 thousand. In total, 429 employees accepted the voluntary exit
plan and left the Group during the year. Additionally, restructuring costs include staff termination benefits
amounting to €226 thousand related to the closure of the operations of Bank of Cyprus (Channel Islands) Ltd.
Retirement benefit plan costs
In addition to the employer’s contributions to state social insurance, the Group operates plans for the provision
of additional retirement benefits as described below:
Defined benefit plans
Defined contribution plans
2016
€000
2015
€000
406
15.690
16.096
636
19.439
20.075
Cyprus
The main retirement plan for the Group’s permanent employees in Cyprus (85% of total Group employees) is a
defined contribution plan. This plan provides for employer contributions of 9% (2015: up until 31 May 2015
14% and 9% thereafter) and employee contributions of 3%-10% of the employees’ gross salaries. This plan is
managed by a Committee appointed by the members.
A small number of employees who do not participate in the main retirement plan, are members of a pension
scheme that is closed to new entrants and may receive part or all of their retirement benefit entitlement by way
of a pension for life. This plan is managed by an Administrative Committee composed of representatives of
both the members and the employer.
A small number of employees of Group subsidiaries in Cyprus are also members of defined benefit plans. These
plans are funded with assets backing the obligations held in separate legal vehicles.
Greece
After the disposal of the Greek operations in 2013, a small number of employees of the Group’s Greek
subsidiaries and the Greek branch of the Company continue to be members of the defined benefit plans.
67
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2016
14.
Staff costs (continued)
Retirement benefit plan costs (continued)
United Kingdom
The Group’s employees in the United Kingdom (5% of total Group employees) are covered by a defined
contribution plan for all current employees which provides for employee contributions of 0%-7,5% on the
employees’ gross salaries and employer contributions of 7,5% plus matching contributions by the employer of
up to 7,5% depending on the employee contributions. In addition, a defined benefit plan (which was closed in
December 2008 to future accrual of benefits) remains for active members.
Other countries
The Group does not operate any retirement benefit plans in Romania and Russia.
Analysis of the results of the actuarial valuations for the defined benefit plans
Amounts recognised in the consolidated balance sheet
Liabilities (Note 33)
Assets (Note 28)
2016
€000
2015
€000
22.776
(668)
22.108
12.588
(1.203)
11.385
One of the plans has a funded status surplus of €13.999 thousand (2015: €15.065 thousand) that is not
recognised as an asset on the basis that the Group has no unconditional right to future economic benefits either
via a refund or a reduction in future contributions.
The amounts recognised in the consolidated balance sheet and the movements in the net defined benefit
obligation over the years are presented below:
68
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
14.
Staff costs (continued)
Retirement benefit plan costs (continued)
Analysis of the results of the actuarial valuations for the defined benefit plans (continued)
1 January 2016
Current service cost
Gains on curtailment and settlement
Net interest expense/(income)
Total amount recognised in the consolidated income
statement
Remeasurements:
- Return on plan assets, excluding amounts included in net
interest expense
- Actuarial loss from changes in financial assumptions
- Experience adjustments
- Change in asset ceiling
Total amount recognised in the consolidated OCI
Exchange differences
Contributions:
- Employer
- Plan participants
Benefits paid from the plans
Benefits paid directly by the employer
31 December 2016
Present value
of obligation
Fair value of
plan assets
Net amount
before impact
of asset ceiling
Impact of
minimum
funding
requirement/
asset ceiling
Net defined
benefit liability
€000
€000
€000
€000
€000
94.115
(97.795)
(3.680)
15.065
11.385
469
(80)
17
406
(6.357)
21.979
(301)
-
15.321
(1.671)
-
-
(72)
8.109
-
-
-
-
-
-
-
(1.066)
(1.066)
-
-
-
-
-
13.999
469
(80)
17
406
(6.357)
21.979
(301)
(1.066)
14.255
(1.671)
(2.195)
-
-
(72)
22.108
(2.195)
(2.195)
469
(80)
2.927
3.316
-
-
(2.910)
(2.910)
-
(6.357)
21.979
(301)
-
21.678
(9.699)
-
177
(6.560)
(72)
-
-
-
(6.357)
8.028
(177)
6.560
-
102.955
(94.846)
69
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
14.
Staff costs (continued)
Retirement benefit plan costs (continued)
Analysis of the results of the actuarial valuations for the defined benefit plans (continued)
Present value
of obligation
Fair value of
plan assets
Net amount
before impact
of asset ceiling
Impact of
minimum
funding
requirement/
asset ceiling
Net defined
benefit liability
€000
€000
€000
€000
€000
1 January 2015
Current service cost
Gains on curtailment and settlement
Net interest expense/(income)
Total amount recognised in the consolidated income
statement
Remeasurements:
- Return on plan assets, excluding amounts included in net
interest expense
- Actuarial loss from changes in demographic assumptions
- Actuarial gain from changes in financial assumptions
- Experience adjustments
- Change in asset ceiling
Total amount recognised in the consolidated OCI
Exchange differences
Contributions:
- Employer
- Plan participants
Benefits paid from the plans
Benefits paid directly by the employer
31 December 2015
97.164
(94.926)
499
(126)
3.173
3.546
-
16
(5.396)
(579)
-
(5.959)
3.988
-
187
(4.724)
(87)
-
-
(2.910)
(2.910)
2.487
-
-
-
-
2.487
(3.037)
(187)
4.724
-
94.115
(97.795)
70
2.238
499
(126)
263
636
2.487
16
(5.396)
(579)
-
(3.472)
951
-
-
(87)
(3.680)
13.921
-
-
-
-
-
-
-
-
1.144
1.144
-
-
-
-
-
15.065
16.159
499
(126)
263
636
2.487
16
(5.396)
(579)
1.144
(2.328)
951
(3.946)
-
-
(87)
11.385
(3.946)
(3.946)
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2015
14.
Staff costs (continued)
Retirement benefit plan costs (continued)
Analysis of the results of the actuarial valuations for the defined benefit plans (continued)
The actual return on plan assets for year 2016 was a gain of €9.267 thousand (2015: gain of €423 thousand).
The assets of funded plans are generally held in separately administered entities, either as specific assets or as
a proportion of a general fund, or as insurance contracts and are governed by local regulations and practice in
each country.
Pension plan assets are invested in different asset classes in order to maintain a balance between risk and
return. Investments are well diversified to limit the financial effect of the failure of any individual investment.
Through its defined benefit plans, the Group is exposed to a number of risks as outlined below:
Interest rate risk
Changes in bond yields
Inflation risk
Asset volatility
The Group is exposed to interest rate risk due to the mismatch of the
duration of assets and liabilities.
A decrease in corporate bond yields will increase the liabilities, although this
will be partially offset by an increase in the value of bond holdings.
The Group faces inflation risk, since the liabilities are either directly (through
increases in pensions) or indirectly (through wage increases) exposed to
inflation risks. Investments to ensure inflation-linked returns (i.e. real
returns through investments such as equities, index-linked bonds and assets
whose return increase with increasing inflation) could be used for better
match with the expected increases in liabilities.
The liabilities are calculated using a discount rate set with reference to
corporate bond yields; if assets underperform this yield, a deficit will be
created.
The major categories of plan assets as a percentage of total plan assets are as follows:
Equity securities
Debt securities
Loans and advances to banks
2016
2015
46%
44%
10%
43%
46%
11%
100%
100%
The assets held by the funded plans include equity securities issued by the Company, the fair value of which is
as at 31 December 2016 €2.433 thousand (2015: €2.412 thousand).
The Group expects to make additional contributions to defined benefit plans of €2.265 thousand during 2017.
At the end of the reporting period, the average duration of the defined benefit obligation was 18,7 years.
71
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2015
14.
Staff costs (continued)
Retirement benefit plan costs (continued)
Principal actuarial assumptions used in the actuarial valuations
The present value of the defined benefit obligations of the retirement plans is estimated annually using the
Projected Unit Credit Method of actuarial valuation, carried out by independent actuaries. The principal
actuarial assumptions used for the valuations of the retirement plans of the Group during 2016 and 2015 are
set out below:
2016
Discount rate
Inflation rate
Future salary increases
Rate of pension increase
Life expectancy for pensioners at age 60
Cyprus
Greece
UK
1,56%-1,83%
1,50%-2,00%
1,75%
2,00%
2,00%
23,5 years M
29,6 years F
1,75%
2,00%
n/a
n/a
n/a
Life expectancy for pensioners at age 65
n/a
2015
Discount rate
Inflation rate
Future salary increases
Rate of pension increase
Life expectancy for pensioners at age 60
2,21%-2,32%
2,30%-2,80%
1,75%
0% for 2016 and 2%
thereafter
0% for 2016 and 2%
thereafter
23,5 years M
29,6 years F
1,75%
0% for 2016 and
2% thereafter
n/a
n/a
n/a
Life expectancy for pensioners at age 65
n/a
2,70%
3,30%
n/a
3,15%
n/a
23,9 years M
25,4 years F
3,90%
3,10%
n/a
3,05%
n/a
23,9 years M
25,4 years F
The discount rate used in the actuarial valuations reflects the rate at which liabilities could effectively be settled
and is set by reference to market yields at the reporting date in high quality corporate bonds of suitable
maturity and currency. For the Group’s plans in the Eurozone (Cyprus and Greece) which comprise 24% of the
defined benefit obligations, the Group adopted a full yield curve approach using AA- rated corporate bond data
from the iBoxx Euro Corporates AA10+ index. For the Group’s plan in the UK which comprises 76% of the
defined benefit obligations, the Group adopted a full yield curve approach using the discount rate that has been
set based on the yields on AA- rated corporate bonds with duration consistent with the scheme’s liabilities.
Under this approach, each future liability payment is discounted by a different discount rate that reflects its
exact timing.
To develop the assumptions relating to the expected rates of return on plan assets, the Group, in consultation
with its actuaries, uses forward-looking assumptions for each asset class reflecting market conditions and
future expectations at the reporting date. Adjustments are made annually to the expected rate of return
assumption based on revised expectations of future investment performance of asset classes, changes to local
legislation that may affect investment strategy, as well as changes to the target strategic asset allocation.
A quantitative sensitivity analysis for significant assumptions as at 31 December 2016 and 2015 is presented
below.
72
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2015
14.
Staff costs (continued)
Retirement benefit plan costs (continued)
Principal actuarial assumptions used in the actuarial valuations (continued)
Variable
Discount rate
Inflation growth rate
Salary growth rate
Pension growth rate
2016
2015
Change
+0,5%
Change
-0,5%
Change
+0,5%
Change
-0,5%
-10,0%
8,7%
0,8%
0,8%
10,9%
-8,0%
-0,7%
-0,7%
-8,2%
5,7%
0,5%
0,8%
9,1%
-5,4%
-0,2%
-0,8%
Plus 1 year Minus 1 year
Plus 1 year
Minus 1 year
Life expectancy
-1,3%
1,7%
-1,2%
1,6%
The above sensitivity analysis (with the exception of the inflation sensitivity) is based on a change in one
assumption while holding all other assumptions constant. In practice this is unlikely to occur and some changes
of the assumptions may be correlated. The inflation sensitivity above includes changes to any inflation-linked
benefit increases. When calculating the sensitivity of the defined benefit obligation to significant assumptions,
the same method has been applied as when calculating the pension liability recognised on the consolidated
balance sheet. The methods and types of assumptions used in preparing the sensitivity analysis did not change
compared to previous years.
15.
Other operating expenses
Repairs and maintenance of property and equipment
Other property-related costs
Operating lease rentals for property and equipment
Special levy on deposits of credit institutions in Cyprus
Consultancy and other professional services fees
Insurance
Advertising and marketing
Depreciation of property and equipment (Note 25)
Amortisation of intangible assets (Note 26)
Communication expenses
Provisions and settlements of litigations, claims and provisions for
regulatory matters (Note 33)
Printing and stationery
Local cash transfer expenses
Contribution to depositor protection scheme
Other operating expenses
Advisory and other restructuring costs
2016
€000
2015
€000
21.705
14.728
10.512
19.968
13.972
10.697
17.502
11.558
7.263
8.118
17.840
3.485
2.848
329
30.888
191.413
51.542
242.955
25.819
16.934
10.176
17.347
16.445
14.941
13.375
12.257
7.001
8.543
7.604
3.988
2.749
381
24.348
181.908
43.130
225.038
Advisory and other restructuring costs comprise mainly: (a) fees of external advisors in relation to: (i) customer
loan restructuring activities which are not part of the effective interest rate, (ii) the listing on the London Stock
Exchange, (iii) disposal of operations and non-core assets and (b) litigation provisions related to the operations
of Laiki Bank acquired in 2013.
73
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2015
15.
Other operating expenses (continued)
Consultancy and other professional services fees and advisory and other restructuring costs include fees
(including taxes) to the independent auditors of the Group, for audit and other professional services provided
both in Cyprus and overseas, as follows:
Audit of the financial statements of the Group and its subsidiaries
Other audit-related services
Tax services
Services related to the listing on the London Stock Exchange
Other services
Continuing operations
Discontinued operations
2016
€000
2015
€000
2.615
423
598
4.879
1.032
9.547
9.547
-
9.547
1.918
464
423
1.491
435
4.731
4.633
98
4.731
16.
Impairment of financial and non-financial instruments and gain on derecognition of loans
and advances to customers and changes in expected cash flows
Gain on derecognition of loans and advances to customers and
changes in expected cash flows
Provisions net of reversals of provisions for impairment of loans and
advances to customers and other customer credit losses
Loans and advances to customers (Note 43)
Financial guarantees and commitments (Note 33)
Impairment/(reversal of impairment) of other financial instruments
Available-for-sale equity securities
Available-for-sale mutual funds
Loans and receivables debt securities
Loans and advances to banks
Other receivables
Deposits by banks
Impairment of non-financial instruments
Property held for own use (Note 25)
Stock of property (Note 27)
74
2016
€000
2015
€000
(63.315)
(305.089)
439.761
(6.152)
1.305.957
(41.403)
433.609
1.264.554
839
56
-
13.820
(3.869)
447
1.291
1.206
(169)
19.604
21.571
-
11.293
43.503
-
36.220
36.220
311
17.792
18.103
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2015
17.
Income tax
Current tax:
- Cyprus
- overseas
Cyprus special defence contribution
Deferred tax
Prior years’ tax adjustments
Other tax charges
2016
€000
2015
€000
4.776
1.986
212
6.657
2.668
2.086
18.385
3.271
1.502
193
338
3.899
-
9.203
The Group’s share of income tax charge from associate for 2016 amounts to €1.244 thousand. The Group had
no material share of income tax charge from associates for 2015.
The reconciliation between the income tax expense and the profit/(loss) before tax as estimated using the
current income tax rates is set out below:
Profit/(loss) before tax from continuing operations
Income tax at the normal tax rates in Cyprus
Income tax effect of:
- expenses not deductible for income tax purposes
- income not subject to income tax
- differences between overseas income tax rates and Cyprus
income tax rates
- reversal of previously recognised deferred tax
Prior years’ tax adjustments
Other tax charges
2016
€000
2015
€000
85.616
(379.992)
10.916
(47.306)
14.255
22.368
(21.566)
(20.550)
6.428
3.598
13.631
2.668
2.086
18.385
7.756
43.036
5.304
3.899
-
9.203
The loss on disposal of the Russian operations and Aphrodite group in 2015 is included in discontinued
operations and is partially income tax deductible, whereas the impairment loss on measurement to fair value
less costs to sell of the Russian operations, which is included in discontinued operations, is non-income tax
deductible.
Income tax in Cyprus is calculated at the rate of 12,5% on taxable income (2015: 12,5%).
For life insurance business there is a minimum income tax charge of 1,5% on gross premiums. Special defence
contribution is payable on rental income at a rate of 3% (2015: 3%) and on interest income from activities
outside the ordinary course of business at a rate of 30% (2015: 30%).
The Group’s profits from overseas operations are taxed at the rates prevailing in the respective countries, which
for 2016 were: Greece 29% (2015: 29%), Romania 16% (2015: 16%), Russia 20% (2015: 20%), UK 20%
(2015: 21% until 31 March 2015 and 20% thereafter).
75
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2015
17.
Income tax (continued)
The Group is subject to income taxes in the various jurisdictions it operates and the calculation of the Group’s
income tax charge and provisions for income tax necessarily involves a degree of estimation and judgement.
There are transactions and calculations for which the ultimate income tax treatment is uncertain and cannot be
determined until resolution has been reached with the relevant tax authority. The Group has a number of open
income tax returns with various income tax authorities and liabilities relating to these open and judgemental
matters, which are based on estimates of whether additional income taxes will be due. In case the final income
tax outcome of these matters is different from the amounts that were initially recorded, such differences will
impact the current and deferred income tax assets and liabilities in the period in which such determination is
made.
The accumulated income tax losses are presented in the table below:
2016
Expiring within 4 years
Expiring between 5 and 10 years
Expiring between 11 and 15 years
2015
Expiring within 4 years
Expiring between 5 and 10 years
Expiring between 11 and 15 years
Total income
tax losses
€000
Income tax
losses for
which a
deferred tax
asset was
recognised
€000
Income tax
losses for
which no
deferred tax
asset was
recognised
€000
4.675.399
266.800
4.408.599
16.306
-
16.306
7.378.801
3.336.000
4.042.801
12.070.506
3.602.800
8.467.706
4.307.396
295.584
4.011.812
401.156
-
401.156
7.378.801
3.336.000
4.042.801
12.087.353
3.631.584
8.455.769
The majority of the deferred tax asset relates to the Laiki Bank income tax losses transferred to the Company
as a result of the acquisition of certain operations on 29 March 2013. The income tax losses were transferred
under ‘The Resolution of Credit and Other Institutions Law’ which states that any accumulated losses of the
transferring credit institution at the time of the transfer, are transferred to the acquiring credit institution and
may be used by it for a period of up to 15 years from the end of the year during which the transfer took place.
In the case of the Group’s acquisition of certain operations of Laiki Bank, these losses can be utilised up to
2028. The income tax losses transferred are still subject to review and agreement with the income tax
authorities in Cyprus. The deferred tax asset recognised on these specific losses can be set off against the
future profits of the Company by 2028 at an income tax rate of 12,5%.
Recognition of deferred tax assets on unutilised income tax losses is supported by management’s business
forecasts, taking into account available information and making various assumptions on future growth rates of
customer loans, deposits, funding evolution, loan impairment and pricing, and considering the recoverability of
the deferred tax assets within their expiry period.
The Group performed its regular assessment regarding the recoverability of its deferred tax asset as at 31
December 2016, taking into account the actual results for the year ended 31 December 2016, the declining
trend of loans that are impaired or past due for more than 90 days, the improved funding structure with the
loans to deposits ratio of 95%, the significant inflow of deposits and the significant decrease of ELA funding.
76
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2015
17.
Income tax (continued)
Τhe Group performed its assessment for the recoverability of its deferred tax asset as at 31 December 2016
taking into account the Group’s actual performance, the key objectives of the Group’s strategy as well as the
macroeconomic environment in Cyprus, and the analytical financial projections up to the end of 2019 which had
been also used to roll out assumptions thereafter until year 2028. The key assumptions, amongst others,
include the following:
New loan originations and repayments
Loan and deposit interest income/expense evolution
Funding structure and associated cost
Diversified income streams
Level of operating expenses
Level of loans that are impaired or past due for more than 90 days (new defaults, curing, cost of risk)
The financial projections have taken into account the key objectives of the Group’s strategy which are set out
below:
Materially reduce the level of delinquent loans
Normalise the funding structure and fully repay the ELA in January 2017
Focus on the core markets in Cyprus by providing credit to promising sectors and exit from non-core
markets
Achieve a lean operating model
Maintain an appropriate capital position by internally generating capital through profitability, deleveraging
and disposing of non-core assets
Deliver value to shareholders and other stakeholders
Based on the above, management has concluded that the deferred tax asset of €450.441 thousand for the
Group as at 31 December 2016 is recoverable.
The tax losses of prior years utilised during 2016 amount to €28.784 thousand (2015: €905 thousand).
The income tax losses relate to the same jurisdiction to which the deferred tax asset relates.
Deferred tax
The net deferred tax assets arises from:
Difference between capital allowances and depreciation
Property revaluation
Investment revaluation and stock of property
Unutilised income tax losses carried forward
Value of in-force life insurance business
Other temporary differences
Net deferred tax assets
2016
€000
2015
€000
7.794
17.038
3.807
7.773
16.658
90
(450.350)
(453.948)
14.750
1.895
14.271
(568)
(405.066)
(415.724)
77
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2015
17.
Income tax (continued)
Deferred tax (continued)
Deferred tax assets
Deferred tax liabilities
Net deferred tax assets
The table below sets out the geographical analysis of the deferred tax assets:
Cyprus
United Kingdom
Deferred tax assets
Deferred tax liabilities
Net deferred tax assets
The movement of the net deferred tax assets is set out below:
1 January
Deferred tax recognised in the consolidated income statement –
continuing operations
Acquisition of subsidiary (Note 50.1.1)
Deferred tax recognised in the consolidated statement of
comprehensive income
Deferred tax on disposal of subsidiaries
Foreign exchange adjustments
31 December
2016
€000
2015
€000
(450.441)
(456.531)
45.375
40.807
(405.066)
(415.724)
2016
€000
2015
€000
(450.356)
(456.531)
(85)
-
(450.441)
(456.531)
45.375
40.807
(405.066)
(415.724)
2016
€000
2015
€000
(415.724)
(412.130)
6.657
3.807
(219)
-
413
338
-
(3.923)
(510)
501
(405.066)
(415.724)
The Group offsets income tax assets and liabilities if and only if, it has a legally enforceable right to set off
current income tax assets and current income tax liabilities.
78
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2015
17.
Income tax (continued)
Deferred tax (continued)
The analysis of the net deferred tax expense recognised in the consolidated income statement is set out below:
Difference between capital allowances and depreciation
Investment revaluation
Unutilised income tax losses carried forward
Value of in-force life insurance business
Other temporary differences
2016
€000
2015
€000
207
(90)
3.598
479
2.463
6.657
1.057
(895)
203
147
(174)
338
The analysis of the net deferred tax recognised in the consolidated statement of comprehensive income is set
out below:
2016
€000
2015
€000
Timing differences on property revaluation – income
219
3.923
18.
Earnings per share
Basic and diluted earnings/(losses) per share attributable to the
owners of the Company
Profit/(loss) for the year attributable to the owners of the Company
(€ thousand)
Weighted average number of shares in issue during the year, excluding
treasury shares (thousand)
2016
2015
63.656
(438.352)
8.921.069
8.911.574
Basic and diluted earnings/(losses) per share (€ cent)
0,7
(4,9)
Basic and diluted earnings/(losses) per share attributable to the
owners of the Company–continuing operations
Profit/(loss) for the year attributable to the owners of the Company
–continuing operations (€ thousand)
Weighted average number of shares in issue during the year, excluding
treasury shares (thousand)
Basic and diluted earnings/(losses) per share–continuing operations
(€ cent)
Basic and diluted losses per share attributable to the owners of
the Company – discontinued operations
Loss for the year attributable to the owners of the Company
–discontinued operations (€ thousand)
Weighted average number of shares in issue during the year, excluding
treasury shares (thousand)
Basic and diluted losses per share–discontinued operations
(€ cent)
63.656
(382.513)
8.921.069
8.911.574
0,7
(4,3)
-
(55.839)
8.921.069
8.911.574
-
(0,6)
79
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2015
19.
Cash, balances with central banks and loans and advances to banks
Cash
Balances with central banks
Cash and balances with central banks
2016
€000
132.594
1.373.802
1.506.396
2015
€000
154.017
1.268.585
1.422.602
Loans and advances to banks
1.087.837
1.314.380
Balances with central banks include obligatory deposits for liquidity purposes as at 31 December 2016 which
amount to €142.697 thousand (2015: €122.807 thousand).
The credit rating analysis of balances with central banks and loans and advances to banks by independent
credit rating agencies is set out in Note 43.
Loans and advances to banks earn interest based on the interbank rate of the relevant term and currency.
20.
Investments
Investments
Investments at fair value through profit or loss
Investments available-for-sale
Investments classified as loans and receivables
2016
€000
2015
€000
43.016
262.789
68.074
373.879
50.785
100.535
436.935
588.255
The amounts pledged as collateral under repurchase agreements with banks are shown below:
Investments pledged as collateral
Investments available-for-sale
2016
€000
2015
€000
299.765
421.032
All investments pledged as collateral under repurchase agreements can be sold or repledged by the
counterparty.
The maximum exposure to credit risk for debt securities is disclosed in Note 43.
80
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2015
20.
Investments (continued)
Investments at fair value through profit or loss
Trading investments
Other investments at
fair value through profit
or loss
Total
2016
€000
2015
€000
2016
€000
2015
€000
2016
€000
2015
€000
Debt securities
Equity securities
Mutual funds
476
2.601
9.396
317
10.426
17.430
10.902
17.747
3.832
4.030
4.018
6.631
9.205
16.087
15.983
25.483
12.473
13.354
30.543
37.431
43.016
7.850
25.188
50.785
Debt securities
Cyprus government
Banks and other
corporations
Listed on the Cyprus
Stock Exchange
Listed on other stock
exchanges
Equity securities
Listed on the Cyprus
Stock Exchange
Listed on other stock
exchanges
Unlisted
476
-
476
1
475
476
316
10.426
17.430
10.902
17.746
1
-
-
-
1
317
10.426
17.430
10.902
17.747
1
10.426
17.430
10.427
17.431
316
-
-
475
316
317
10.426
17.430
10.902
17.747
2.159
3.384
3.102
3.310
5.261
6.694
442
-
448
-
-
928
-
708
442
928
448
708
2.601
3.832
4.030
4.018
6.631
7.850
The debt securities classified as other investments at fair value through profit or loss were originally classified
as such, to eliminate an accounting mismatch with derivatives used to economically hedge these instruments.
Mutual funds classified as other investments at fair value through profit or loss represent a group of financial
assets managed by the Group and their performance is evaluated on a fair value basis according to the Group’s
investment strategy. Mutual funds are unlisted and issued in other European countries.
81
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2015
20.
Investments (continued)
Investments available-for-sale
Debt securities
Equity securities
Mutual funds
Debt securities
Cyprus government
French government
Other governments
Banks and other corporations
Listed on the Cyprus Stock Exchange
Listed on other stock exchanges
Geographic dispersion by country of issuer
Cyprus
France
Germany
Italy
Other European countries
European Financial Stability Facility and European Investment Fund
Supranational organisations
Other countries
Equity securities
Listed on the Cyprus Stock Exchange
Listed on other stock exchanges
Unlisted
2016
€000
2015
€000
540.592
21.683
279
461.934
59.292
341
562.554
521.567
178.520
287.324
41.887
32.861
540.592
178.520
362.072
540.592
178.520
287.324
-
12.507
10.473
11.823
9.365
30.580
4.478
290.205
130.832
36.419
461.934
4.478
457.456
461.934
4.478
290.205
45.686
23.234
61.912
11.928
10.890
13.601
540.592
461.934
4.883
430
16.370
21.683
5.427
271
53.594
59.292
At 31 December 2016 and 2015 there were no available-for-sale investments in debt securities which have
been determined to be individually impaired.
Available-for-sale mutual funds are unlisted and issued in other countries.
82
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2015
20.
Investments (continued)
Investments classified as loans and receivables
Debt securities
Cyprus government
Listed on the Cyprus Stock Exchange`
Geographic dispersion by country of issuer
2016
€000
2015
€000
68.074
68.074
68.074
436.935
436.935
436.935
Cyprus
68.074
436.935
Loans and receivables at 31 December 2016 include €49.185 thousand (2015: €146.444 thousand) of debt
securities which have been determined to be individually impaired.
Reclassification of investments
Reclassification of trading investments to loans and receivables
On 1 April 2010, in light of the crisis prevailing in global markets, the Group identified the investments which it
had no intention to trade or sell in the foreseeable future. These investments in debt securities were reclassified
from trading investments to loans and receivables.
Reclassification of available-for-sale investments to loans and receivables
On 1 October 2008 and 30 June 2011 the Group reclassified certain available-for-sale debt securities to
investments classified as loans and receivables, in view of the fact that there was no active market for these
debt securities and the Group had the intention and ability to hold these securities in the foreseeable future.
Reclassification of held–to-maturity investments to available-for-sale investments
On 1 November 2012, the Group reassessed its policies in respect of the management of its investment
portfolio in view of its efforts to strengthen its liquidity and capital adequacy ratios and decided to reclassify all
debt securities previously classified as held-to-maturity to investments available-for-sale, in order to be able to
sell these securities as and when required. As a result, in accordance with the Group’s accounting policies and
IFRSs, the Group was not allowed to classify any investments as held-to-maturity until November 2014.
83
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
20.
Investments (continued)
Reclassification of investments (continued)
The table below presents the debt securities reclassified by the Group, by date of reclassification.
31 December
2016
31 December
2015
Year 2016
Reclassification
date
Carrying and
fair value on
reclassification
date
Carrying
value
Fair value
Carrying
value
Fair value
Additional
profit in the
consolidated
income
statement had
the debt
securities not
been
reclassified
Additional gain
in other
comprehensive
income had the
debt securities
not been
reclassified
Effective
interest rate on
reclassification
date
€000
€000
€000
€000
€000
€000
€000
Reclassification of
available-for-sale
investments to:
- loans and receivables
1 October 2008
49.800
49.185
50.329
48.021
50.232
-
1.144
4,6%-4,7%
84
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
20.
Investments (continued)
Reclassification of investments (continued)
The table below presents the debt securities reclassified by the Group, by date of reclassification.
31 December
2015
31 December
2014
Reclassification
date
Carrying and
fair value on
reclassification
date
Carrying
value
Fair value
Carrying
value
Fair value
Year 2015
Additional
profit in the
consolidated
income
statement had
the debt
securities not
been
reclassified
Additional
gain/(loss)
in other
comprehensive
income had the
debt securities
not been
reclassified
Effective
interest rate on
reclassification
date
€000
€000
€000
€000
€000
€000
€000
Reclassification of trading
investments to:
- loans and receivables
1 April 2010
34.810
35.255
35.227
36.722
35.056
171
-
1,2%-4,4%
Reclassification of
available-for-sale
investments to:
- loans and receivables
1 October 2008
129.497 119.683
126.913
120.235
120.289
- loans and receivables
30 June 2011
151.967
90.600
87.327
92.613
84.046
Reclassification of held-to-
maturity investments to:
- available-for-sale
1 November 2012
42.151
41.763
41.763
43.358
43.358
-
-
-
7.230
4,6%-4,7%
(3.273)
2,8%-6,3%
-
0,4%-3,1%
85
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
21.
Derivative financial instruments
The contract amount and fair value of the derivative financial instruments is set out below:
Contract
amount
2016
Fair value
Assets
Liabilities
2015
Contract
amount
Fair value
Assets
Liabilities
€000
€000
€000
€000
€000
€000
43.820
794
589
90.870
1.113
2.103
Trading
derivatives
Forward exchange
rate contracts
Currency swaps
1.774.916
15.875
8.215
1.484.763
12.235
Interest rate swaps
230.874
Currency options
7.986
480
85
-
-
1.901
198
-
-
34.511
175
1.515
6.562
141
8
477
-
-
-
5.720
2.305
167
441
53
2.057.596
17.234
10.903
1.618.396
13.974
10.789
418.293
87
37.463
425.900
45
39.570
178.605
3.514
259
151.246
4
4.040
Equity options
Interest rate
caps/floors
Derivatives
qualifying for
hedge accounting
Fair value hedges
- interest rate
swaps
Net investments
– forward exchange
rate contracts
Total
2.654.494
20.835
48.625
2.195.542
14.023
54.399
596.898
3.601
37.722
577.146
49
43.610
The use of derivatives is an integral part of the Group’s activities. Derivatives are used to manage the Group’s
own exposure to fluctuations in interest rates, exchange rates and equity price indices. Derivatives are also
sold to customers as risk management products.
Forward exchange rate contracts are irrevocable agreements to buy or sell a specified quantity of foreign
currency on a specified future date at an agreed rate.
Currency swaps include simple currency swaps and cross-currency swaps. Simple currency swaps involve the
exchange of two currencies at the current market rate and the commitment to re-exchange them at a specified
rate upon maturity of the swap. Cross-currency swaps are interest rate swaps in which the cash flows are in
different currencies.
Interest rate swaps are contractual agreements between two parties to exchange fixed rate and floating rate
interest, by means of periodic payments, based upon a notional principal amount and the interest rates defined
in the contract.
Currency options are contracts that grant the holder the right, but not the obligation, to buy or sell currency at
a specified exchange rate during a specified period of time.
86
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
21.
Derivative financial instruments (continued)
Interest rate, currency and equity options provide the buyer with the right but not the obligation, to either
purchase or sell the underlying values at a specified price or level on or before a specified date.
Interest rate caps/floors protect the holder from fluctuations of interest rates above or below a specified
interest rate for a specified period of time.
The credit exposure of derivative financial instruments represents the cost to replace these contracts at the
reporting date. The exposure arising from these transactions is managed as part of the Group’s credit risk
management process for credit facilities granted to customers and financial institutions.
The contract amount of certain types of derivative financial instruments provides a basis for comparison with
other instruments recognised on the consolidated balance sheet, but does not necessarily indicate the amounts
of future cash flows involved or the current fair value of the instruments and, consequently, does not indicate
the Group’s exposure to credit or market risk.
The fair value of the derivatives can be either positive (asset) or negative (liability) as a result of fluctuations in
market interest rates, foreign exchange rates or equity price indices, in accordance with the terms of the
relevant contract. The aggregate net fair value of derivatives may fluctuate significantly over time.
Hedge accounting
The Group applies fair value hedge accounting using derivatives when the required criteria for hedge accounting
are met. The Group also uses derivatives for economic hedging (hedging the changes in interest rates,
exchange rates or other risks) which do not meet the criteria for hedge accounting. As a result, these
derivatives are accounted for as trading derivatives and the gains or losses arising from revaluation are
recognised in the consolidated income statement.
Changes in the fair value of derivatives designated as fair value hedges and the fair value of the item in relation
to the risk being hedged are recognised in the consolidated income statement.
Fair value hedges
The Group uses interest rate swaps to hedge the interest rate risk arising as a result of the possible adverse
movement in the fair value of fixed rate available-for-sale debt securities and fixed rate customer loans and
deposits.
Hedges of net investments
The Group’s consolidated balance sheet is affected by foreign exchange differences between the Euro and all
non-Euro functional currencies of overseas subsidiaries and branches and other foreign operations. The Group
hedges its structural currency risk when it considers that the cost of such hedging is within an acceptable range
(in relation to the underlying risk). This hedging is effected by financing with borrowings in the same currency
as the functional currency of the overseas subsidiaries and branches, as well as overseas associates and joint
ventures and forward exchange rate contracts.
As at 31 December 2016, deposits and forward exchange rate contracts amounting to €100.756 thousand and
€178.605 thousand respectively (2015: €178.101 thousand and €151.246 thousand respectively) have been
designated as hedging instruments and have given rise to a gain of €53.408 thousand (2015: loss of €22.860
thousand) which was recognised in the ‘Foreign currency translation reserve’ in the consolidated statement of
comprehensive income, against the profit or loss from the retranslation of the net assets of the overseas
subsidiaries and branches.
87
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
22.
Fair value measurement
The following table presents the carrying value and fair value of the Group’s financial assets and liabilities.
Financial assets
2016
2015
Carrying
value
€000
Fair value
Carrying value
Fair value
€000
€000
€000
Cash and balances with central banks
1.506.396
1.506.396
1.422.602
1.422.602
Loans and advances to banks
Investments at fair value through profit or
loss
Investments available-for-sale
Investments classified as loans and
receivables
Derivative financial assets
Loans and advances to customers
Life insurance business assets attributable
to policyholders
Other assets
Financial liabilities
Obligations to central banks and deposits
by banks
Repurchase agreements
Derivative financial liabilities
Customer deposits
Debt securities in issue
Other liabilities
1.087.837
1.092.964
1.314.380
1.303.414
43.016
43.016
50.785
50.785
562.554
562.554
521.567
521.567
68.074
69.451
436.935
445.521
20.835
20.835
14.023
14.023
15.649.401 16.791.164
17.191.632
18.150.401
485.633
485.633
462.613
462.613
131.811
131.811
179.661
179.661
19.555.557 20.703.824
21.594.198
22.550.587
1.284.800
1.284.800
4.694.987
4.694.987
257.367
292.752
48.625
48.625
368.151
54.399
406.014
54.399
16.509.741 16.492.715
14.180.681
14.185.996
-
-
712
712
168.422
168.422
141.357
141.357
18.268.955 18.287.314
19.440.287
19.483.465
The fair value of financial assets and liabilities in the above table is as at the reporting date and does not
represent any expectations about their future value.
The Group uses the following hierarchy for determining and disclosing fair value:
Level 1: investments valued using quoted prices in active markets.
Level 2: investments valued using models for which all inputs that have a significant effect on fair value are
market observable.
Level 3: investments valued using models for which inputs that have a significant effect on fair value are not
based on observable market data.
For assets and liabilities that are recognised in the consolidated financial statements at fair value, the Group
determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation at
the end of each reporting period.
88
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
22.
Fair value measurement (continued)
The following is a description of the determination of fair value for financial instruments and non-financial
assets which are recorded at fair value on a recurring and on a non-recurring basis and for financial instruments
and non-financial assets which are not measured at fair value but for which fair value is disclosed, using
valuation techniques. These incorporate the Group’s estimate of assumptions that a market participant would
make when valuing the instruments.
Derivative financial instruments
Derivative financial instruments valued using a valuation technique with market observable inputs are mainly
interest rate swaps, currency swaps, currency rate options, forward foreign exchange rate contracts, equity
options and interest rate collars. The most frequently applied valuation techniques include forward pricing and
swap models, using present value calculations. The models incorporate various inputs including the credit
quality of counterparties, foreign exchange spot and forward rates and interest rate curves.
Credit Valuation Adjustments (CVA) and Debit Valuation Adjustments (DVA)
The CVA and DVA are incorporated into derivative valuations to reflect the impact on fair value of counterparty
risk and the Company’s own credit quality respectively.
The Group calculates the CVA by applying the probability of default (PD) of the counterparty, conditional on the
non-default of the Group, to the Group’s expected positive exposure to the counterparty and multiplying the
result by the loss expected in the event of default. Conversely, the Group calculates the DVA by applying its
own PD, conditional on the non-default of the counterparty, to the expected positive exposure of the
counterparty to Group and multiplying the result by the loss expected in the event of default. Both calculations
are performed over the life of the potential exposure.
The expected exposure of derivatives is calculated as per the Capital Requirement Regulations (CRR) and takes
into account the netting agreements where they exist. A standard loss given default (LGD) assumption in line
with industry norms is adopted. Alternative LGD assumptions may be adopted when both the nature of the
exposure and the available data support this.
The Group does not hold any significant derivative instruments which are valued using a valuation technique
with significant non-market observable inputs.
Investments available-for-sale and other investments at fair value through profit or loss
Available-for-sale investments and other investments at fair value through profit or loss which are valued using
a valuation technique or pricing models, primarily consist of unquoted equity securities and debt securities.
These assets are valued using valuation models which sometimes only incorporate market observable data and
at other times use both observable and non-observable data.
Loans and advances to customers
The fair value of loans and advances to customers is based on the present value of expected future cash flows.
Future cash flows have been based on the future expected loss rate per loan portfolio, taking into account
expectations for the credit quality of the borrowers. The discount rate includes components that capture the
funding cost and the cost of capital.
Customer deposits
The fair value of customer deposits is determined by calculating the present value of future cash flows. The
discount rate takes into account current market rates and the credit profile of the Company. The fair value of
deposits repayable on demand and deposits protected by the Deposit Protection Guarantee Scheme are
approximated by their carrying values.
Repurchase agreements
Repurchase agreements are collateralised bank takings. Given that the collateral provided by the Group is
greater than the amount borrowed, the fair value calculation of these repurchase agreements only takes into
account the time value of money.
89
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
22.
Fair value measurement (continued)
Loans and advances to banks
Loans and advances to banks with maturity over one year are discounted using an appropriate risk free rate
plus the credit spread of each counterparty. For short-term lending, the fair value is approximated by the
carrying value.
Deposits by banks
Since almost all deposits by banks are very short-term, the fair value is an approximation of the carrying value.
Investment properties
The fair value of investment properties is determined using valuations performed by external accredited,
independent valuers and internal accredited valuers. Further information on the techniques applied is disclosed
in the remainder of this Note.
Property and equipment
The freehold land and buildings consist of offices and other commercial properties. The fair value of the
properties is determined using valuations performed by external, accredited, independent valuers and internal
accredited valuers. Further information on the techniques applied is disclosed in the remainder of this Note.
Model inputs for valuation
Observable inputs to the models for the valuation of unquoted equity and debt securities include, where
applicable, current and expected market interest rates, market expected default rates, market implied country
and counterparty credit risk and market liquidity discounts.
90
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
22.
Fair value measurement (continued)
Model inputs for valuation (continued)
The following table presents the fair value measurement hierarchy of the Group’s assets and liabilities recorded
at fair value or for which fair value is disclosed, by level of the fair value hierarchy:
Level 1
Level 2
Level 3
€000
€000
€000
Total
€000
2016
Assets measured at fair value
Investment properties
Offices and other commercial properties
Manufacturing and industrial
Land (fields and plots)
Investment properties held for sale
Offices and other commercial properties
Hotels
Freehold property
Offices and other commercial properties
Trading derivatives
Forward exchange rate contracts
Currency swaps
Interest rate swaps
Currency options
Derivatives qualifying for hedge accounting
Fair value hedges-interest rate swaps
Net investments-forward exchange rate contracts
Investments at fair value through profit or loss
Trading investments
Other investments at fair value through profit or
loss
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
346
-
346
20.548
2.791
14.720
38.059
3.071
7.994
20.548
2.791
14.720
38.059
3.417
7.994
11.065
11.411
10.340
246.215
256.555
794
15.875
480
85
17.234
87
3.514
3.601
11.787
-
19.189
11.176
30.976
11.176
-
-
-
-
-
-
-
-
686
178
864
794
15.875
480
85
17.234
87
3.514
3.601
12.473
30.543
43.016
Investments available-for-sale
545.898
576.874
41
16.615
562.554
42.738
312.818
932.430
Other financial assets not measured at fair
value
Loans and advances to banks
Loans and receivables-investments
Loans and advances to customers
-
-
-
-
1.092.964
69.451
-
-
1.092.964
69.451
-
16.791.164 16.791.164
1.162.415
16.791.164 17.953.579
For available-for-sale equity securities categorised as Level 3, for one investment with a carrying amount of
€8.740 thousand, a change in the conversion factor by 10% would result in a change in the value of the equity
securities by €874 thousand.
91
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
22.
Fair value measurement (continued)
Model inputs for valuation (continued)
2016
Liabilities measured at fair value
Trading derivatives
Forward exchange rate contracts
Currency swaps
Interest rate swaps
Currency options
Derivatives qualifying for hedge accounting
Fair value hedges-interest rate swaps
Net investments-forward exchange rate contracts
Other financial liabilities not measured at fair
value
Deposits by banks
Repurchase agreements
Customer deposits
Level 1
Level 2
Level 3
€000
€000
€000
Total
€000
-
-
-
-
-
-
-
-
-
-
-
-
-
589
8.215
1.901
198
10.903
37.463
259
37.722
48.625
434.786
292.752
-
-
-
-
-
-
-
-
-
-
-
589
8.215
1.901
198
10.903
37.463
259
37.722
48.625
434.786
292.752
-
16.492.715 16.492.715
727.538
16.492.715 17.220.253
92
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
22.
Fair value measurement (continued)
Model inputs for valuation (continued)
2015
Assets measured at fair value
Investment properties
Offices and other commercial properties
Manufacturing and industrial
Land (fields and plots)
Investment properties held for sale
Residential
Offices and other commercial properties
Hotels
Freehold property
Offices and other commercial properties
Freehold property held for sale
Hotels
Trading derivatives
Forward exchange rate contracts
Currency swaps
Interest rate swaps
Currency options
Equity options
Derivatives qualifying for hedge accounting
Fair value hedges-interest rate swaps
Net investments-forward exchange rate contracts
Investments at fair value through profit or loss
Trading investments
Other investments at fair value through profit or
loss
Investments available-for-sale
Other financial assets not measured at fair
value
Loans and advances to banks
Loans and receivables-investments
Loans and advances to customers
Level 1
€000
Level 2
€000
Level 3
€000
Total
€000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
12.865
-
-
-
-
2.095
5.222
-
7.317
20.325
583
13.720
34.628
-
6.552
8.466
15.018
20.325
583
13.720
34.628
2.095
11.774
8.466
22.335
12.364
227.945
240.309
-
25.400
25.400
1.113
12.235
141
8
477
13.974
45
4
49
-
-
-
-
-
-
-
-
-
-
489
233
722
54.531
358.244
1.113
12.235
141
8
477
13.974
45
4
49
13.354
37.431
50.785
521.567
909.047
19.293
17.905
32.158
466.995
499.153
17.905
41
51.650
-
-
-
-
1.303.414
424.070
-
1.727.484
-
-
1.303.414
424.070
18.150.401 18.150.401
18.150.401 19.877.885
For available-for-sale equity securities categorised as Level 3, for one investment with a carrying amount of
€51.263 thousand, a change in the conversion factor by 10% would result in a change in the value of the equity
securities by €750 thousand.
93
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
22.
Fair value measurement (continued)
Model inputs for valuation (continued)
2015
Liabilities measured at fair value
Trading derivatives
Forward exchange rate contracts
Currency swaps
Interest rate swaps
Currency options
Equity options
Interest rate caps/floors
Derivatives qualifying for hedge accounting
Fair value hedges-interest rate swaps
Net investments-forward exchange rate contracts
Other financial liabilities not measured at fair
value
Deposits by banks
Repurchase agreements
Customer deposits
Level 1
Level 2
Level 3
€000
€000
€000
Total
€000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2.103
5.720
2.305
167
441
53
10.789
39.570
4.040
43.610
54.399
242.137
406.014
-
-
-
-
-
-
-
-
-
-
-
-
-
2.103
5.720
2.305
167
441
53
10.789
39.570
4.040
43.610
54.399
242.137
406.014
-
14.185.996 14.185.996
648.151
14.185.996 14.834.147
The cash and balances with central banks, the funding from central banks and the treasury bills are financial
instruments whose carrying value is a reasonable approximation of fair value, because they are mostly
short-term in nature or are repriced to current market rates frequently. Other assets and other liabilities are of
a financial nature and their carrying value is a close approximation of fair value. Disclosures for life insurance
business assets attributable to policyholders by level are disclosed in Note 24.
During the years 2016 and 2015 there were no significant transfers between Level 1 and Level 2.
94
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
22.
Fair value measurement (continued)
Movements in Level 3 financial instruments measured at fair value
Transfers from Level 3 to Level 2 occur when the market for some securities becomes more liquid, which eliminates the need for the previously required significant
unobservable valuation inputs. Following a transfer to Level 2 the instruments are valued using valuation models incorporating observable market inputs. Transfers into
Level 3 reflect changes in market conditions as a result of which instruments become less liquid. Therefore, the Group requires significant unobservable inputs to
calculate their fair value.
The movement in Level 3 assets which are measured at fair value is presented below:
Investment
properties
Investment
properties
held for sale
2016
Own use
properties
Own use
properties
held for sale
Financial
instruments
Investment
properties
Investment
properties
held for sale
2015
Own use
properties
Own use
properties held
for sale
Financial
instruments
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
34.628
2.114
15.018
227.945
25.400
-
-
2.107
19.952
10
-
55.253
13.867
-
488.598
114.404
-
44.566
1.927
-
(25.410)
(51.937)
(13.923)
(18.238)
1 January
Additions
Acquisition of subsidiary (Note 50.1.1)
Disposals
Disposal of Russian operations
Transfers from own use properties to investment
properties
Transfers to stock of property (Note 27)
Transfers from non-current assets and disposal
group held for sale
Transfers to non-current assets and disposal group
held for sale
Transfers (to)/from Levels 1 and 2
Net gains from fair value changes recognised in
the consolidated statement of other
comprehensive income
Depreciation charge for the year–continuing
operations
Impairment charge for the year–continuing
operations
Revaluation gains/(losses) – continuing operations
Foreign exchange adjustments
31 December
(612)
(3.480)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1.482
447
(442)
(31)
-
-
-
(1.371)
-
-
-
-
(2.404)
-
-
(14)
38.059
11.065
246.215
251.491
1.456
-
(191)
-
25.681
-
-
-
-
-
-
-
(31.051)
16.782
-
(16.782)
(492.927)
(247)
(541)
-
-
25.681
(25.681)
(21.908)
21.908
(25.400)
25.400
(7.317)
-
-
-
-
-
-
-
(49.801)
720
(2.774)
(1.073)
-
-
(2.688)
(311)
(4.795)
25
-
-
-
-
-
-
34.628
15.018
227.945
25.400
3.688
339
-
(45)
-
-
-
-
-
321
50.695
-
-
-
255
55.253
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
485
-
-
-
(189)
17.479
95
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
Annual Financial Report 2015
22.
Fair value measurement (continued)
Valuation policy and sensitivity analysis
Investment properties, investment properties held for sale and own use properties
The valuation technique mainly applied by the Group is the market comparable approach, adjusted for market
and property specific conditions. In certain cases, the Group also utilises the income capitalisation approach.
The key inputs used for the valuations of the investment properties, investment properties held for sale and
own use properties are presented in the tables below.
96
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
22.
Fair value measurement (continued)
Valuation policy and sensitivity analysis (continued)
Analysis of investment properties and investment properties held for sale
Type and country
2016
Estimated
rental value
per m2
per annum
Rent
growth per
annum
Estimated
building
cost per m2
Yield
Estimated fair
value per m2
Estimated
land value
per m2
Land
Building
area
Age of
building
Offices and other
commercial properties
Cyprus
UK
Russia
Manufacturing and industrial
Russia
Hotels
Romania
Land (fields and plots)
Cyprus
Total
€000
m2
m2
Years
23.266
€54-€353
n/a €821-€1.130
4%-6%
€1.060-€7.059
€80-€1.053
1.591-30.001
68—7.078
346
353
23.965
2.791
7.994
14.720
49.470
€97
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
€900
n/a
n/a
n/a
9%
n/a
n/a
€133
n/a
n/a
n/a
2.773
304
1.644
€55-€380
€10-€282
570-3.639
259-998
n/a
n/a
n/a
10.337
16.642
€272-€750
4.627-21.053
n/a
6-33
87
13
6-9
42
n/a
Analysis of own use properties
Type and country
2016
Estimated
rental value
per m2
per annum
Rent
growth per
annum
Estimated
building
cost per m2
Yield
Estimated fair
value per m2
Estimated
land value
per m2
Land
Building
area
Age of
building
Offices and other commercial
properties
Cyprus
Romania
UK
Total
€000
m2
m2
Years
242.792
3.423
€27-€434
n/a
n/a
n/a
€588-€2.102
n/a
5%-6%
9%
€566-€8.860 €139-€3.381
n/a
n/a
390-53.155
660
94-10.985
2.284
10.340
€141-€524
0%-6%
n/a
5%-7% €2.460-€12.715
n/a
173-1.740
173-1.689
9-37
9
Re-furnished
in 2009
256.555
97
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
22.
Fair value measurement (continued)
Valuation policy and sensitivity analysis (continued)
Analysis of investment properties and investment properties held for sale
Type and country
2015
Residential
€000
Estimated
rental value
per m2
per annum
Rent
growth
per
annum
Estimated
building
cost per m2
Yield
Estimated fair
value per m2
Estimated
land value
per m2
Land
Building
area
Age of
building
m2
m2
Years
2.095
€548
n/a
n/a
n/a
€12.965
n/a
n/a
156
46
UK
Offices and other commercial
properties
Cyprus
Greece
UK
Manufacturing and industrial
Russia
Hotels
Romania
Land (fields and plots)
Cyprus
Total
24.427
2.450
5.222
32.099
583
8.466
13.720
56.963
€54-€353
€480
€110-€230
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
€658-€1.302
4%-6%
€1.060-€7.059
€95-€1.053
1.591-30.001
68-4.788
7%-10%
€3.926
n/a
€1.013-€3.123
447
n/a
624
5-32
8
233-954
26-116
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
10.337
4.789
n/a
€248-€750
4.627-29.398
n/a
n/a
40
n/a
n/a
n/a
n/a
n/a
n/a
98
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
22.
Fair value measurement (continued)
Valuation policy and sensitivity analysis (continued)
Analysis of own use properties and own use properties held for sale
Type and country
2015
Estimated
rental value
per m2
per annum
Rent
growth
per
annum
Estimated
building
cost per m2
Yield
Estimated fair
value per m2
Estimated
land value
per m2
Offices and other commercial
properties
Cyprus
Romania
UK
Hotels
Cyprus
Total
Land
Building
area
Age of
building
m2
m2
Years
n/a
Re-
furbished in
2009
€000
224.479
3.466
€23-€434
n/a
n/a
n/a
€674-€2.102
5%-6%
€566-€8.860
€139-€3.007
390-53.155
94-10.985
8-36
n/a
n/a
n/a
n/a
648
2.284
12.364
€181-€671
5%-6%
n/a
5%-7% €2.704-€13.982
n/a
173-1.740
173-1.689
240.309
25.400
265.709
n/a
n/a
n/a
n/a
€2.485
n/a
91.887
10.222
33
99
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
22.
Fair value measurement (continued)
Valuation policy and sensitivity analysis (continued)
Sensitivity analysis
Most of the Group’s property valuations have been classified as Level 3. Significant increases/decreases in
estimated values per square meter for properties valued with the comparable approach or significant
increases/decreases in estimated rental values or yields for properties valued with the income capitalisation
approach would result in a significantly higher/lower fair value of the properties.
23.
Loans and advances to customers
Gross loans and advances to customers
Provisions for impairment of loans and advances to customers
(Note 43)
2016
€000
2015
€000
19.201.642
21.385.065
(3.552.241)
(4.193.433)
15.649.401
17.191.632
Loans and advances to customers pledged as collateral are disclosed in Note 45.
Additional analysis and information regarding credit risk and analysis of the provisions for impairment of loans
and advances to customers are set out in Note 43.
24.
Life insurance business assets attributable to policyholders
Equity securities
Debt securities
Mutual funds
Mortgages and other loans
Bank deposits
Property
2016
€000
2015
€000
8.298
56.389
9.288
58.440
367.096
344.331
1.489
52.361
1.668
48.886
485.633
462.613
13.900
12.790
499.533
475.403
Financial assets of life insurance business attributable to policyholders are classified as investments at fair value
through profit or loss.
In addition to the above assets, the life insurance subsidiary of the Group holds shares of the Company, as part
of the assets attributable to policyholders with a carrying value as at 31 December 2016 of €404 thousand
(2015: €425 thousand). Such shares are presented in the consolidated financial statements as treasury shares
(Note 34).
100
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
24.
Life insurance business assets attributable to policyholders (continued)
The analysis of the financial assets of life insurance business attributable to policyholders measured at fair
value by level, is presented below:
2016
Equity securities
Debt securities
Mutual funds
Mortgages and other loans
2015
Equity securities
Debt securities
Mutual funds
Mortgages and other loans
Level 1
Level 2
Level 3
€000
€000
€000
Total
€000
7.090
-
1.208
8.298
31.886
24.503
367.096
1.489
-
-
-
-
-
56.389
367.096
1.489
407.561
24.503
1.208
433.272
7.852
-
1.436
27.881
30.559
344.331
1.668
-
-
-
-
-
9.288
58.440
344.331
1.668
381.732
30.559
1.436
413.727
Bank deposits are financial instruments whose carrying amount is a reasonable approximation of fair value,
because they are short-term in nature or are repriced to current market rates frequently.
The movement of financial assets classified as Level 3 is presented below:
1 January
Unrealised losses recognised in the consolidated income statement
31 December
2016
€000
2015
€000
1.436
(228)
1.208
1.443
(7)
1.436
During years 2016 and 2015 there were no significant transfers between Level 1 and Level 2.
101
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
25.
Property and equipment
2016
Property
Equipment
€000
€000
Total
€000
Net book value at 1 January
242.941
21.392
264.333
Acquisition of subsidiary (Note 50.1.1)
Additions
Transfers to stock of property (Note 27)
Transfers from intangible assets (Note 26)
Disposals and write-offs
Disposal of subsidiary (Note 50.2.1)
Depreciation charge for the year (Note 15)
Foreign exchange adjustments
19.952
2.572
(1.371)
-
(80)
-
(3.692)
(1.770)
356
9.524
-
456
(184)
(952)
20.308
12.096
(1.371)
456
(264)
(952)
(7.866)
(11.558)
(385)
(2.155)
Net book value at 31 December
258.552
22.341
280.893
1 January 2016
Cost or valuation
278.285
147.602
425.887
Accumulated depreciation
(35.344)
(126.210)
(161.554)
Net book value
242.941
21.392
264.333
31 December 2016
Cost or valuation
298.743
152.838
451.581
Accumulated depreciation
(40.191)
(130.497)
(170.688)
Net book value
258.552
22.341
280.893
102
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
25.
Property and equipment (continued)
2015
Property
Equipment
€000
€000
Total
€000
Net book value at 1 January
267.126
23.294
290.420
Additions
Revaluation
Transfers to investment properties (Note 22)
Transfers to stock of property (Note 27)
Transfers from disposal group held for sale
Transfers to disposal group held for sale
2.620
(4.795)
(16.782)
(541)
25.681
(25.400)
6.089
8.709
-
-
-
-
-
(4.795)
(16.782)
(541)
25.681
(25.400)
Disposals and write-offs
(191)
(222)
(413)
Depreciation charge for the year – continuing
operations (Note 15)
Impairment charge for the year – continuing
operations
Foreign exchange adjustments
(4.689)
(7.568)
(12.257)
(311)
223
-
(311)
(201)
22
Net book value at 31 December
242.941
21.392
264.333
1 January 2015
Cost or valuation
301.535
165.080
466.615
Accumulated depreciation
(34.409)
(141.786)
(176.195)
Net book value
267.126
23.294
290.420
31 December 2015
Cost or valuation
278.285
147.602
425.887
Accumulated depreciation
(35.344)
(126.210)
(161.554)
Net book value
242.941
21.392
264.333
The net book value of the Group’s property comprises:
Freehold property
Improvements on leasehold property
2016
€000
2015
€000
256.555
240.309
1.997
2.632
258.552
242.941
Freehold property includes land amounting to €92.818 thousand (2015: €89.272 thousand) for which no
depreciation is charged.
103
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
25.
Property and equipment (continued)
The Group’s policy is to revalue its properties periodically (between 3 to 5 years) but more frequent
revaluations may be performed where there are significant and volatile movements in values. As a
consequence of the economic conditions in Cyprus, and their impact on the real estate market, the Group
performed revaluations as at 31 December 2015. As a result, a net loss on revaluation of €4.795 thousand was
recognised in the consolidated statement of comprehensive income and an impairment loss of €311 thousand
was recognised in the consolidated income statement for the year ended 31 December 2015. The valuations
are carried out by qualified valuers, on the basis of market value using observable prices and/or recent market
transactions depending on the location of the property. Details on valuation techniques and inputs are
presented in Note 22.
The net book value of freehold property, on a cost less accumulated depreciation basis, as at 31 December
2016 would have amounted to €190.241 thousand (2015: €164.503 thousand).
26.
Intangible assets
2016
Computer
software
In-force life
insurance
business
Total
€000
€000
€000
Net book value at 1 January
20.464
113.324
133.788
Additions
Transfers to equipment (Note 25)
Increase in value of in-force life insurance business
(Note 12)
Disposals and write-offs
Amortisation charge for the year (Note 15)
Foreign exchange adjustments
16.363
(456)
-
-
-
4.680
(13)
(7.263)
(136)
-
-
-
16.363
(456)
4.680
(13)
(7.263)
(136)
Net book value at 31 December
28.959
118.004
146.963
1 January 2016
Cost
130.151
113.324
243.475
Accumulated amortisation and impairment
(109.687)
-
(109.687)
Net book value
20.464
113.324
133.788
31 December 2016
Cost
144.898
118.004
262.902
Accumulated amortisation and impairment
(115.939)
-
(115.939)
Net book value
28.959
118.004
146.963
104
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
26.
Intangible assets (continued)
2015
Computer
software
In-force life
insurance
business
Total
€000
€000
€000
Net book value at 1 January
15.577
111.825
127.402
Additions
11.827
-
11.827
Increase in value of in-force life insurance business
(Note 12)
Amortisation charge for the year - continuing
operations (Note 15)
Foreign exchange adjustments
-
1.499
1.499
(7.001)
61
-
-
(7.001)
61
Net book value at 31 December
20.464
113.324
133.788
1 January 2015
Cost
123.027
111.825
234.852
Accumulated amortisation and impairment
(107.450)
-
(107.450)
Net book value
15.577
111.825
127.402
31 December 2015
Cost
130.151
113.324
243.475
Accumulated amortisation and impairment
(109.687)
-
(109.687)
Net book value
20.464
113.324
133.788
Valuation of in-force life insurance business
The actuarial assumptions made to determine the value of in-force life insurance business relate to future
mortality, redemptions, level of administration and selling expenses and investment returns. The main
assumptions used in determining the value of the in-force business are:
Discount rate (after tax)
Return on investments
Expense inflation
2016
2015
10,0%
10,0%
5,0%
4,0%
5,0%
4,0%
105
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
27.
Stock of property
The carrying value of stock is determined as the lower of cost and net realisable value. Impairment is
recognised if the net realisable value is below the cost of the stock of property. During 2016 an impairment
loss of €36.220 thousand was recognised in ‘Impairment of non-financial instruments’ in the consolidated
income statement arising from measuring items at lower of cost and net realisable value (2015: impairment of
€17.792 thousand). At 31 December 2016, stock of €608.985 thousand (2015: €496.594 thousand) is carried
at net realisable value which is approximately the fair value less costs to sell.
The stock of property includes residential properties, offices and other commercial properties, manufacturing
and industrial properties, hotels, land (fields and plots) and properties under construction. The stock of property
pledged as collateral for central bank funding facilities under Eurosystem monetary policy operations and ELA
amounts to €22.055 thousand (2015: €21.875 thousand).
The carrying value of the stock of property is analysed in the tables below:
Net book value at 1 January
Acquisition of subsidiaries (Note 50.1)
Additions
Disposals
Transfers from investment properties (Note 22)
Transfers from own use properties (Note 25)
Transfers from disposal group held for sale
Impairment (Note 16)
Foreign exchange adjustments
Net book value at 31 December
2016
€000
515.858
75.632
1.010.059
(139.316)
2015
€000
12.662
-
32.216
(4.298)
-
492.927
1.371
-
541
247
(36.220)
(17.792)
(112)
(645)
1.427.272
515.858
Analysis by type and country
2016
Residential properties
Offices and other commercial properties
Manufacturing and industrial properties
Hotels
Land (fields and plots)
Properties under construction
Total
2015
Cyprus
€000
Greece
Romania
€000
€000
Total
€000
90.308
256.152
81.572
74.578
739.058
791
36.810
55.676
53.735
544
5.732
-
9.641
12.340
511
-
136.759
324.168
135.818
75.122
9.824
754.614
-
791
1.242.459
152.497
32.316
1.427.272
Residential properties
Offices and other commercial properties
Manufacturing and industrial properties
Hotels
Land (fields and plots)
Properties under construction
17.664
122.885
18.174
73.630
75.494
365
39.222
63.934
59.279
2.221
6.347
-
13.030
13.553
513
-
9.547
-
69.916
200.372
77.966
75.851
91.388
365
Total
308.212
171.003
36.643
515.858
106
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
28.
Prepayments, accrued income and other assets
Receivables relating to disposal of operations
Reinsurers’ share of insurance contract liabilities (Note 32)
Taxes refundable
Debtors
Prepaid expenses
Retirement benefit plan assets (Note 14)
Other assets
2016
€000
2015
€000
57.056
49.973
33.582
24.571
1.765
668
98.454
56.763
38.204
23.020
1.411
1.203
102.296
62.725
269.911
281.780
As at 31 December 2016, the receivables relating to disposal of operations related to the disposal of the
Ukrainian operations during 2014 which is secured and repayable in June 2019, whereas at 31 December 2015
they related to the disposal of the Ukrainian and Russian operations during 2014 and 2015 respectively.
During 2016, a reversal of impairment of €3.869 thousand was recognised in relation to other assets (2015:
impairment loss of €21.571 thousand) (Note 16).
29.
Non-current assets and disposal group held for sale
Non-current assets and disposal group held for sale
Disposal group held for sale
Investment properties held for sale
2016
€000
2015
€000
-
11.411
11.411
26.168
22.335
48.503
Non-current liabilities and disposal group held for sale
Disposal group held for sale
-
3.677
The following non-current assets and disposal group were classified as held for sale as at 31 December 2016
and 2015:
Non-current assets held for sale
Investment properties
The investment properties classified as held for sale are properties which management is committed to sell and
has proceeded with an active programme to complete this plan. The disposals are expected to take place
within 12 months from the date of classification. Investment properties classified as held for sale are measured
at fair value. The results of the fair value changes are presented within ‘Gains/(losses) from revaluation and
disposal of investment properties’ in the consolidated income statement and are within the Cyprus operating
segment for investment properties in Cyprus and in the Other countries operating segment for Greek, UK and
Romanian investment properties. An analysis of investment properties held for sale by country and key
valuation inputs are disclosed in Note 22.
107
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
29.
Non-current assets and disposal group held for sale (continued)
Disposal group held for sale
As at 31 December 2015, the disposal group held for sale relates to the Kermia Hotel business of the Group. In
June 2016, the Group completed the sale of Kermia Hotels Ltd and adjacent land for a consideration of €26.500
thousand (Note 50.2.1).
30.
Funding from central banks
Funding from central banks comprises funding from the ECB under Eurosystem monetary policy operations and
ELA from the CBC, as set out in the table below:
Emergency Liquidity Assistance (ELA)
Main Refinancing Operations (MRO)
Longer-Term Refinancing Operations (LTRO)
Targeted Longer-Term Refinancing Operations (TLTRO)
2016
€000
2015
€000
200.014
3.802.058
-
150.000
50.000
-
600.000
500.792
850.014
4.452.850
In 2014, the Company participated in the TLTRO of the ECB for an amount of €500 million. On 29 June 2016
the Company repaid the amount borrowed through the TLTRO amounting to €500 million and borrowed the
same amount from the MRO. In December 2016, the Group borrowed an amount of €600 million through the
new series of TLTRO (TLTRO II) announced by the ECB in March 2016. Additionally, an amount of €50 million
was borrowed through the LTRO. As a result, in December 2016 all the ECB funding that was borrowed through
the MRO, was switched to longer term funding.
In May 2016, the Company raised new funding from the ECB using as collateral a pool of housing loans that
satisfy the criteria of the Additional Credit Claims as set out in accordance with the Implementation of the
Eurosystem Monetary Policy Framework Directives of 2015 and 2016.
The interest rate applied to TLTRO II will be fixed for each operation at the rate applied in the MRO prevailing at
the time of allotment and is subject to a lower rate for counterparties whose eligible net lending in the pre-
specified period exceeds their benchmark. This lower rate will be linked to the interest rate on the deposit
facility prevailing at the time of the allotment of each operation.
The Company’s ELA funding bears interest at a rate equal to the ruling marginal lending facility rate (MLF rate)
of the Eurosystem, plus a margin. ELA funding was repaid in full by the Company on 5 January 2017.
Details on encumbered assets related to the above funding facilities are disclosed in Note 45.
108
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
31.
Customer deposits
By type of deposit
Demand
Savings
Time or notice
By geographical area
Cyprus
United Kingdom
Romania
By customer sector
2016
Corporate
SMEs
Retail
Restructuring
– Corporate
– SMEs
Recoveries
– Corporate
International banking services
Wealth management
2015
Corporate
SMEs
Retail
Restructuring
– Corporate
– SMEs
Recoveries
– Corporate
International banking services
Wealth management
2016
€000
2015
€000
6.182.096
1.061.786
9.265.859
16.509.741
4.987.078
1.033.991
8.159.612
14.180.681
15.043.362
1.464.651
1.728
16.509.741
12.691.090
1.486.551
3.040
14.180.681
Cyprus
€000
1.184.681
566.172
7.778.136
192.442
27.685
United
Kingdom
€000
53.457
204.166
1.207.028
Romania
Total
€000
1.446
178
104
€000
1.239.584
770.516
8.985.268
-
-
-
-
192.442
27.685
11.176
4.494.755
788.315
15.043.362
-
-
-
1.464.651
-
-
-
11.176
4.494.755
788.315
1.728 16.509.741
978.672
455.133
6.995.757
40.425
236.616
1.134.334
2.242
461
337
1.021.339
692.210
8.130.428
189.196
35.363
-
-
-
-
189.196
35.363
7.865
3.710.742
318.362
12.691.090
-
-
75.176
1.486.551
-
-
-
7.865
3.710.742
393.538
3.040 14.180.681
Deposits by geographical area are based on the originator country of the deposit.
109
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
32.
Insurance liabilities
2016
Reinsurers’
share
Net
Gross
2015
Reinsurers’
share
€000
€000
€000
€000
Net
€000
Gross
€000
530.075
(28.379)
501.696
510.729
(30.396)
480.333
22.690
(8.605)
14.085
24.029
(11.533)
12.496
Life insurance
Life insurance
contract liabilities
General insurance
Provision for
unearned premiums
Other liabilities
Claims outstanding
31.009
(12.989)
18.020
32.083
(14.834)
17.249
Unexpired risks
reserve
Equalisation reserve
General insurance
contract liabilities
204
19
-
-
204
19
61
23
-
-
61
23
53.922
(21.594)
32.328
56.196
(26.367)
29.829
583.997
(49.973)
534.024
566.925
(56.763)
510.162
Reinsurance balances receivable are included in ‘Prepayments, accrued income and other assets’ (Note 28).
Life insurance contract liabilities
The movement of life insurance contract liabilities and reinsurance assets during the year is analysed as
follows:
Gross
€000
2016
Reinsurers’
share
€000
Net
€000
Gross
€000
2015
Reinsurers’
share
€000
Net
€000
1 January
510.729
(30.396)
480.333
514.074
(35.542)
478.532
New business
Change in existing
business
31 December
8.389
(1.150)
7.239
8.403
(1.035)
7.368
10.957
3.167
14.124
(11.748)
6.181
(5.567)
530.075
(28.379)
501.696
510.729
(30.396)
480.333
General insurance contract liabilities
The movement in general insurance contract liabilities and reinsurance assets for the year is analysed as
follows:
Gross
2016
Reinsurers’
share
Net
Gross
2015
Reinsurers’
share
Net
€000
€000
€000
€000
€000
€000
Premium income
60.215
(27.544)
24.029
(11.533)
12.496
32.671
24.891
64.828
(11.782)
(36.927)
13.109
27.901
Earned premiums
(61.554)
30.472
(31.082)
(65.690)
37.176
(28.514)
31 December
22.690
(8.605)
14.085
24.029
(11.533)
12.496
110
Liabilities for
unearned
premiums
1 January
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
32.
Insurance liabilities (continued)
General insurance contract liabilities (continued)
The provisions for unearned insurance and reinsurance premiums represent the portion of premiums that relate
to risks that have not yet expired at the reporting date.
Claims and
adjustments for
losses
1 January
Amount paid for claims
settled in the period
Increase in liabilities
arising from claims
31 December
Reported claims
Incurred but not
reported
Gross
2016
Reinsurers’
share
Net
Gross
2015
Reinsurers’
share
Net
€000
€000
€000
€000
€000
€000
32.083
(14.834)
17.249
37.581
(18.853)
18.728
(25.864)
12.004
(13.860)
(28.175)
14.423
(13.752)
24.790
(10.159)
14.631
22.677
(10.404)
12.273
31.009
(12.989)
18.020
32.083
(14.834)
29.188
(12.178)
17.010
30.125
(13.916)
17.249
16.209
1.821
(811)
1.010
1.958
(918)
1.040
31.009
(12.989)
18.020
32.083
(14.834)
17.249
33.
Accruals, deferred income and other liabilities
Income tax payable and related provisions
Special defence contribution payable
Retirement benefit plans liabilities (Note 14)
Provisions for pending litigation, claims and regulatory matters (Note 38)
Provisions for financial guarantees and commitments (Notes 16 and 38)
Liabilities for investment-linked contracts under administration
Accrued expenses and other provisions
Deferred income
Items in the course of settlement
Other liabilities
2016
€000
2015
€000
25.599
23.308
5.719
22.776
48.882
38.196
5.458
6.354
12.588
34.749
44.348
4.954
58.761
59.850
7.379
49.522
73.633
7.820
29.905
58.955
335.925
282.831
111
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
33.
Accruals, deferred income and other liabilities (continued)
Provisions for pending litigation, claims and regulatory matters
The movement for the year in the provisions for pending litigation, claims and regulatory matters is as follows:
1 January
Increase of provisions
Utilisation of provisions
Release of provisions
Foreign exchange adjustments
31 December
2016
€000
2015
€000
34.749
30.890
(7.931)
(7.924)
(902)
48.882
27.329
11.904
(225)
(4.300)
41
34.749
The provisions for pending litigation, claims and regulatory matters are analysed as follows:
Pending litigation or claims
Regulatory matters
31 December
2016
€000
2015
€000
25.234
23.648
48.882
34.749
-
34.749
The increase of provisions during the year 2016 of €22.966 thousand includes an amount of €5.126 thousand
which is classified in advisory and other restructuring costs in other operating expenses (Note 15).
The provisions for pending litigation, claims and regulatory matters do not include insurance claims arising in
the ordinary course of business of the Group’s insurance subsidiaries as these are included in Insurance
liabilities (Note 32).
Further details on the pending litigations, claims and regulatory matters are disclosed in Note 38.
34.
Share capital
Authorised
2016
2015
Shares
(thousand)
€000
Shares
(thousand)
€000
Ordinary shares of €0,10 each
47.677.593
4.767.759
47.677.593
4.767.759
Issued
1 January
Issue of shares
31 December
8.922.945
892.294
8.922.378
892.238
-
-
567
56
8.922.945
892.294
8.922.945
892.294
112
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
34.
Share capital (continued)
Issued share capital
2016
There were no changes to the issued share capital during the year 2016. The changes to the issued share
capital following the resolutions of the Extraordinary General Meeting which took place on 13 December 2016,
effective on 18 January 2017, are disclosed in Note 53.1.
2015
During 2015, the issued share capital was increased by 567 thousand shares of a nominal value of €0,10 each.
All issued ordinary shares carry the same rights.
Share premium reserve
The share premium reserve is maintained pursuant to the provisions of section 55 of the Companies Law, Cap.
113 and is not available for distribution to equity holders in the form of a dividend.
The share premium was created in 2014 and 2015 by the issuance of 4.167.234 thousand shares of a nominal
value of €0,10 each of a subscription price of €0,24 each, and was reduced by the relevant transaction costs of
€30.794 thousand.
Capital reduction reserve
The capital reduction reserve is maintained pursuant to the provisions of section 55 of the Companies Law, Cap.
113 and is not available for distribution to equity holders in the form of a dividend.
The capital reduction reserve was created upon the reduction of the nominal value of ordinary shares from
€1,00 each to €0,10 each in 2014. The reduction in capital amounted to €4.280.140 thousand, of which an
amount of €2.327.654 thousand was applied against accumulated losses and an amount of €1.952.486
thousand was credited to the capital reduction reserve.
Treasury shares of the Company
Shares of the Company held by entities controlled by the Group are deducted from equity on the purchase,
sale, issue or cancellation of such shares. No gain or loss is recognised in the consolidated income statement.
During 2016 all treasury shares other than those held by the life insurance subsidiary of the Group have been
disposed of.
The life insurance subsidiary, as at 31 December 2016, held a total of 2.889 thousand (2015: 2.889 thousand)
shares of the Company, as part of its financial assets which are invested for the benefit of insurance
policyholders. The cost of acquisition of these shares was €25.333 thousand (2015: €25.333 thousand). In
addition, as at 31 December 2015, 5.136 thousand shares with a total cost of acquisition of €41.301 thousand
were held by other entities of the Group.
Share-based payments - share options
On 24 November 2015, the Annual General Meeting of the Company’s shareholders authorised the Board of
Directors to establish and implement a Long Term Incentive Plan and allowed the Company the flexibility to
increase the ratio of variable remuneration relative to fixed remuneration up to a maximum of 100% of fixed
remuneration for members of senior management (‘Shareholder Resolution’). The authorised Long Term
Incentive Plan involved the granting of options for the acquisition of shares to a defined group of employees of
the Group and under the current terms of the Shareholder Resolution:
(i)
the total amount of shares that may be issued and allotted under the Long Term Incentive Plan shall not
exceed 178.458.891 ordinary shares of nominal value of €0,10 each,
(ii) the exercise price shall be set at €0,25 per share,
(iii) the vested share options will only be able to be exercised three years after the grant date, and
(iv) any share options not exercised by 31 March 2026 will lapse.
113
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
34.
Share capital (continued)
Share-based payments - share options (continued)
The options would be designed to vest only if certain key performance conditions were met, including amongst
other things, the full repayment of ELA, the lifting of dividend restrictions, the cancellation of government
guarantee and the performance of eligible employees.
The original proposed grant date of 31 March 2016 as per the Shareholder Resolution, was postponed until such
time that all relevant approvals were obtained.
Following the final SREP 2016 decision received in December 2016, the ECB’s prohibition on variable pay was
lifted and replaced with a limitation on variable remuneration to 10% of net revenues.
Following the incorporation of Bank of Cyprus Holdings Public Limited Company and its introduction as the new
holding company of the Group in January 2017, the Long Term Incentive Plan was replaced by the Share Option
Plan which operates at the level of Bank of Cyprus Holdings Public Limited Company. Further information is
disclosed in Note 53.2.
No share options were issued until the date of replacement of the Long Term Incentive Plan by the Share
Option Plan at the level of Bank of Cyprus Holdings Public Limited Company.
35.
Dividends
The Company is currently under a regulatory dividend distribution prohibition and therefore no dividend was
declared or paid during years 2016 and 2015.
36.
Accumulated losses
Retained earnings are the only distributable reserve.
Companies, tax resident in Cyprus, which do not distribute at least 70% of their profits after tax as defined by
the Special Defence Contribution Law during the two years after the end of the year of assessment to which the
profits refer, will be deemed to have distributed this amount as dividend. Special defence contribution at 17%
is payable on such deemed dividend distribution to the extent that the shareholders of the Company
(individuals who are domiciled in Cyprus and companies) at the end of the period of two years from the end of
the year of assessment to which the profits refer, are directly or indirectly Cyprus tax residents. Deemed
distribution does not apply in respect of profits that are directly or indirectly attributable to shareholders that
are non-Cyprus tax residents and individual shareholders who are not domiciled in Cyprus.
The amount of this deemed dividend distribution is reduced by any actual dividend paid out of the profits of the
relevant year.
This special defence contribution is paid by the Company on account of the shareholders.
During 2016 and 2015 no deemed dividend distribution was paid by the Company.
37.
Fiduciary transactions
The Group offers fund management and custody services that result in holding or investing financial assets on
behalf of its customers. The Group is not liable to its customers for any default by other banks or organisations.
The assets under management and custody are not included in the consolidated balance sheet of the Group
unless they are placed with the Group. Total assets under management and custody at 31 December 2016
amounted to €1.054.210 thousand (2015: €1.012.357 thousand).
38.
Contingent liabilities and commitments
As part of the services provided to its customers, the Group enters into various irrevocable commitments and
contingent liabilities. These consist of financial guarantees, letters of credit and other undrawn commitments to
lend.
Even though these obligations may not be recognised on the consolidated balance sheet, they do contain credit
risk and are therefore part of the overall credit risk exposure of the Group (Note 43).
114
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
38.
Contingent liabilities and commitments (continued)
38.1
Capital commitments
Capital commitments for the acquisition of property, equipment and intangible assets as at 31 December 2016
amount to €14.830 thousand (2015: €17.099 thousand).
38.2
Pending litigation, claims and regulatory matters
The Group in the ordinary course of business is subject to enquiries and examinations, requests for information,
audits, investigations and legal and other proceedings by regulators, governmental and other public bodies,
actual and threatened, relating to the suitability and adequacy of advice given to clients or the absence of
advice, lending and pricing practices, selling and disclosure requirements, record keeping, filings and a variety
of other matters. In addition, as a result of the deterioration of the Cypriot economy and banking sector in
2012 and the subsequent Restructuring of the Company in 2013 as a result of the Bail-in Decrees, the
Company is subject to a large number of proceedings and investigations that either precede, or result from the
events that occurred during the period of the Bail-in Decrees. Most ongoing investigations and proceedings of
significance relate to matters arising during the period prior to the issue of the Bail-in Decrees.
Apart from what is described below, the Group considers that none of these matters is material, either
individually or in aggregate. The Group has not disclosed an estimate of the potential financial effect on its
contingent liabilities arising from these matters where it is not practicable to do so because it is too early or the
outcome is too uncertain or, in cases where it is practicable, where disclosure could prejudice conduct of the
matters. Provisions have been recognised for those cases where the Group is able to estimate probable losses.
Where an individual provision is material, the fact that a provision has been made is stated. Any provision
recognised does not constitute an admission of wrongdoing or legal liability. While the outcome of these
matters is inherently uncertain, management believes that, based on the information available to it, appropriate
provisions have been made in respect of legal proceedings and regulatory matters as at 31 December 2016 and
hence it is not believed that such matters, when concluded, will have a material impact upon the financial
position of the Group.
38.2.1 Pending litigation and claims
Investigations and litigation relating to securities issued by the Company
A number of institutional and retail customers have filed various separate actions against the Company alleging
that the Company is guilty of misselling in relation to securities issued by the Company between 2007 and
2011. Remedies sought include the return of the money investors paid for these securities. Claims are currently
pending before the courts in Cyprus and in Greece, as well as the decisions and fines imposed upon the
Company in related matters by Cyprus Securities and Exchange Commission (CySEC) and/or Hellenic Capital
Market Commission (HCMC).
The bonds and capital securities in respect of which claims have been brought are the following: 2007 Capital
Securities, 2008 Convertible Bonds, 2009 Convertible Capital Securities (CCS) and 2011 Convertible Enhanced
Capital Securities (CECS).
The Company is defending these claims, particularly with respect to institutional investors and retail purchasers
who received investment advice from independent investment advisors. In the case of retail investors, if it can
be documented that the relevant Company officers 'persuaded' them to proceed with the purchase and/or
purported to offer 'investment advice', the Company may face significant difficulties. To date, a small number of
cases have been tried in Greece. The Company has appealed against any such cases which were not ruled in
its favour. The resolution of the claims brought in the courts of Greece is expected to take a number of years.
Provision has been made based on management's best estimate of probable outflows and based on advice of
legal counsel.
115
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
38.
Contingent liabilities and commitments (continued)
38.2
Pending litigation, claims and regulatory matters (continued)
38.2.1 Pending litigation and claims (continued)
Bail-in related litigation
Depositors
A number of the Company's depositors, who allege that they were adversely affected by the bail-in, filed claims
against the Company and other parties (such as the CBC and the Ministry of Finance of Cyprus) on the grounds
that, inter alia, the ‘Resolution Law of 2013’ and the Bail-in Decrees were in conflict with the Constitution of the
Republic of Cyprus and the European Convention on Human Rights. They are seeking damages for their alleged
losses resulting from the bail-in of their deposits. The Company is defending these actions.
Shareholders
Numerous claims were filed by shareholders in 2013 (some of whom are current shareholders of the Company)
against the Government and the CBC before the Supreme Court in relation to the dilution of their shareholding
as a result of the recapitalisation pursuant to the Resolution Law and the Bail-in Decrees issued thereunder.
These proceedings sought the cancellation and setting aside of the Bail-in Decrees as unconstitutional and/or
unlawful and/or irregular. The Company appeared in these proceedings as an interested party to support the
position that the cases should be adjudicated upon in the context of private law. The Supreme Court ruled in
these cases in October 2014 that the proceedings fall within private and public law and thus fall within the
jurisdiction of the District Courts.
As at the present date, both the Resolution Law and the Bail-in Decrees have not been annulled by a court of
law and thus remain legally valid and in effect. It is expected that actions for damages will be instituted by the
shareholders in due course before the District Courts of Cyprus.
Claims based on set-off
Certain claims have been filed by customers against the Company alleging that the implementation of the bail-
in under the Bail-in Decrees was not carried out correctly in relation to them and, in particular, that their rights
of set-off were not properly respected. The Company intends to contest such claims.
Laiki Bank depositors and shareholders
The Company has been joined as a defendant with regards to certain claims which have been brought against
Laiki Bank by its depositors, shareholders and holders of debt securities. These claims have been brought on
grounds similar to the claims brought by the Company’s bailed-in depositors and shareholders as described
above. The Company, inter alia, maintains the position that it should not be a party to these proceedings.
Implementation of Decrees
Occasionally, other claims are brought against the Company in respect of the implementation of the Decrees
issued following the adoption of the Resolution Law (as regards the way and methodology whereby such
Decrees have been implemented).
Legal position of the Group
All above claims are being vigorously disputed by the Group, in close consultation with the appropriate state
and governmental authorities. The position of the Group is that the Resolution Law and the Decrees take
precedence over all other laws. As matters now stand, both the Resolution Law and the Decrees issued
thereunder are constitutional and lawful, in that they were properly enacted and have not so far been annulled
by any court.
116
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
38.
Contingent liabilities and commitments (continued)
38.2
Pending litigation, claims and regulatory matters (continued)
38.2.1 Pending litigation and claims (continued)
CNP Arbitration
The French entity CNP Assurances S.A. had certain exclusive arrangements with Laiki Bank with respect to
insurance products offered in, inter alia, Cyprus through the formation of a local company (CNP Cyprus
Insurance Holdings Ltd (a company in which the Company now has a 49,9% shareholding, acquired as part of
the acquisition of certain operations of Laiki Bank pursuant to Regulatory Administrative Act 104/2013)). CNP
Assurances S.A. held 50,1% of the shares of CNP Cyprus Insurance Holdings Ltd and Laiki Bank held 49,9% of
the shares. In the context of the total arrangement between the parties, two agreements were in place between
CNP Assurances S.A. and Laiki Bank, a Shareholders’ Agreement and a Distribution Agreement (to which
Distribution Agreement CNP Cyprus Insurance Holdings Ltd was also a party).
Following the resolution of Laiki Bank, CNP Assurances S.A. and CNP Cyprus Insurance Holdings Ltd instituted
arbitration proceedings in London under the rules of arbitration of the International Chamber of Commerce,
alleging that the Company was a successor to Laiki Bank in respect of both the Shareholders’ and Distribution
Agreements and that the said Agreements were violated by the Company. The claims of CNP Assurances S.A.
and CNP Cyprus Insurance Holdings Ltd amounted to approximately €240 million (including adjustments for
taxes and pre-award interest as at March 2015). The Tribunal award was issued in September 2016, rejecting
all claims made by the Claimants with costs in favour of the Company.
Provident fund cases
A number of claims which were pending before the Cypriot Labour Disputes Tribunal by certain of the
Company's former employees with respect to their retirement benefits were withdrawn unreservedly and
dismissed by the court in April 2016, following an out-of-court settlement to the satisfaction of the Company,
utilising part of the provisions for pending litigation in place.
In December 2015, the Bank of Cyprus Employees Provident Fund (the Provident Fund) filed an action against
the Company claiming €70 million allegedly owed as part of the Company's contribution by virtue of an
agreement with the union dated 31 December 2011. Based on facts currently known, it is not practicable at this
time for the Company to predict the resolution of this matter, including the timing or any possible impact on the
Company, however at this stage the Group does not expect a material impact on its financial position.
Employment litigation
Former senior officers of the Company have instituted a total of three claims for unfair dismissal and for
Provident Fund entitlements against the Company and Trustees of the Provident Fund. As at the present date
one case had been dismissed as filed out of time, but the plaintiff has appealed against this ruling. The Group
does not consider that these cases will have a material impact upon its financial position.
Greek case
In connection with a legal dispute (one case by the Company against Themis and one by Themis against the
Company) relating to the Company's discontinued operations in Greece (Themis case), a provision was
recognised in previous periods (30 September 2014: €38.950 thousand) following a court judgement of the
Athens Court of Appeal (dismissing the Company's case and upholding the Themis case). This provision was
reversed as at 31 December 2014 following the dismissal of the judgement by the Greek Supreme Court in
March 2015. The Supreme Court further ruled that these claims (the Company's claim against Themis for
approximately €25 million which had been transferred to Piraeus Bank SA in March 2013, as well as Themis'
claim against the Company for a similar amount) be reconsidered by the Supreme Court on the merits at the
instigation of the affected party. Both cases were heard in December 2016 and the court reserved its
judgement. The Group does not consider that this case will have a material impact upon its financial position.
Swiss Francs loans litigation in Cyprus and UK
A number of actions have been instituted against the Company by borrowers who obtained loans in foreign
currencies (mainly Swiss Francs). The central allegation in these cases is that the Company misled these
borrowers and/or misrepresented matters, in violation of applicable law. The Company intends to contest such
proceedings. The Group does not expect that these actions will have a material impact upon its financial
position.
117
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
38.
Contingent liabilities and commitments (continued)
38.2
Pending litigation, claims and regulatory matters (continued)
38.2.1 Pending litigation and claims (continued)
UK property lending claims
The Company is the defendant in certain proceedings alleging that the Company is legally responsible for
allegedly, inter alia, advancing and misselling loans for the purchase by UK nationals of property in Cyprus. The
proceedings in the United Kingdom are currently stayed in order for the parties to have time to negotiate
possible settlements.
General criminal investigations and proceedings
The Attorney General and the Cypriot Police (the Police) are conducting various investigations and inquiries
following and relating to the financial crisis which culminated in March 2013. The Company is cooperating fully
with the Attorney General and the Police and is providing all information requested of it. Based on the currently
available information, the Group is of the view that any further investigations or claims resulting from these
investigations will not have a material impact on its financial position.
The Attorney General has filed a criminal case against the Company and five former members of the Board of
Directors for alleged breach of Article 302 (conspiracy to defraud) of Cyprus' criminal code and Article 19 of the
Manipulation of Insider Information and Market Manipulation (Market Abuse) Law. The alleged offence refers to
the non-publication in a timely manner of the increased capital shortfall of the Company in 2012. The Company
denies all allegations. The case is pending in court. The maximum penalty on the Company, if found guilty, will
be the imposition of a fine that is not expected to have a material impact on the financial position of the Group.
The Attorney General has filed a separate criminal case against the Company and six former members of the
Board of Directors for alleged breach of Article 19 of the Manipulation of Insider Information and Market
Manipulation (Market Abuse) Law, with respect to the Greek Government Bonds. The alleged offence refers to
the non-disclosure of the purchase of the Greek Government Bonds during a specified period. The Company
denies all allegations. The case is pending in court. The maximum penalty on the Company, if found guilty, will
be the imposition of a fine that is not expected to have a material impact on the financial position of the Group.
In January 2017 the Attorney General has filed a criminal case against a number of current and former officers
of the Company relating to the reclassification of Greek Government Bonds in April 2010. No charges were
instituted against the Company in this case.
38.2.2 Provisions for regulatory matters
The Hellenic Capital Market Commission (HCMC) Investigation
The HCMC is currently in the process of investigating matters concerning the Group's investment in Greek
Government Bonds from 2009 to 2011, including, inter-alia, related non-disclosure of material information in
the Company's CCS and CECS and rights issue prospectus (tracking the investigation carried out by CySEC in
2013), Greek government bonds' reclassification, ELA disclosures and allegations by some Greek Government
Bond investors regarding the Company's non-compliance with Markets in Financial Instruments Directive
(MiFID) in respect of investors' direct investments in Greek Government Bonds.
A specific estimate of the outcome of the investigations or of the amount of possible fines cannot be given at
this stage, though it is not expected that any resulting liability or damages will have a material impact on the
financial position of the Group.
The Cyprus Securities and Exchange Commission (CySEC) Investigations
CySEC is currently in the process of investigating matters concerning possible price manipulation attributable to
the Company for the period from 1 November 2009 to 30 June 2010 post the investment in Banca
Transylvania.
CySEC has also completed the investigation on the adequacy of provisions for the impairment of loans and
advances in year 2011 and the investigation is currently pending with the CySEC Board.
As the above investigations are in progress or decisions have been reserved, it is not practical at this stage for
the Group to estimate reliably the possible consequences thereof, though it is not expected that any resulting
liability or damages will have a material impact on the financial position of the Group.
118
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
38.
Contingent liabilities and commitments (continued)
38.2
Pending litigation, claims and regulatory matters (continued)
38.2.2 Provisions for regulatory matters (continued)
The Cyprus Securities and Exchange Commission (CySEC) Investigations (continued)
Additionally, in late 2014 CySEC completed an investigation into the value of goodwill in CB Uniastrum Bank
LLC disclosed in the interim financial statements of the Group in 2012. In October 2016, CySEC issued a
decision, concluding that the Company was in breach of certain laws regarding disclosure in accordance, inter
alia, with the Market Manipulation (Market Abuse) Law of 2005 and has imposed an administrative fine upon
the Company of €25 thousand. CySEC also imposed higher fines upon certain former members of the Board of
Directors and former management of the Company. The Company filed a recourse before the Administrative
Court against the decisions of CySEC and the fine imposed upon the Company. In March 2017, CySEC filed a
legal action against the Company, claiming the amount of €25 thousand imposed as a fine.
In 2015, CySEC carried out an investigation into the reclassification of Greek Government Bonds in April 2010,
which was also completed in 2016 with no findings against the Company.
The investigation regarding the adequacy of provisions for impairment of loans and advances in year 2013 in
light of the results of the Asset Quality Review was also completed in 2016 with no finding against the
Company.
Commission for the Protection of Competition Investigation
In April 2014, following an investigation which began in 2010, the Cypriot Commission for the Protection of
Competition (the CPC) issued a statement of objections, alleging violations of Cypriot and EU competition law
relating to the activities and/or omissions in respect of card payment transactions by, among others, the
Company and JCC Payment Systems Ltd (JCC), a card-processing business currently 75% owned by the
Company.
There was also an allegation concerning the Company's arrangements with American Express, namely that such
exclusive arrangements violated Cypriot and EU competition law. On both matters, the CPC has concluded that
the Company (in common with other banks and JCC) has breached the relevant provisions of the applicable law
for the protection of competition. For the time being, the proceedings before the CPC had been stalled due to
an Administrative Court decision holding that the composition of the CPC was contrary to law, which was
however overturned in March 2017 by the Supreme Court on appeal by the Attorney General. The Company
intends to file a recourse before the Administrative Court for the annulment of the CPC's decision and fine (if
and when a fine is imposed in reliance thereof). At this stage it is not possible to predict the amount of the fine
that may be imposed upon the Company, though it is not expected that any resulting liability or damages will
have a material impact on the financial position of the Group.
UK regulatory matters
During 2016, following complaints and litigation against a subsidiary of the Group, the Group reviewed and
concluded that during 2008 and 2009 the manner in which a group of loans was re-priced breached a Financial
Conduct Authority (FCA) conduct principle. The matter was notified to the FCA and remediation principles were
agreed. The provision booked is dependent on the response rates to an “invitation complain” and the actual
response rate will be monitored against the Group’s assumptions. The assumptions are subjective, in particular
due to uncertainty associated with future claims levels. The level of the provision represents the best estimate
of all probable outflows arising from customer redress based on information available to management.
However, this is at the early stage of its lifecycle and consequently elements affecting the potential exposure
are contingent. Management will continue to reassess the adequacy of the provision, as well as the
assumptions underlying the calculations at each reporting date based upon experience and other relevant
factors prevailing at that time. As such, it is possible that the eventual outcome may differ materially from the
current level of provision.
119
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
38.
Contingent liabilities and commitments (continued)
38.3
Other contingent liabilities
The Group, as part of its disposal process of certain of its operations, has provided various representations,
warranties and indemnities to the buyers. These relate to, among other things, the ownership of the loans, the
validity of the liens, tax exposures and other matters agreed with the buyers. As a result, the Group may be
obliged to compensate the buyers in the event of a valid claim by the buyers with respect to the above
representations, warranties and indemnities.
A provision has been made, based on management’s best estimate of probable outflows, where it was assessed
that such an outflow is probable.
120
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
39.
Net cash flow from operating activities
Profit/(loss) before tax from continuing operations
Loss before tax from discontinued operations
Adjustments for:
Provisions for impairment of loans and advances to customers and other customer
credit losses and gain on derecognition and changes in expected cash flows
Depreciation of property and equipment
Amortisation of intangible assets
Impairment of property and equipment
Impairment upon re-measurement of disposal group at fair value less costs to sell
Impairment of other financial instruments
(Profit)/loss upon disposal of disposal groups held for sale and discontinued
operations
Amortisation of discounts/premiums, catch-up adjustment and interest on debt
securities
Loss on sale and write-offs of property and equipment and intangible assets
(Gains)/losses on disposal of investment properties and investment properties held
for sale
(Gains)/losses from revaluation of investment properties and investment properties
held for sale
Dividend income
Net gains on disposal of available-for-sale investments in equity securities
Net gains on disposal of available-for-sale investments and investments classified as
loans and receivables in debt securities
Share of profit from associates and joint ventures
Loss from revaluation of debt securities designated as fair value hedges
Gain on disposal of joint ventures
Loss on dissolution of subsidiaries
Gains on disposal of stock of property
Impairment of stock of property
Interest on funding from central banks
Interest on debt securities in issue
Change in value of in-force life insurance business
Change in:
Loans and advances to banks
Deposits by banks
Obligatory balances with central banks
Customer deposits
Value of in-force life insurance policies and liabilities
Loans and advances to customers
Other assets
Accrued income and prepaid expenses
Other liabilities
Accrued expenses and deferred income
Derivative financial instruments
Investments at fair value through profit or loss
Repurchase agreements
Proceeds on disposals of stock of property
Subordinated loan stock
Tax paid
Net cash flow from operating activities
121
2016
€000
2015
€000
85.616
-
(379.992)
(65.062)
370.294
1.002.130
11.558
7.263
-
-
11.293
(2.545)
12.257
7.001
1.203
3.288
43.503
17.392
(22.764)
(72.252)
67
(3.934)
(1.040)
(343)
(58.368)
(8.441)
(8.194)
16.466
-
4.101
(1.361)
36.220
29.656
-
(4.680)
460.864
53.890
193.096
(19.890)
2.329.060
(7.058)
57.958
20.039
(354)
52.698
(1.530)
(12.586)
7.769
(110.784)
140.677
-
3.163.849
(1.224)
3.162.625
70
665
52.575
(900)
(1.075)
(49.504)
(5.923)
11.600
(10.005)
-
(816)
17.792
78.187
25
(1.499)
660.660
60.204
51.029
362.954
1.503.754
(12.187)
(51.339)
6.373
446
(44.366)
16.042
30.418
(16.438)
(211.531)
6.433
475
2.362.927
(3.485)
2.359.442
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
39.
Net cash flow from operating activities (continued)
Non-cash transactions
2016
Acquisition of S.Z. Eliades Leisure Ltd
During the year ended 31 December 2016 the Group acquired a 70% interest in the share capital of S.Z.
Eliades Leisure Ltd in exchange for the settlement of the majority of the borrowing due from S.Z. Eliades
Leisure Ltd to the Company, as part of the restructuring of its debt. The acquisition did not include any cash
consideration. Further information is disclosed in Note 50.1.1.
Sale of shares held in Visa Europe Limited
During the year ended 31 December 2016 the Group sold its shares held in Visa Europe Limited following the
purchase of Visa Europe Limited by Visa Inc. The transaction in addition to the cash paid, involved the granting
of preferred stock in Visa Inc. with a carrying value of approximately €8 million and a deferred cash component
of a carrying value of approximately €4 million.
Repossession of collaterals
During the year ended 31 December 2016, the Group acquired stock of property by taking possession of
collaterals held as security for loans and advances to customers of €1.010.059 thousand (2015: €32.216
thousand) (Note 27).
Closure of the operations of Bank of Cyprus (Channel Islands) Ltd
As part of the Group’s strategy of focusing on its core businesses and markets, the Group decided the closure of
the operations of Bank of Cyprus (Channel Islands) Ltd and the relocation of its business to other Group
locations mainly Cyprus and the UK.
2015
Disposal of the majority of the Russian operations
On 25 September 2015, the Group completed the disposal of the majority of its Russian operations. As part of
the sales agreement, the parties agreed an asset swap arrangement which involved the exchange of certain
assets between them that resulted in €41.849 thousand receivable for the Group, which was fully settled during
2016.
Disposal of Aphrodite group
During 2015 the Group disposed of a 65% shareholding in the Aphrodite group. The transaction involved the
restructuring of the debt owed by this group to the Company.
Net cash flow from operating activities – interest and dividends
Interest paid
Interest received
Dividends received
40.
Cash and cash equivalents
Cash and cash equivalents comprise:
2016
€000
2015
€000
(200.266)
(342.158)
1.018.010
1.270.146
343
900
818.087
928.888
2016
€000
2015
€000
Cash and non-obligatory balances with central banks
1.363.699
1.299.795
Treasury bills repayable within three months
Loans and advances to banks with original maturity less than
three months
-
21.451
867.329
1.026.162
2.231.028
2.347.408
122
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
40.
Cash and cash equivalents (continued)
Analysis of cash and balances with central banks and loans and advances to banks
2016
€000
2015
€000
Cash and non-obligatory balances with central banks
1.363.699
1.299.795
Obligatory balances with central banks
142.697
122.807
Total cash and balances with central banks (Note 19)
1.506.396
1.422.602
Loans and advances to banks with original maturity less than
three months
Other restricted loans and advances to banks
Other loans and advances to banks
867.329
1.026.162
136.398
84.110
153.608
134.610
Total loans and advances to banks (Note 19)
1.087.837
1.314.380
Other restricted loans and advances to banks include collaterals under derivative transactions of €55.017
thousand (2015: €82.123 thousand) which is not immediately available for use by the Group, but is released
once the transactions are terminated.
41.
Operating leases – The Group as lessee
The total future minimum lease payments under non-cancellable operating leases at 31 December 2016 and
2015 are presented below:
Within one year
Between one and five years
After five years
2016
€000
2015
€000
1.452
3.296
282
5.030
2.217
5.438
742
8.397
The above mainly relate to property leases for the Group’s branches and offices.
123
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
42.
Analysis of assets and liabilities by expected maturity
Assets
Cash and balances with central
banks
2016
Less than
one year
Over one
year
€000
€000
Total
€000
Less than
one year
€000
2015
Over one
year
€000
Total
€000
1.364.949
141.447
1.506.396
1.300.846
121.756
1.422.602
Loans and advances to banks
953.160
134.677
1.087.837
1.212.418
101.962
1.314.380
Derivative financial assets
20.590
245
20.835
13.939
84
14.023
Investments
76.415
597.229
673.644
348.596
660.691
1.009.287
Loans and advances to
customers
Life insurance business assets
attributable to policyholders
Prepayments, accrued income
and other assets
5.546.601
10.102.800
15.649.401
5.147.878
12.043.754
17.191.632
19.510
480.023
499.533
17.243
458.160
475.403
110.968
158.943
269.911
87.690
194.090
281.780
Stock of property
457.104
970.168
1.427.272
90.115
425.743
515.858
Property, equipment and
intangible assets
Investment properties
Investments in associates and
joint ventures
21
427.835
427.856
485
397.636
398.121
-
-
38.059
38.059
109.339
109.339
-
-
34.628
34.628
107.753
107.753
Deferred tax assets
2.970
447.471
450.441
8.828
447.703
456.531
Non-current assets and disposal
group held for sale
Liabilities
11.411
-
11.411
48.503
-
48.503
8.563.699
13.608.236
22.171.935
8.276.541
14.993.960
23.270.501
Deposits by banks
354.778
80.008
434.786
206.997
35.140
242.137
Funding from central banks
250.014
600.000
850.014
2.744.764
1.708.086
4.452.850
Repurchase agreements
-
257.367
257.367
111.605
256.546
368.151
Derivative financial liabilities
9.434
39.191
48.625
16.032
38.367
54.399
Customer deposits
Insurance liabilities
Accruals, deferred income and
other liabilities
Debt securities in issue
Deferred tax liabilities
Non-current liabilities and
disposal group held for sale
5.367.559
11.142.182
16.509.741
4.981.609
9.199.072
14.180.681
86.002
497.995
583.997
80.118
486.807
566.925
273.332
62.593
335.925
219.346
63.485
282.831
-
17
-
-
-
45.358
45.375
712
415
-
712
40.392
40.807
-
-
3.677
-
3.677
6.341.136
12.724.694
19.065.830
8.365.275
11.827.895
20.193.170
The main assumptions used in determining the expected maturity of assets and liabilities are set out below.
The ELA funding which forms part of the funding from central banks has been included in the ‘less than one
year’ time band as at 31 December 2016, since it was expected to be repaid within one year. Funding under
ELA has a contractual maturity of less than one year.
The investments are classified in the relevant time band based on expectations as to their realisation. In most
cases this is the maturity date, unless there is an indication that the maturity will be prolonged or there is an
intention to sell, roll or replace the security with a similar one. The latter would be the case where there is
secured borrowing, requiring the pledging of bonds and these bonds mature before the maturity of the secured
borrowing. The maturity of bonds is then extended to cover the period of the secured borrowing.
124
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
42.
Analysis of assets and liabilities by expected maturity (continued)
Performing loans and advances to customers in Cyprus are classified based on the contractual repayment
schedule. Overdraft accounts are classified in the ‘over one year’ time band. The impaired loans as defined in
Note 43, net of specific and collective provisions, and the loans which are past due for more than 90 days, are
classified in the ‘over one year’ time band except from expected receipts which are included within time bands,
according to historic amounts of receipts in the last months.
Stock of property is classified in the relevant time band based on expectations as to its realisation.
A percentage of customer deposits in Cyprus maturing within one year is transferred in the ‘over one year’ time
band, based on the observed behavioural analysis. In the United Kingdom deposits are classified on the basis
of contractual maturities.
Trading investments are classified in the less than one year time band.
The expected maturity of all prepayments, accrued income and other assets and accruals, deferred income and
other liabilities is the same as their contractual maturity. If they don’t have a contractual maturity, the
expected maturity is based on the timing the asset is expected to be realised and the liability is expected to be
settled.
43.
Risk management – Credit risk
In the ordinary course of its business the Group is exposed to credit risk which is monitored through various
control mechanisms across all Group entities in order to prevent undue risk concentrations and to price credit
facilities and products on a risk-adjusted basis.
Credit risk is the risk that arises from the possible failure of one or more customers to discharge their
obligations towards the Group.
The Credit Risk department sets the Group’s credit disbursement policies and monitors compliance with credit
risk policy applicable to each business line and monitors the quality of the Group’s loans and advances portfolio
through the timely assessment of problematic customers. The credit exposures from related accounts are
aggregated and monitored on a consolidated basis.
Credit Risk department, safeguards the effective management of credit risk at all stages of the credit cycle,
monitors the quality of decisions and processes and ensures that credit sanctioning function is being properly
managed.
The credit policies are combined with the methods used for the assessment of the customers’ creditworthiness
(credit rating and credit scoring systems).
The loan portfolio is analysed on the basis of assessments about the customers’ creditworthiness, their
economic sector of activity and the country in which they operate.
The credit risk exposure of the Group is diversified both geographically and across the various sectors of the
economy. The Credit Risk department determines the prohibitive/dangerous sectors of the economy and sets
out stricter policy rules for these sectors, according to their degree of riskiness.
The Group’s significant judgements, estimates and assumptions regarding the determination of the level of
provisions for impairment are described in Note 5.1.
The Market Risk department assesses the credit risk relating to investments in liquid assets (mainly loans and
advances to banks and debt securities) and submits its recommendations for limits to be set for banks and
countries to the ALCO for approval.
125
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
43.
Risk management – Credit risk (continued)
Maximum exposure to credit risk and collateral and other credit enhancements
The Group’s maximum exposure to credit risk is analysed by geographic area as follows:
On-balance sheet
Cyprus
Greece
Russia
United Kingdom
Romania
Off-balance sheet
Cyprus
Greece
Russia
United Kingdom
Romania
Total on and off-balance sheet
Cyprus
Greece
Russia
United Kingdom
Romania
2016
€000
2015
€000
17.067.617
18.851.208
57.314
40.974
57.032
93.432
1.602.229
1.673.293
165.093
266.695
18.933.227
20.941.660
2.738.382
2.736.014
112.596
131.172
-
16.327
397
20.000
21.063
307
2.867.702
2.908.556
19.805.999
21.587.222
169.910
188.204
40.974
113.432
1.618.556
1.694.356
165.490
267.002
21.800.929
23.850.216
126
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
43.
Risk management – Credit risk (continued)
Maximum exposure to credit risk and collateral and other credit enhancements (continued)
The Group offers guarantee facilities to its customers under which the Group may be required to make
payments on their behalf and enters into commitments to extend credit lines to secure their liquidity needs.
Letters of credit and guarantee (including standby letters of credit) commit the Group to make payments on
behalf of customers in the event of a specific act, generally related to the import or export of goods. Such
commitments expose the Group to risks similar to those of loans and advances and are therefore monitored by
the same policies and control processes.
Loans and advances to customers
The Credit Risk department determines the amount and type of collateral and other credit enhancements
required for the granting of new loans to customers.
The main types of collateral obtained by the Group are mortgages on real estate, cash collateral/blocked
deposits, bank guarantees, government guarantees, pledges of equity securities and debt instruments of public
companies, fixed and floating charges over corporate assets, assignment of life insurance policies, assignment
of rights on certain contracts and personal and corporate guarantees.
The Group’s management regularly monitors the changes in the market value of the collateral and, where
necessary, requests the pledging of additional collateral in accordance with the relevant agreement.
Other financial instruments
Collateral held as security for financial assets other than loans and advances is determined by the nature of the
financial instrument. Debt securities and other eligible bills are generally unsecured with the exception of
asset-backed securities and similar instruments, which are secured by pools of financial assets. In addition,
some debt securities are government-guaranteed.
The Group has chosen the ISDA Master Agreement for documenting its derivatives activity. It provides the
contractual framework within which dealing activity across a full range of over-the-counter (OTC) products is
conducted and contractually binds both parties to apply close-out netting across all outstanding transactions
covered by an agreement, if either party defaults. In most cases the parties execute a Credit Support Annex
(CSA) in conjunction with the ISDA Master Agreement. Under a CSA, the collateral is passed between the
parties in order to mitigate the market contingent counterparty risk inherent in their open positions.
Settlement risk arises in any situation where a payment in cash or securities is made in the expectation of a
corresponding receipt in securities or cash. The Group sets daily settlement limits for each counterparty.
Settlement risk is mitigated when transactions are effected via established payment systems or on a delivery
upon payment basis.
The table below presents the maximum exposure to credit risk, the tangible and measurable collateral and
credit enhancements held and the net exposure to credit risk, that is the exposure after taking into account the
impairment loss and tangible and measurable collateral and credit enhancements held. Personal guarantees
are an additional form of collateral, but are not included in the information below since it is impracticable to
estimate their fair value.
The fair value of the collateral presented in the tables below is capped to the carrying value of the loans and
advances to customers.
127
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
43.
Risk management – Credit risk (continued)
Maximum exposure to credit risk and collateral and other credit enhancements (continued)
2016
Maximum
exposure to
credit risk
Fair value of collateral and credit enhancements held by the Group
Cash
Securities
Letters of
credit/
guarantee
Property
Other
Surplus
collateral
Net
collateral
Net
exposure
to credit
risk
€000
€000
€000
€000
€000
€000
€000
€000
€000
Balances with central banks (Note 19)
1.373.802
Loans and advances to banks (Note 19)
1.087.837
Trading investments - debt securities
(Note 20)
Debt securities at fair value through
profit or loss (Note 20)
Debt securities classified as available-
for-sale and loans and receivables
(Note 20)
Derivative financial instruments
(Note 21)
Loans and advances to customers
(Note 23)
Debtors (Note 28)
Reinsurers’ share of insurance contract
liabilities (Note 28)
Other assets
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1.373.802
1.087.837
476
10.426
608.666
20.835
476
10.426
608.666
20.835
15.649.401
345.827
335.599
305.202
22.250.801
501.500
(9.949.923)
13.789.006
1.860.395
24.571
49.973
107.240
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
24.571
49.973
107.240
On-balance sheet total
18.933.227
345.827
335.599
305.202
22.250.801
501.500
(9.949.923)
13.789.006
5.144.221
Contingent liabilities
Acceptances and endorsements
7.606
375
-
-
9.524
13
Guarantees
Commitments
797.269
69.720
1.326
65.185
164.880
6.222
(4.090)
(1.177)
5.822
1.784
306.156
491.113
Documentary credits
27.636
10.837
15
102
8.112
297
-
19.363
8.273
Undrawn formal stand-by facilities,
credit lines and other commitments to
lend
2.035.191
31.449
1.050
2.221
329.280
16.158
(19.705)
360.453
1.674.738
Off-balance sheet total
2.867.702
112.381
2.391
67.508
511.796
22.690
(24.972)
691.794
2.175.908
Total credit risk exposure
21.800.929
458.208
337.990
372.710
22.762.597
524.190
(9.974.895)
14.480.800
7.320.129
128
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
43.
Risk management – Credit risk (continued)
Maximum exposure to credit risk and collateral and other credit enhancements (continued)
2015
Balances with central banks (Note
19)
Loans and advances to banks (Note
19)
Trading investments - debt
securities (Note 20)
Debt securities at fair value
through profit or loss (Note 20)
Debt securities classified as
available-for-sale and loans and
receivables
(Note 20)
Derivative financial instruments
(Note 21)
Loans and advances to customers
(Note 23)
Debtors (Note 28)
Reinsurers’ share of insurance
contract liabilities (Note 28)
Other assets
Maximum
exposure
to credit
risk
Fair value of collateral and credit enhancements held by the Group
Cash
Securities
Property
Other
Surplus
collateral
Net
collateral
Net
exposure
to credit
risk
€000
€000
€000
1.268.585
-
1.314.380
28.667
317
17.430
898.869
14.023
-
-
-
-
Letters of
credit
/guarantee
€000
-
-
-
-
-
-
-
-
-
-
-
-
€000
€000
€000
€000
€000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1.268.585
28.667
1.285.713
-
-
-
-
317
17.430
898.869
14.023
17.191.632
484.628
253.305
377.011
23.791.204
348.057
(9.717.984)
15.536.221
1.655.411
23.020
56.763
156.641
-
-
-
-
-
4.600
-
-
-
-
-
19.043
-
-
-
-
-
-
-
-
23.020
56.763
23.643
132.998
On-balance sheet total
20.941.660
513.295
257.905
377.011
23.810.247
348.057
(9.717.984)
15.588.531
5.353.129
Contingent liabilities
Acceptances and endorsements
Guarantees
Commitments
Documentary credits
Undrawn formal stand-by facilities,
credit lines and other commitments
to lend
Off-balance sheet total
Total credit risk exposure
8.385
793.111
717
52.455
18.441
1.123
-
687
9
-
73.436
13.124
187.437
32
10.442
(7.478)
(237)
6.395
324.220
1.990
468.891
71
8.245
495
-
9.943
8.498
2.088.619
30.445
1.302
1.744
336.646
14.433
(28.544)
356.026
1.732.593
2.908.556
23.850.216
84.740
598.035
1.998
259.903
75.251
452.262
545.452
24.355.699
25.402
373.459
(36.259)
(9.754.243)
696.584
16.285.115
2.211.972
7.565.101
129
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
43.
Risk management – Credit risk (continued)
Credit risk concentration of loans and advances to customers
There are restrictions on loan concentrations which are imposed by the Banking Law in Cyprus and the
relevant CBC Directives and CRR. According to these restrictions, banks are prohibited from lending more
than 25% of the capital base to a single customer group. The Group’s risk appetite statement imposes
stricter concentration limits and the Group is taking actions to run down those exposures which are in excess
of these internal limits over time.
In addition to the above, the Group’s overseas subsidiaries must comply with guidelines for large exposures as
set by the regulatory authorities of the countries in which they operate.
Fair value adjustment on initial recognition
The fair value adjustment on initial recognition relates to the loans and advances to customers acquired as
part of the acquisition of certain operations of Laiki Bank in 2013 and originated credit impaired loans. In
accordance with the provisions of IFRS 3, this adjustment has decreased the gross balance of loans and
advances to customers. However, for IFRS 7 disclosure purposes as well as for credit risk monitoring, the
aforementioned adjustment is not presented within the gross balances of loans and advances.
130
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
43.
Risk management – Credit risk (continued)
Credit risk concentration of loans and advances to customers (continued)
Geographical and industry concentrations of Group loans and advances to customers are presented below:
2016
Cyprus
Greece
United
Kingdom
Romania
Russia
Total
Fair value
adjustment
on initial
recognition
Gross loans
after fair
value
adjustment
on initial
recognition
By economic activity
€000
€000
€000
€000
€000
€000
€000
€000
Trade
Manufacturing
Hotels and catering
Construction
Real estate
Private individuals
Professional and other services
Other sectors
By customer sector
Corporate
SMEs
Retail
- housing
- consumer, credit cards and other
International banking services
Wealth management
2.044.324
658.811
1.302.543
2.874.331
2.022.559
6.980.383
1.332.250
1.054.255
-
-
-
-
13.964
7.133
112.773
11.141
55.100
2.124.529
(87.576)
2.036.953
7.735
3.263
25.396
699.075
(25.734)
673.341
-
1.418.579
(62.665)
1.355.914
3.181
75.918
12.793
2.966.223
(210.436)
2.755.787
19.599
1.056.924
200.825
6.934
3.306.841
(114.140)
3.192.701
214
-
337
45.557
54.865
1.361
3.093
12.458
32.927
-
7.029.247
(227.057)
6.802.190
97.148
1.496.721
(80.501)
1.416.220
-
1.088.880
(120.344)
968.536
18.269.456
20.150
1.295.758
347.360
197.371 20.130.095
(928.453)
19.201.642
7.517.473
19.936
1.040.941
334.440
179.293
9.092.083
(481.340)
8.610.743
4.100.298
4.202.358
2.064.802
321.571
62.954
-
-
214
-
-
222.337
12.641
11.144
4.346.420
(202.240)
4.144.180
13.314
19.166
-
-
100
179
-
-
-
4.215.772
(100.509)
4.115.263
6.934
2.091.295
(135.350)
1.955.945
-
-
321.571
62.954
(3.619)
(5.395)
317.952
57.559
18.269.456
20.150
1.295.758
347.360
197.371 20.130.095
(928.453)
19.201.642
131
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
43.
Risk management – Credit risk (continued)
Credit risk concentration of loans and advances to customers (continued)
2016
Cyprus
Greece
United
Kingdom
Romania
Russia
Total
Fair value
adjustment
on initial
recognition
By business line
€000
€000
€000
€000
€000
€000
€000
Gross loans
after fair
value
adjustment
on initial
recognition
€000
Corporate
SMEs
Retail
- housing
- consumer, credit cards and other
Restructuring
- major corporate
- corporate
- SMEs
Recoveries
- corporate
- SMEs
- retail housing
- retail other
International banking services
Wealth management
2.557.653
19.936
1.036.331
237.203
165.592
4.016.715
(71.064)
3.945.651
1.377.837
3.531.293
1.317.434
2.080.586
1.014.853
1.219.572
1.864.381
1.502.889
671.065
747.368
321.571
62.954
-
-
214
-
-
-
-
-
-
-
-
-
222.337
12.442
11.144
1.623.760
(29.071)
1.594.689
13.314
17.617
-
-
-
100
179
33.947
-
-
-
-
-
-
-
3.544.707
(40.640)
3.504.067
1.335.444
(26.435)
1.309.009
2.114.533
(156.190)
1.958.343
1.014.853
(22.795)
992.058
1.219.572
(50.393)
1.169.179
4.610
63.290
13.701
1.945.982
(231.291)
1.714.691
-
-
1.549
-
-
199
-
-
-
-
-
-
1.503.088
(122.776)
1.380.312
671.065
(59.869)
6.934
755.851
(108.915)
-
-
321.571
62.954
(3.619)
(5.395)
611.196
646.936
317.952
57.559
Restructuring major corporate business line includes customers with exposures over €100.000 thousand, whereas restructuring corporate business line includes
customers with exposures between €6.000 thousand and €100.000 thousand.
18.269.456
20.150
1.295.758
347.360
197.371
20.130.095
(928.453)
19.201.642
132
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
43.
Risk management – Credit risk (continued)
Credit risk concentration of loans and advances to customers (continued)
2015
Cyprus
Greece
United
Kingdom
Romania
Russia
Total
Fair value
adjustment
on initial
recognition
Gross loans
after fair
value
adjustment
on initial
recognition
By economic activity
€000
€000
€000
€000
€000
€000
€000
€000
Trade
Manufacturing
Hotels and catering
Construction
Real estate
Private individuals
Professional and other services
Other sectors
By customer sector
Corporate
SMEs
Retail
- housing
- consumer, credit cards and other
International banking services
Wealth management
2.267.092
801.536
1.463.129
3.976.254
2.130.028
7.282.322
1.595.010
1.145.327
-
-
-
-
23.138
9.214
98.871
27.119
12.360
57.704
2.360.294
(121.192)
2.239.102
7.604
6.209
15.066
833.420
(31.596)
801.824
-
1.568.209
(77.444)
1.490.765
56.830
10.457
4.070.660
(335.803)
3.734.857
43.443
927.423
250.956
69.132
3.420.982
(137.185)
3.283.797
216
-
24.866
44.627
64.398
12.325
5.684
38.834
28.759
-
7.332.849
(268.496)
7.064.353
96.542
1.794.784
(101.913)
1.692.871
-
1.211.277
(133.781)
1.077.496
20.660.698
68.525
1.207.115
407.236
248.901 22.592.475
(1.207.410)
21.385.065
9.222.429
68.309
918.423
386.973
232.733 10.828.867
(666.631)
10.162.236
4.408.096
4.285.156
2.152.950
528.795
63.272
-
-
216
-
-
248.647
17.523
9.520
4.683.786
(263.630)
4.420.156
17.336
22.709
-
-
1.306
1.434
-
-
-
4.303.798
(108.267)
4.195.531
6.648
2.183.957
(154.174)
2.029.783
-
-
528.795
63.272
(8.056)
(6.652)
520.739
56.620
20.660.698
68.525
1.207.115
407.236
248.901 22.592.475
(1.207.410)
21.385.065
133
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
43.
Risk management – Credit risk (continued)
Credit risk concentration of loans and advances to customers (continued)
2015
Cyprus
Greece
United
Kingdom
Romania
Russia
Total
Fair value
adjustment
on initial
recognition
By business line
€000
€000
€000
€000
€000
€000
€000
Gross loans
after fair
value
adjustment
on initial
recognition
€000
Corporate
SMEs
Retail
- housing
- consumer, credit cards and other
Restructuring
- major corporate
- corporate
- SMEs
Recoveries
- corporate
- SMEs
- retail housing
- retail other
International banking services
Wealth management
2.188.777
68.309
918.423
305.980
219.040
3.700.529
(83.695)
3.616.834
1.502.261
3.657.181
1.409.855
2.877.985
1.814.518
1.376.635
2.341.149
1.529.200
627.975
743.095
528.795
63.272
-
-
216
-
-
-
-
-
-
-
-
-
248.647
17.523
9.520
1.777.951
(46.973)
1.730.978
17.336
22.709
-
-
-
-
-
-
-
-
-
1.306
1.434
35.736
-
-
-
-
-
-
-
3.675.823
(45.585)
3.630.238
1.434.214
(36.834)
1.397.380
2.913.721
(175.920)
2.737.801
1.814.518
(75.945)
1.738.573
1.376.635
(67.758)
1.308.877
45.257
13.693
2.400.099
(331.071)
2.069.028
-
-
-
-
-
-
-
1.529.200
(148.899)
1.380.301
627.975
(62.682)
6.648
749.743
(117.340)
-
-
528.795
63.272
(8.056)
(6.652)
565.293
632.403
520.739
56.620
20.660.698
68.525
1.207.115
407.236
248.901
22.592.475
(1.207.410)
21.385.065
The loans and advances to customers in Cyprus include lending exposures to Greek entities granted by the Company in Cyprus in its normal course of business with a
carrying value of €82.154 thousand (2015: €81.078 thousand) and lending exposures in Cyprus with collaterals in Greece with a carrying value of €106.968 thousand
(2015: €69.983 thousand). Additionally as at 31 December 2016, the loans and advances to customers in Cyprus include lending exposures to Serbian entities or
with collaterals in Serbia with a carrying value of €9.700 thousand.
134
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
43.
Risk management – Credit risk (continued)
Currency concentration of loans and advances to customers
2016
Euro
US Dollar
British Pound
Russian Rouble
Romanian Lei
Swiss Franc
Other currencies
2015
Euro
US Dollar
British Pound
Russian Rouble
Romanian Lei
Swiss Franc
Other currencies
Cyprus
Greece
United
Kingdom
Romania
Russia
Total
Fair value
adjustment
on initial
recognition
Gross loans
after fair
value
adjustment
on initial
recognition
€000
€000
€000
€000
€000
€000
€000
€000
17.563.760
20.150
149.235
38.907
103
-
471.167
46.284
-
-
-
-
-
-
229
490
1.276.658
-
-
7.570
10.811
345.931
16.079
17.946.149
(882.038)
17.064.111
-
88
-
1.341
-
-
73.457
223.182
(10.281)
212.901
-
1.315.653
(538)
1.315.115
107.835
107.938
1.341
(1)
-
107.937
1.341
478.737
(31.170)
447.567
57.095
(4.425)
52.670
18.269.456
20.150
1.295.758
347.360
197.371
20.130.095
(928.453)
19.201.642
19.261.905
68.525
28.423
405.998
16.099
19.780.950
(1.128.137)
18.652.813
250.757
49.052
108
1
1.028.865
70.010
-
-
-
-
-
-
507
1.154.110
-
-
13.492
10.583
22
93
-
1.123
-
-
137.204
388.490
(11.540)
376.950
-
1.203.255
(10.121)
1.193.134
95.598
95.706
1.124
(1)
-
95.705
1.124
1.042.357
(51.761)
990.596
80.593
(5.850)
74.743
20.660.698
68.525
1.207.115
407.236
248.901
22.592.475
(1.207.410)
21.385.065
135
-
-
-
-
-
-
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
43.
Risk management – Credit risk (continued)
Credit quality of loans and advances to customers
The following table presents the credit quality of the Group’s loans and advances to customers:
2016
Fair value
adjustment
on initial
recognition
Gross loans
before fair
value
adjustment
on initial
recognition
Gross loans
after fair
value
adjustment
on initial
recognition
Gross loans
before fair
value
adjustment
on initial
recognition
2015
Fair value
adjustment
on initial
recognition
Gross loans
after fair
value
adjustment
on initial
recognition
€000
€000
€000
€000
€000
€000
10.990.773
(166.185)
10.824.588
10.442.903
(173.260)
10.269.643
2.238.127
(38.743)
2.199.384
3.048.929
(60.803)
2.988.126
Neither past due nor
impaired
Past due but not
impaired
Impaired
6.901.195
(723.525)
6.177.670
9.100.643
(973.347)
8.127.296
20.130.095
(928.453)
19.201.642
22.592.475
(1.207.410)
21.385.065
Past due loans are those with delayed payments or in excess of authorised credit limits. Impaired loans are
those which are not considered fully collectable and for which a provision for impairment has been recognised
on an individual basis or for which incurred losses exist at their initial recognition or customers in Debt
Recovery.
During the year ended 31 December 2016 the total non-contractual write-offs recorded by the Group
amounted to €517.694 thousand (2015: €172.670 thousand). The remaining gross loan balance of these
customers as at 31 December 2016 was €305.591 thousand (2015: €280.575 thousand), of which €19.651
thousand (2015: €56.548 thousand) were past due for more than 90 days but not impaired and €130.964
thousand (2015: €198.296 thousand) were impaired.
Loans and advances to customers that are neither past due nor impaired
The credit quality of loans and advances to customers that were neither past due nor impaired is monitored
by the Group using internal systems. The table below presents the credit risk quality of loans and advances
to customers that were neither past due nor impaired.
2016
Cyprus
Greece
United Kingdom
Romania
Russia
2015
Cyprus
Greece
United Kingdom
Romania
Russia
Grade 1
€000
Grade 2
Grade 3
€000
€000
Total
€000
6.127.350
1.751.332
1.802.957
9.681.639
-
1.187.130
56.857
-
-
214
214
53.838
10.011
1.250.979
348
-
693
43
57.898
43
7.371.337
1.805.518
1.813.918 10.990.773
5.572.036
1.441.298
2.244.258
9.257.592
-
1.009.277
45.962
-
-
63.300
35.141
61
216
216
20.803
1.093.380
10.551
91.654
-
61
6.627.275
1.539.800
2.275.828 10.442.903
136
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
43.
Risk management – Credit risk (continued)
Credit quality of loans and advances to customers (continued)
Loans and advances to customers that are neither past due nor impaired (continued)
Loans and advances to customers that were neither past due nor in excess of their limit during the last
twelve months, are classified as Grade 1.
Loans and advances to customers that were past due or in excess of their limit for up to 30 consecutive days
during the first half of the year or for up to 15 consecutive days during the second half of the year, are
classified as Grade 2.
Loans and advances to customers that were past due or in excess of their limit for more than 30 consecutive
days during the first half of the year or for more than 15 consecutive days during the second half of the year,
are classified as Grade 3.
Loans and advances to customers that are past due but not impaired
Past due analysis:
- up to 30 days
- 31 to 90 days
- 91 to 180 days
- 181 to 365 days
- over one year
2016
€000
2015
€000
455.394
375.161
128.675
140.714
468.791
351.450
144.362
258.920
1.138.183
1.825.406
2.238.127
3.048.929
The fair value of the collateral that the Group holds (to the extent that it mitigates credit risk) in respect of
loans and advances to customers that are past due but not impaired as at 31 December 2016 is
€1.762.528 thousand (2015: €2.466.960 thousand). The fair value of the collateral is capped to the gross
carrying value of the loans and advances to customers.
Impaired loans and advances to customers
Cyprus
Greece
Russia
United Kingdom
Romania
2016
2015
Gross loans
and advances
€000
Fair value of
collateral
€000
Gross loans
and advances
€000
Fair value of
collateral
€000
6.384.503
3.953.086
8.414.868
5.596.169
19.936
196.144
12.041
288.571
17.962
87.381
7.213
54.436
68.309
247.319
56.584
313.563
17.945
94.417
10.821
170.080
6.901.195
4.120.078
9.100.643
5.889.432
137
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
43.
Risk management – Credit risk (continued)
Credit quality of loans and advances to customers (continued)
Impaired loans and advances to customers (continued)
The fair value of the collateral presented above has been computed based on the extent that the collateral
mitigates credit risk and has been capped to the gross carrying value of the loans and advances to customers.
Impaired:
- no arrears
- up to 30 days
- 31 to 90 days
- 91 to 180 days
- 181 to 365 days
- over one year
2016
€000
2015
€000
471.855
875.488
62.119
29.201
49.572
51.438
78.176
24.353
65.382
310.167
6.237.010
7.747.077
6.901.195
9.100.643
Provision for impairment of loans and advances to customers
The movement in provisions for impairment of loans and advances, is as follows:
2016
Cyprus
Greece
Russia
Other
countries
Total
€000
€000
€000
€000
€000
1 January
3.731.750
33.833
195.017
232.833
4.193.433
Dissolution of subsidiaries
Acquisition of subsidiary
Foreign exchange and other
adjustments
Applied in writing off
impaired loans and advances
Interest accrued on impaired
loans and advances
Collection of loans and
advances previously written
off
Charge for the year (Note 16)
-
(8.577)
-
-
-
-
(6.154)
-
(6.154)
(8.577)
113.109
2.267
14.011
(1.785)
127.602
(923.723)
(27.163)
(68.997)
(35.382)
(1.055.265)
(138.603)
(627)
(594)
(688)
(140.512)
1.872
-
-
81
1.953
394.333
(1.181)
17.815
28.794
439.761
31 December
3.170.161
7.129
157.252
217.699
3.552.241
Individual impairment
2.779.379
7.129
156.585
214.697
3.157.790
Collective impairment
390.782
-
667
3.002
394.451
138
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
43.
Risk management – Credit risk (continued)
Provision for impairment of loans and advances to customers (continued)
2015
1 January
Disposal of Russian
operations
Foreign exchange and other
adjustments
Transfer between
geographical areas
Applied in writing off
impaired loans and advances
Interest accrued on impaired
loans and advances
Collection of loans and
advances previously written
off
Charge for the year –
continuing operations
(Note 16)
Charge for the year –
discontinued operations
(Note 6)
31 December
Cyprus
Greece
Russia
Other
countries
Total
€000
€000
€000
€000
€000
2.867.345
9.275
415.894
195.334
3.487.848
-
80.372
-
-
(238.012)
-
(238.012)
(310)
1.538
81.600
(63.380)
6.329
-
57.051
-
(151.812)
(16.700)
(62.313)
(63.022)
(293.847)
(197.009)
(2.134)
(146)
(1.430)
(200.719)
2.671
-
-
5.270
7.941
1.193.563
37.063
37.239
38.092
1.305.957
-
-
42.665
-
42.665
3.731.750
33.833
195.017
232.833
4.193.433
Individual impairment
3.255.398
29.458
194.805
227.579
3.707.240
Collective impairment
476.352
4.375
212
5.254
486.193
The above table does not include the provisions for impairment on financial guarantees and commitments
which are part of ‘Accruals, deferred income and other liabilities’ (Note 33).
Assumptions have been made about the future changes in property values, as well as the timing for the
realisation of the collateral and for taxes and expenses on the repossession and subsequent sale of the
collateral. Indexation has been used to estimate updated market values of properties, while assumptions
were made on the basis of a macroeconomic scenario for future changes in property values. The timing of
recovery from real estate collaterals has been estimated to be on average 3 years, with the exception of
specific cases for which, based on specific facts and circumstances, a different period has been used and for
customers in Debt Recovery where an average 6 year period has been used. In accordance with the Loan
Impairment and Provisioning Procedures Directives of 2014 and 2015 of the CBC, the cumulative average
future change in property values during the year has been capped to zero. The average liquidity haircut and
selling expenses used in the provisions calculation is 10% of the current market value of the property for
those collaterals for which the increase in their value is capped to zero and 10% of the projected market value
of the property for those collaterals for which their value is expected to drop.
The above assumptions are also influenced by the ongoing regulatory dialogue the Company maintains with
its lead regulator, the ECB, and other regulatory guidance and interpretations issued by various regulatory
and industry bodies such as the ECB and EBA, which provide guidance and expectations as to relevant
definitions and the treatment/classification of certain parameters/assumptions used in the estimation of
provisions.
139
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
43.
Risk management – Credit risk (continued)
Provision for impairment of loans and advances to customers (continued)
Any changes in these assumptions or difference between assumptions made and actual results could result in
significant changes in the amount of required provisions for impairment of loans and advances.
Sensitivity analysis
The Group has performed sensitivity analysis on certain of the loan impairment assumptions relating to the
loan portfolio in Cyprus with reference date 31 December 2016. The impact on the provisions for impairment
of loans and advances is presented below:
Change in provisions assumptions:
Increase the timing of recovery from collaterals by 1 year (to an average of 4
years) for the customers that were assessed on a collective basis, excluding any
customers in Debt Recovery
Decrease the timing of recovery from collaterals by 1 year (to an average of 2
years) for the customers that were assessed on a collective basis, excluding any
customers in Debt Recovery
Decrease the recoverable amount from collaterals of customers individually
assessed and which have an identified impairment loss and all customers in Debt
Recovery by 5% compared to the expected recoverable amount applied in the
provisions calculations
Decrease the recoverable amount from collaterals of customers individually
assessed and which have an identified impairment loss and all customers in Debt
Recovery by 10% compared to the expected recoverable amount applied in the
provisions calculations
Increase the recoverable amount from collaterals of customers individually
assessed and which have an identified impairment loss and all customers in Debt
Recovery by 5% compared to the expected recoverable amount applied in the
provisions calculations
Increase the recoverable amount from collaterals of customers individually
assessed and which have an identified impairment loss and all customers in Debt
Recovery by 10% compared to the expected recoverable amount applied in the
provisions calculations
Extend the timing of recovery from collaterals by 1 year and decrease the
liquidation haircut by 20% on customers that have been individually assessed for
impairment with an identified impairment loss and on customers collectively
assessed for impairment
Decrease the timing of recovery from collaterals by 1 year and increase the
liquidation haircut by 20% on customers that have been individually assessed for
impairment with an identified impairment loss and on customers collectively
assessed for impairment
Increase/(decrease)
on provisions for
impairment of loans
and advances
€000
27.891
(26.814)
118.055
216.359
(73.940)
(168.357)
90.028
(45.844)
140
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
43.
Risk management – Credit risk (continued)
Collateral and other credit enhancements obtained
The carrying value of assets obtained during 2016 and 2015 by taking possession of collateral held as
security, was as follows:
Residential property
Commercial and other property
2016
€000
2015
€000
85.171
2.108
1.000.533
123.323
1.085.704
125.431
The total carrying value of the assets obtained over the years by taking possession of collateral held as
security for customer loans and advances and held by the Group as at 31 December 2016 amounted to
€1.395.127 thousand including an amount of €3.072 thousand relating to commercial and other property
which were classified as held for sale (2015: €455.416 thousand, including an amount of €6.552 thousand
relating to commercial and other property held for sale).
The disposals of repossessed assets during 2016 amounted to €129.002 thousand (2015: €29.499 thousand).
Forbearance
Forbearance measures occur in situations in which the borrower is considered to be unable to meet the terms
and conditions of the contract due to financial difficulties. Taking into consideration these difficulties, the
Group decides to modify the terms and conditions of the contract to provide the borrower the ability to service
the debt or refinance the contract, either partially or fully.
The practice of extending forbearance measures constitutes a grant of a concession whether temporarily or
permanently to that borrower. A concession may involve restructuring the contractual terms of a debt or
payment in some form other than cash, such as an arrangement whereby the borrower transfers collateral
pledged to the Group. As such, it constitutes an objective indicator that requires assessing whether
impairment is needed.
Modifications of loans and advances that do not affect payment arrangements, such as restructuring of
collateral or security arrangements are not regarded as sufficient to indicate impairment as by themselves
they do not necessarily indicate credit distress affecting payment ability.
Rescheduled loans and advances are those facilities for which the Group has modified the repayment
programme (provision of a grace period, suspension of the obligation to repay one or more instalments,
reduction in the instalment amount and/or elimination of overdue instalments relating to capital or interest)
and current accounts/overdrafts for which the credit limit has been increased with the sole purpose of
covering an excess.
For an account to qualify for rescheduling it must meet certain criteria including that the client’s business
must be considered to be viable. The extent to which the Group reschedules accounts that are eligible under
its existing policies may vary depending on its view of the prevailing economic conditions and other factors
which may change from year to year. In addition, exceptions to policies and practices may be made in
specific situations in response to legal or regulatory agreements or orders.
Forbearance activities may include measures that restructure the borrower's business (operational
restructuring) and/or measures that restructure the borrower’s financing (financial restructuring).
Restructuring options may be of a short or long-term nature or combination thereof. The Group has developed
and deployed sustainable restructuring solutions, which are suitable for the borrower and acceptable for the
Group.
141
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
43.
Risk management – Credit risk (continued)
Forbearance (continued)
Short-term restructuring solutions are defined as restructured repayment solutions of duration of less than
two years. In the case of loans for the construction of commercial property and project finance, a short-term
solution may not exceed one year.
Short-term restructuring solutions can include the following:
Interest only: during a defined short-term period, only interest is paid on credit facilities and no
principal repayment is made.
Reduced payments: decrease of the amount of repayment instalments over a defined short-term period
in order to accommodate the borrower’s new cash flow position.
Arrears and/or interest capitalisation: the capitalisation of arrears and/or of accrued interest arrears to
the principal; that is forbearance of the arrears and addition of any unpaid interest to the outstanding
principal balance for repayment under a rescheduled program.
Grace period: an agreement allowing the borrower a defined delay in fulfilling the repayment obligations
usually with regard to the principal.
Interest rate reduction: permanent or temporary reduction of interest rate (fixed or variable) into a fair
and sustainable rate.
Long-term restructuring solutions can include the following:
Extension of maturity: extension of the maturity of the loan which allows a reduction in instalment
amounts by spreading the repayments over a longer period.
Additional security: when additional liens on unencumbered assets are obtained as additional security
from the borrower in order to compensate for the higher risk exposure and as part of the restructuring
process.
Forbearance of penalties in loan agreements: waiver, temporary or permanent, of violations of
covenants in the loan agreements.
Rescheduling of payments: the existing contractual repayment schedule is adjusted to a new sustainable
repayment program based on a realistic, current and forecasted, assessment of the cash flow generation
of the borrower.
Strengthening of the existing collateral: a restructuring solution may entail the pledge of additional
security for instance, in order to compensate for the reduction in interest rates or to balance the
advantages the borrower receives from the restructuring.
New loan facilities: new loan facilities may be granted during a restructuring agreement, which may
entail the pledge of additional security and in the case of inter-creditor arrangements the introduction of
covenants in order to compensate for the additional risk incurred by the Group in providing a new
financing to a distressed borrower.
Debt consolidation: the combination of multiple exposures into a single loan or limited number of loans.
Debt/equity swaps: partial set-off of the debt and obtaining of an equivalent amount of equity by the
Group, with the remaining debt right-sized to the cash flows of the borrower to allow repayment to the
Group from repayment on the re-sized debt and from the eventual sale of the equity stake in the
business. This solution is used only in exceptional cases and only where all other efforts for restructuring
are exhausted and after ensuring compliance with the banking law.
Debt/asset swaps: agreement between the Group and the borrower to voluntarily dispose of the secured
asset to partially or fully repay the debt. The asset may be acquired by the Group and any residual debt
may be restructured within an appropriate repayment schedule in line with the borrower’s reassessed
repayment ability.
Debt write-off: cancellation of part or the whole of the amount of debt outstanding by the borrower. The
Group applies the debt forgiveness solution only as a last resort and in remote cases having taken into
consideration the ability of the borrower to repay the remaining debt in the agreed timeframe and the
moral hazard.
Split and freeze: the customer’s debt is split into sustainable and unsustainable parts. The sustainable
part is restructured and continues to operate. The unsustainable part is ‘frozen’ for the restructured
duration of the sustainable part. At the maturity of the restructuring, the frozen part is either forgiven
pro-rata (based on the actual repayment of the sustainable part) or restructured.
Rescheduled loans and advances to customers
The below tables present the Group’s rescheduled loans and advances to customers by industry sector,
geography and credit quality classification, as well as impairment provisions and tangible collateral held for
rescheduled loans.
142
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
43. Risk management – Credit risk (continued)
Rescheduled loans and advances to customers (continued)
2016
1 January
New loans and advances rescheduled in the year
Assets no longer classified as rescheduled
(including repayments)
Applied in writing off rescheduled loans and advances
Interest accrued on rescheduled loans and advances
Foreign exchange adjustments
31 December
2015
1 January
Disposal of Russian operations
New loans and advances rescheduled in the year
Assets no longer classified as rescheduled
(including repayments)
Applied in writing off rescheduled loans and advances
Interest accrued on rescheduled loans and advances
Foreign exchange adjustments
31 December
Cyprus
Greece
Russia
€000
€000
€000
United
Kingdom
€000
Romania
€000
Total
€000
8.391.624
24.865
138.376
116.232
119.185
8.790.282
900.616
-
-
54.780
340
955.736
(1.504.769)
(97)
(77.308)
(68.305)
(42.843) (1.693.322)
(715.713)
(24.871)
326.260
3.852
7.401.870
440
-
337
-
-
(255)
557
(189)
(741.028)
2.392
329.649
22.825
(12.686)
(4)
13.987
83.893
90.323
78.881
7.655.304
7.024.847
75.778
234.659
136.421
184.585
7.656.290
-
2.189.524
-
-
(118.313)
-
24.097
32.695
-
-
(118.313)
2.246.316
(1.125.219)
(35.927)
(80.896)
(16.700)
-
-
(66.606)
(32.396) (1.260.148)
-
(33.888)
(131.484)
337.231
46.137
1.714
10.424
-
(12.491)
5.538
8.184
1.687
(803)
356.594
41.027
8.391.624
24.865
138.376
116.232
119.185
8.790.282
The classification as rescheduled loans is discontinued when all EBA criteria for the discontinuation of the classification as forborne exposure are met. These are
set out in the EBA Final draft Implementing Technical Standards (ITS) on supervisory reporting and non-performing exposures.
143
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
43. Risk management – Credit risk (continued)
Rescheduled loans and advances to customers (continued)
Credit quality
2016
Neither past due nor impaired
Past due but not impaired
Impaired
2015
Neither past due nor impaired
Past due but not impaired
Cyprus
Greece
Russia
€000
€000
€000
United
Kingdom
€000
Romania
€000
Total
€000
4.021.923
1.212.177
2.167.770
7.401.870
3.636.868
1.591.934
-
-
337
337
-
-
-
671
83.222
85.722
85
4.107.730
2.509
2.092
225
1.215.582
78.571
2.331.992
83.893
90.323
78.881
7.655.304
-
699
84.829
60.182
3.781.879
29.229
297
1.622.159
Impaired
3.162.822
24.865
137.677
2.174
58.706
3.386.244
8.391.624
24.865
138.376
116.232
119.185
8.790.282
144
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
43. Risk management – Credit risk (continued)
Rescheduled loans and advances to customers (continued)
Fair value of collateral
2016
Neither past due nor impaired
Past due but not impaired
Impaired
2015
Neither past due nor impaired
Past due but not impaired
Impaired
Cyprus
€000
3.772.578
1.021.347
1.828.036
6.621.961
3.360.868
1.407.575
2.709.602
Russia
United Kingdom
Romania
€000
€000
€000
Total
€000
-
671
47.740
48.411
-
696
49.297
85.661
2.504
1.974
80
182
3.858.319
1.024.704
22.060
1.899.810
90.139
22.322
6.782.833
84.722
29.182
1.668
59.930
3.505.520
178
1.437.631
39.696
2.800.263
7.478.045
49.993
115.572
99.804
7.743.414
The fair value of collateral presented above has been computed based on the extent that the collateral mitigates credit risk.
145
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
43. Risk management – Credit risk (continued)
Rescheduled loans and advances to customers (continued)
Credit risk concentration
2016
By economic activity
Trade
Manufacturing
Hotels and catering
Construction
Real estate
Private individuals
Professional and other services
Other sectors
By customer sector
Corporate
SMEs
Retail
- housing
- consumer, credit cards and other
International banking services
Wealth management
Cyprus
€000
668.305
214.248
619.259
1.539.773
1.047.280
2.515.157
446.946
350.902
7.401.870
3.418.231
1.675.528
1.661.487
567.426
74.704
4.494
Greece
€000
Russia
United Kingdom
Romania
€000
€000
€000
35.229
16.347
-
8.934
-
-
23.383
-
261
-
12.139
176
69.426
996
7.325
-
Total
€000
705.419
231.858
634.647
1.624
1.263
3.249
25.175
1.574.058
47.192
1.163.898
60
-
318
2.516.213
477.654
351.557
83.893
90.323
78.881
7.655.304
78.488
5.405
74.987
14.501
77.556
3.649.599
1.265
1.696.699
-
-
-
-
-
835
-
-
-
60
-
-
1.661.487
568.321
74.704
4.494
-
-
-
-
-
-
-
337
337
337
-
-
-
-
-
7.401.870
337
83.893
90.323
78.881
7.655.304
146
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
43. Risk management – Credit risk (continued)
Rescheduled loans and advances to customers (continued)
Credit risk concentration (continued)
2016
By business line
Corporate
SMEs
Retail
- housing
- consumer, credit cards and other
Restructuring
- major corporate
- corporate
- SMEs
Recoveries
- corporate
- SMEs
- retail housing
- retail other
International banking services
Wealth management
Cyprus
€000
Greece
€000
Russia
United Kingdom
Romania
€000
€000
€000
Total
€000
711.872
464.163
1.494.123
449.107
1.371.448
790.600
815.597
544.311
395.768
167.364
118.319
74.704
4.494
337
-
-
-
-
-
-
-
-
-
-
-
-
78.488
5.405
-
-
-
-
-
-
-
-
-
-
-
74.987
14.501
-
835
-
-
-
-
-
-
-
-
-
77.391
1.265
943.075
485.334
-
60
1.494.123
450.002
165
1.371.613
-
-
-
-
-
-
-
-
790.600
815.597
544.311
395.768
167.364
118.319
74.704
4.494
7.401.870
337
83.893
90.323
78.881
7.655.304
147
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
43. Risk management – Credit risk (continued)
Rescheduled loans and advances to customers (continued)
Credit risk concentration (continued)
2015
By economic activity
Trade
Manufacturing
Hotels and catering
Construction
Real estate
Private individuals
Professional and other services
Other sectors
By customer sector
Corporate
SMEs
Retail
- housing
- consumer, credit cards and other
International banking services
Wealth management
Cyprus
€000
Greece
€000
Russia
United Kingdom
Romania
€000
€000
€000
707.105
282.449
743.585
2.155.778
1.069.156
2.526.554
584.836
322.161
-
-
-
-
-
-
-
24.865
31.580
14.207
-
8.081
-
-
84.508
-
-
136
7.072
14.862
59.190
4.393
19.517
11.062
Total
€000
741.621
298.050
756.853
2.181.165
2.936
1.258
6.196
2.444
82.739
1.211.085
153
2.531.100
22.697
711.558
762
358.850
8.391.624
24.865
138.376
116.232
119.185
8.790.282
4.368.307
1.720.453
1.685.668
568.986
42.481
5.729
24.865
133.932
-
-
-
-
-
4.444
-
-
-
-
99.603
12.519
116.385
4.743.092
2.647
1.740.063
-
4.110
-
-
-
1.685.668
153
573.249
-
-
42.481
5.729
8.391.624
24.865
138.376
116.232
119.185
8.790.282
148
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
43. Risk management – Credit risk (continued)
Rescheduled loans and advances to customers (continued)
Credit risk concentration (continued)
2015
By business line
Corporate
SMEs
Retail
- housing
- consumer, credit cards and other
Restructuring
- major corporate
- corporate
- SMEs
Recoveries
- corporate
- SMEs
- retail housing
- retail other
International banking services
Wealth management
Cyprus
€000
Greece
€000
Russia
United Kingdom
Romania
€000
€000
€000
Total
€000
647.785
550.664
1.562.149
468.368
1.768.782
1.272.086
798.010
679.654
371.779
123.519
100.618
42.481
5.729
24.865
133.932
-
-
-
-
-
-
-
-
-
-
-
-
4.444
-
-
-
-
-
-
-
-
-
-
-
99.603
12.519
-
4.110
-
-
-
-
-
-
-
-
-
115.639
1.021.824
2.647
570.274
-
1.562.149
153
472.631
626
1.769.408
-
-
1.272.086
798.010
120
679.774
-
-
-
-
-
371.779
123.519
100.618
42.481
5.729
8.391.624
24.865
138.376
116.232
119.185
8.790.282
149
BANK OF CYPRUS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2016
43. Risk management – Credit risk (continued)
Rescheduled loans and advances to customers (continued)
Provisions for impairment
Greece
€000
Russia
United Kingdom
Romania
€000
€000
€000
Total
€000
2016
Individual impairment
Collective impairment
2015
Individual impairment
Collective impairment
1.855
365
2.220
1.396
266
1.662
59.791
1.026.458
2
200.795
59.793
1.227.253
35.694
1.317.708
1.813
209.234
37.507
1.526.942
Cyprus
€000
899.178
200.069
1.099.247
337
-
337
65.297
359
65.656
1.144.475
22.966
113.177
207.106
-
49
1.351.581
22.966
113.226
150
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
43.
Risk management – Credit risk (continued)
Credit quality of Group assets exposed to credit risk other than loans and advances to customers -
analysis by rating agency designation
Balances with central banks and loans and advances to banks
Balances with central banks and loans and advances to banks are analysed by Moody’s rating as follows:
Aaa – Aa3
A1 – A3
Baa1 – Baa3
Ba1 – Ba3
B1 – B3
Caa - C
Unrated
Other receivables from banks
2016
€000
2015
€000
785.002
249.693
41.860
37.067
555.594
643.540
146.428
36.954
1.137.717
957.074
14.410
8.750
154.805
205.924
41.085
28.701
2.461.639
2.582.965
Band B1-B3 above includes an amount of €141.447 thousand which mainly relates to obligatory deposits for
liquidity purposes with the CBC. As at 31 December 2016, bank balances with carrying value of €78.725
thousand are impaired (2015: €134.291 thousand), with cumulative impairment loss of €55.655 thousand
(2015: €28.605 thousand).
151
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
43.
Risk management – Credit risk (continued)
Credit quality of Group assets exposed to credit risk other than loans and advances to customers -
analysis by rating agency designation (continued)
Debt securities
Investments in debt securities are analysed by Moody’s rating, their issuer and classification, as follows:
Aaa – Aa3
Baa1 – Baa3
B1 – B3
Caa – C
Issued by:
- Cyprus government
- other governments
- banks and other corporations
Classified as:
- trading investments
- investments at fair value through profit or loss
- available-for-sale investments
- investments classified as loans and receivables
2016
€000
2015
€000
349.565
12.507
257.495
1
402.830
54.626
459.159
1
619.568
916.616
257.496
329.211
32.861
619.568
476
10.426
540.592
68.074
619.568
459.159
421.037
36.420
916.616
317
17.430
461.934
436.935
916.616
152
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
44.
Risk management – Market risk
Market risk is the risk of loss from adverse changes in market prices - namely from changes in interest rates,
exchange rates and security prices. The Market Risk department is responsible for monitoring the risk resulting
from such changes with the objective to minimise the impact on earnings and capital. The department also
monitors liquidity risk and credit risk with counterparties and countries. It is also responsible for monitoring
compliance with the various market risk policies and procedures.
Interest rate risk
Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate
because of changes in market interest rates. It arises mainly as a result of timing differences on the repricing
of assets, liabilities and off-balance sheet items.
Interest rate risk is measured using interest rate sensitivity gap analysis where the difference between assets
and liabilities repricing in each time band is calculated separately for each currency. A rate change is applied on
each item of the balance sheet for the number of days between its repricing date and the one year horizon in
order to calculate the impact on net interest income.
Interest rate risk is managed through maximum loss limits from interest rate mismatches which are set for
each banking unit of the Group. There are different limits for the Euro and for foreign currencies. The
maximum loss limits apply for each of the next three years. These limits are set as a percentage of Group
capital and as a percentage of net interest income (when positive) and are allocated to the various banking
units of the Group based on their contribution to net interest income. Small limits for open interest rate
positions for periods of more than three years are also in place.
Sensitivity analysis
The table below sets out the impact on the Group’s net interest income, over a one-year period, from
reasonably possible changes in the interest rates of the main currencies:
Change in interest rates
2016
+2% for Russian Rouble
+1% for US Dollar
+0,5% for all other currencies
-4% for Russian Rouble
-0,5% for all other currencies
2015
+5% for Russian Rouble
+0,75% for US Dollar
+0,5% for all other currencies
-5% for Russian Rouble
-0,25% for Japanese Yen
-0,5% for Euro Euribor ECB
-1% for Euro Bank Basic Rate
-0,5% for all other currencies
Euro
€000
US
Dollar
€000
British
Pound
€000
Other
currencies
Total
€000
€000
17.269
15.950
5.081
(43)
38.257
(21.479)
(8.089)
(3.057)
(438)
(33.063)
14.244
10.281
4.524
(570)
28.479
(24.120)
(7.275)
(3.454)
532
(34.317)
153
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
44.
Risk management – Market risk (continued)
Interest rate risk (continued)
Sensitivity analysis (continued)
In addition to the above fluctuations in net interest income, interest rate changes can result in fluctuations in
the fair value of investments at fair value through profit or loss (including investments held for trading) and in
the fair value of derivative financial instruments.
The equity of the Group is also affected by changes in market interest rates. The impact on the Group’s equity
arises from changes in the fair value of fixed rate debt securities classified as available-for-sale (unless
impaired).
The sensitivity analysis is based on the assumption of a parallel shift of the yield curve. The table below sets
out the impact on the Group’s profit/loss before tax and equity as a result of reasonably possible changes in the
interest rates of the major currencies.
Change in interest rates
2016
+2% for Russian Rouble
+1% for US Dollar
+0,5% for all other currencies
-4% for Russian Rouble
-0,5% for all other currencies
2015
+5% for Russian Rouble
+0,75% for US Dollar
+0,5% for all other currencies
-5% for Russian Rouble
-0,25% for Japanese Yen
-0,5% for all other currencies
Currency risk
Impact on
profit/loss before
tax
Impact on equity
€000
€000
1.347
(1.764)
(1.347)
1.734
572
(572)
(97)
97
Currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because
of changes in foreign exchange rates.
In order to manage currency risk, the ALCO has approved open position limits for the total foreign exchange
position limits. The foreign exchange position limits are lower than those prescribed by the CBC. These limits
are managed by Treasury and monitored daily by market risk officers in all the banking units of the Group, who
report the overnight foreign currency position of each unit to Market Risk daily.
The Group does not maintain a currency trading book.
154
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
44.
Risk management – Market risk (continued)
Currency risk (continued)
The table below sets out the Group’s currency risk resulting from the financial instruments that it holds. The
analysis assumes reasonably possible changes in the exchange rates of major currencies against the Euro,
based mainly on historical price fluctuations. The impact on profit/loss after tax includes the change in net
interest income that arises from the change of currency rate.
The impact on equity arises from the hedging instruments that are used to hedge part of the net assets of the
subsidiaries whose functional currency is not the euro. The net assets of foreign operations are also revalued
and affect equity, but their impact is not taken into account in the above sensitivity analysis as the above
relates only to financial instruments which have a direct impact either on profit/loss after tax or on equity.
2016
US Dollar
Russian Rouble
Romanian Lei
Swiss Franc
British Pound
Japanese Yen
Other currencies
US Dollar
Russian Rouble
Romanian Lei
Swiss Franc
British Pound
Japanese Yen
Other currencies
Change in foreign
exchange rate
Impact on profit
after tax
Impact on
equity
%
€000
€000
+10
+25
+10
+20
+20
+10
+10
-10
-25
-10
-20
-20
-10
-10
1.935
2.645
-
6.629
1.017
307
173
(1.584)
(1.587)
-
(4.419)
(678)
(251)
(142)
-
18.828
4.459
-
(19.358)
-
-
-
(11.297)
(3.648)
-
12.905
-
-
155
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
44.
Risk management – Market risk (continued)
Currency risk (continued)
2015
US Dollar
Russian Rouble
Romanian Lei
Swiss Franc
British Pound
Japanese Yen
Other currencies
US Dollar
Russian Rouble
Romanian Lei
Swiss Franc
British Pound
Japanese Yen
Other currencies
Price risk
Change in foreign
exchange rate
Impact on loss
after tax
Impact on equity
%
€000
€000
+10
+40
+10
+20
+10
+10
+10
-10
-40
-10
-20
-10
-10
-10
1.753
5.819
1
9.344
515
490
111
(1.434)
(2.494)
(1)
(6.229)
(422)
(401)
(91)
-
78.573
3.634
-
(18.304)
-
-
-
(33.674)
(2.974)
-
14.976
-
-
Equity securities price risk
The risk of loss from changes in the price of equity securities arises when there is an unfavourable change in
the prices of equity securities held by the Group as investments.
Investments in equities are outside the Group’s risk appetite. The Group monitors the current portfolio mostly
acquired by the Group as part of the acquisition of certain operations of Laiki Bank, with the objective to
gradually liquidate all positions for which there is a market. Equity securities may also be acquired in the
context of delinquent loan workouts and are disposed of by the Group as soon as practicable.
Changes in the prices of equity securities that are classified as investments at fair value through profit or loss,
affect the results of the Group, whereas changes in the value of equity securities classified as available-for-sale
affect the equity of the Group (if not impaired).
The table below shows the impact on the profit/loss before tax and on equity of the Group from a change in the
price of the equity securities held, as a result of reasonably possible changes in the relevant stock exchange
indices.
156
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
44.
Risk management – Market risk (continued)
Price risk (continued)
Equity securities price risk (continued)
2016
Cyprus Stock Exchange
Athens Exchange
Other Stock Exchanges and non listed
Cyprus Stock Exchange
Athens Exchange
Other Stock Exchanges and non listed
2015
Cyprus Stock Exchange
Athens Exchange
Other Stock Exchanges and non listed
Cyprus Stock Exchange
Athens Exchange
Other Stock Exchanges and non listed
Change in
index
%
Impact on
profit/loss
before tax
€000
Impact on
equity
€000
+25
+35
+20
-25
-35
-20
+30
+50
+20
-30
-50
-20
1.313
-
858
(1.567)
(30)
(858)
2.164
-
1.721
(2.298)
(58)
(1.768)
1.049
95
2.122
(795)
(67)
(2.122)
1.509
83
1.916
(1.376)
(25)
(1.869)
Debt securities price risk
Debt securities price risk is the risk of loss as a result of adverse changes in the prices of debt securities held by
the Group. Debt security prices change as the credit risk of the issuer changes and/or as the interest rate
changes for fixed rate securities. The Group invests a significant part of its liquid assets in debt securities
issued mostly by governments. The average Moody’s rating of the debt securities portfolio of the Group as at
31 December 2016 was B1 (2015: Baa2).
Changes in the prices of debt securities classified as investments at fair value through profit or loss, affect the
profit or loss of the Group, whereas changes in the value of debt securities classified as available-for-sale affect
the equity of the Group (if not impaired).
The table below indicates how the profit/loss before tax and equity of the Group will be affected from
reasonably possible changes in the price of the debt securities held, based on observations of changes in credit
risk over the past years.
157
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
44.
Risk management – Market risk (continued)
Price risk (continued)
Debt securities price risk (continued)
Change in market prices
2016
+6,5%
-6,5%
2015
+5,5%
-5,5%
Impact on
profit/loss
before tax
€000
Impact on equity
€000
2.861
(2.861)
34.776
(34.776)
2.002
(2.002)
25.188
(25.188)
45.
Risk management – Liquidity risk and funding
Liquidity risk is the risk that the Group is unable to fully or promptly meet current and future payment
obligations as and when they fall due. This risk includes the possibility that the Group may have to raise
funding at high cost or sell assets at a discount to fully and promptly satisfy its obligations.
It reflects the potential mismatch between incoming and outgoing payments, taking into account unexpected
delays in repayment or unexpectedly high payment outflows. Liquidity risk involves both the risk of unexpected
increases in the cost of funding of the portfolio of assets and the risk of being unable to liquidate a position in a
timely manner on reasonable terms.
In order to limit this risk, management aims to achieve diversified funding sources in addition to the Group’s
core deposit base, and has adopted a policy of managing assets with liquidity in mind and monitoring cash
flows and liquidity on a daily basis. The Group has developed internal control processes and contingency plans
for managing liquidity risk. These incorporate an assessment of expected cash flows and the availability of
collateral which could be used to secure additional funding if required.
Management and structure
The Board of Directors sets the Group’s Liquidity Risk Appetite being the level of risk at which the Group should
operate.
The Board of Directors, through its Risk Committee, approves the Liquidity Policy Statement and reviews almost
at every meeting the liquidity position of the Group. Information on inflows/outflows is also provided.
The ALCO is responsible for setting the policies for the effective management and monitoring of liquidity across
the Group. It also monitors the liquidity position of its major banking units at least monthly. Bank of Cyprus UK
Ltd ALCO is responsible for monitoring the liquidity position of the unit and ensuring compliance with the
approved policies. Given the current liquidity position of the Company, the ALCO considers the monitoring of
liquid assets and the cash inflows/outflows of the Company in Cyprus, to be of utmost importance.
Group Treasury is responsible for liquidity management at Group level and for overseeing the operations of
Bank of Cyprus UK Ltd, to ensure compliance with internal and regulatory liquidity policies and provide direction
as to the actions to be taken regarding liquidity needs. The Group Treasury also manages the treasury
business of Bank of Cyprus Romania, which is in run-down mode. Every unit is responsible for managing its
liquidity and targets to finance its own needs in the medium term. Group Treasury assesses on a continuous
basis, and informs ALCO at regular time intervals, the adequacy of the liquid assets and takes the necessary
actions to enhance the Group’s liquidity position.
Liquidity is also monitored daily by Market Risk, which is an independent department responsible to monitor
compliance at the level of individual units, as well as at Group level, with both internal policies and limits, and
with the limits set by the regulatory authorities in the countries where the Group operates. Market Risk reports
to ALCO the regulatory liquidity position of the various units of the Group, at least monthly. It also provides
the results of various stress tests to ALCO at least quarterly.
158
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
45.
Risk management – Liquidity risk and funding (continued)
Management and structure (continued)
Liquidity is monitored and managed on an ongoing basis through:
(i)
(ii)
(iii)
Risk appetite: established Group Risk Appetite together with the appropriate limits for the management
of all risks including liquidity risk.
Liquidity policy: sets the responsibilities for managing liquidity risk as well as the framework, limits and
stress test assumptions.
Liquidity limits: a number of internal and regulatory limits are monitored on a daily, monthly and
quarterly basis. Where applicable, a traffic light system (RAG) has been introduced for the ratios, in order
to raise flags when the ratios deteriorate.
(iv) Early warning indicators: monitoring of a range of indicators for early signs of liquidity risk in the market
or specific to the Group. These are designed to immediately identify the emergence of increased liquidity
risk to maximise the time available to execute appropriate mitigating actions.
Liquidity Contingency Plan: maintenance of a Liquidity Contingency Plan (LCP) which is designed to
provide a framework where a liquidity stress could be effectively managed. The LCP provides a
communication plan and includes management actions to respond to liquidity stresses.
(v)
(vi) Recovery Plan: the Group has developed a Recovery Plan. The key objectives are to provide the Group
with a range of options to ensure its viability in a stress, to set consistent Early Warning and Recovery
Indicators and to enable the Group to be adequately prepared to respond to stressed conditions.
Monitoring process
Daily
The daily monitoring of cash flows and highly liquid assets is important to safeguard and ensure the
uninterrupted operations of the Group’s activities. Market Risk prepares a report for submission to the CBC and
ECB/Single Supervisory Mechanism (SSM), indicating the opening and closing liquidity position, net customer
movements and other movements analysed by the main currencies. In addition, Group Treasury monitors daily
and intraday the customer inflows and outflows in the main currencies used by the Group.
Since May 2016, Market Risk also prepares daily stress testing for bank-specific, market wide and combined
scenarios. The requirement is to have sufficient liquidity buffer to enable the Company to survive a two-week
stress period, and adequate capacity to raise funding under a three month period, under all scenarios.
The liquidity buffer is made up of: Euro banknotes, CBC balances (excluding the Minimum Reserve
Requirements (MRR)), nostro current accounts, money market placements up to the stress horizon, available
ECB credit line and market value net of haircut of liquid unencumbered/available bonds.
The designing of the stress tests followed best practice guidance and was based on the liquidity risk drivers
which are recognised internationally by both the Prudential Regulation Authority (PRA) and EBA SREP. The
stress tests assumptions are included in the Group Liquidity Policy which is reviewed on an annual basis and
approved by the Board. However, whenever it is considered appropriate to amend the assumptions during the
year, approval is requested by ALCO and the Board Risk Committee. The main items shocked in the different
scenarios are: deposit outflows, wholesale funding, loan repayments, off-balance sheet commitments,
marketable securities and cash collateral for derivatives and repos.
Weekly
Market Risk prepares a weekly report of Euro and foreign currency liquidity mismatch which is submitted to the
CBC.
Monthly
Market Risk prepares reports monitoring compliance with internal and regulatory liquidity ratios, for all banking
units and for the Group and submits them to the ALCO, the Executive Committee and the Board Risk
Committee. It also calculates the expected flows under a stress scenario and compares them with the projected
available liquidity buffer in order to calculate the survival days. The fixed deposit renewal rates and deposits by
tenor are also presented to the ALCO.
Market Risk reports the LCR and Additional Liquidity Monitoring Metrics (ALMM) to the CBC/ECB monthly.
159
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
45.
Risk management – Liquidity risk and funding (continued)
Monitoring process (continued)
Monthly (continued)
Group Treasury prepares a liquidity report which is submitted to the ALCO on a monthly basis. The report
indicates the liquidity position of the Company, data on monthly customer flows, as well as other important
developments related to liquidity. Moreover, during 2016 Group Treasury prepared a cash flows projection
report, under a base and an adverse scenario, covering a one month and two month periods, which was sent to
ECB/SSM/CBC/Ministry of Finance. Following full ELA repayment in January 2017, Group Treasury has stopped
producing the cash flows projection report.
Quarterly
The results of the stress testing scenarios prepared daily are reported to ALCO and Board Risk Committee
quarterly. Moreover, Market Risk reports the Net Stable Funding Ratio (NSFR), Leverage Ratio to the CBC/ECB
quarterly and various other liquidity reports, included in the short-term exercise of the SSM per their SREP
guidelines.
Annually
The Group prepares on an annual basis its report on Internal Liquidity Adequacy Assessment Process (ILAAP).
As part of the Group’s procedures for monitoring and managing liquidity risk, there is a Group Liquidity
Contingency Plan for handling liquidity difficulties. The plan details the steps to be taken in the event that
liquidity problems arise, which escalate to a special meeting of the extended ALCO. The plan sets out the
members of this Committee and a series of the possible actions that can be taken. This plan, as well as the
Group’s Liquidity Policy, is reviewed by ALCO at least annually, during the ILAAP review. The ALCO submits the
updated policy with its recommendations to the Board through the Board Risk Committee for approval. The
approved policy is notified to the SSM.
Liquidity ratios
The Group liquidity ratio presented in the table below, is calculated for management information purposes,
based on the CBC methodology for the Euro stock liquidity ratio. The ratio is calculated as the amount of liquid
assets to total deposits and other liabilities falling due within twelve months. Liquid assets are defined as cash,
interbank deposits maturing within thirty days and eligible debt and equity securities at haircuts prescribed by
the regulatory authorities. Total deposits comprise all customer deposits irrespective of maturity and other
liabilities include all non-customer deposit/liabilities due to be paid in the next twelve months.
The Group liquidity ratio is prepared monthly by Market Risk and monitored by ALCO. Each banking unit has its
own required limit for this ratio and is monitored accordingly: for the operations in Cyprus, two separate ratios
are calculated; one for Euro and one for foreign currencies and the required limit is 20% for Euro and 70% for
foreign currencies. For the other banking units the minimum requirement is at 15%.
It is noted that in the calculation of this ratio, as well as for the CBC regulatory reports, ELA is treated as a long
term liability.
The Group’s liquidity ratio was as follows:
End of reporting year
Average monthly ratio
Highest monthly ratio
Lowest monthly ratio
2016
%
2015
%
15,59
16,05
17,22
14,48
18,25
18,31
21,62
15,64
160
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
45.
Risk management – Liquidity risk and funding (continued)
Liquidity ratios (continued)
The Company is currently not in compliance with the regulatory liquidity requirements with respect to its
operations in Cyprus and the Group is currently not in compliance with its regulatory liquidity requirements with
respect to the LCR and therefore is dependent on continuing regulatory forbearance.
As at 31 December 2016 and 2015 the other banking units of the Group were in compliance with their
regulatory liquidity requirements.
The ratio of loans and advances to customer deposits is presented below:
End of reporting year
Average quarterly ratio
Highest quarterly ratio
Lowest quarterly ratio
Sources of funding
2016
%
2015
%
94,56
109,14
120,92
94,56
120,92
133,57
141,48
120,92
During the year of 2016, the Group’s main sources of liquidity were its deposit base and central bank funding,
either through the Eurosystem monetary policy operations or through ELA.
Reliance on ELA funding was reduced from its peak of €11,4 billion in April 2013 to €200 million as at 31
December 2016 (2015: €3,8 billion) (Note 30). ELA was fully repaid on 5 January 2017.
The liquidity received from central banks is subject to the relevant regulations and requires qualifying assets as
collateral.
The funding provided to the Group through ELA is short term, usually 2-4 weeks. The funding via Eurosystem
monetary policy operations ranges from short term to long term.
In 2014, the Group participated in the TLTRO of the ECB for an amount of €500 million. On 29 June 2016 the
Company repaid the amount borrowed through the TLTRO amounting to €500 million and borrowed the same
amount from the MRO. In December 2016, the Group borrowed an amount of €600 million through the new
series of TLTRO (TLTRO II) announced by the ECB in March 2016. Additionally, an amount of €50 million was
borrowed through the LTRO. As a result, in December 2016 all the ECB funding that was borrowed through the
MRO, was switched to longer term funding.
In May 2016, the Company raised new funding from the ECB using as collateral a pool of housing loans that
satisfy the criteria of the Additional Credit Claims as set out in accordance with the Implementation of the
Eurosystem Monetary Policy Framework Directives of 2015 and 2016.
Funding to subsidiaries
The funding provided by the Company to its subsidiaries for liquidity purposes is repayable as per the terms of
the respective agreements. For lending provided for capital purposes (subordinated loan stocks) the prior
approval of the regulator is usually required on any repayment before the maturity date and for Bank of Cyprus
UK Ltd approval is also required for the final repayment. The Company’s subsidiary Bank of Cyprus UK Ltd
cannot place funds with the Group in excess of maximum limits set by the local regulator.
Any new funding to subsidiaries requires approval from the ECB and the CBC.
The subsidiaries may proceed with dividend distributions in the form of cash to the Company, provided that
they are not in breach of their regulatory capital and liquidity requirements. Certain subsidiaries have a
recommendation from their regulator to avoid any dividend distribution at this point in time.
161
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
45.
Risk management – Liquidity risk and funding (continued)
Collateral requirements
The carrying values of the Group’s encumbered assets as at 31 December 2016 and 2015 are summarised
below:
Cash and other liquid assets
Investments
Loans and advances
Property
2016
€000
2015
€000
139.975
359.813
154.896
892.728
2.853.511
12.882.139
93.574
93.500
3.446.873
14.023.263
Cash is mainly used to cover collateral required for (i) derivatives and repurchase transactions and (ii) trade
finance transactions and guarantees issued. It is also used as part of the supplementary assets for the covered
bond.
Investments are mainly used as collateral for repurchase transactions with commercial banks as well as
supplementary assets for the covered bond.
Loans and advances indicated as encumbered as at 31 December 2016 and 2015 are mainly used as collateral
for funding from the CBC, the covered bond and the ECB.
As at 31 December 2016 loans and advances to customers include loans of a nominal amount of €787 million
(2015: €14.763 million) in Cyprus, which are pledged as collateral for ELA. Additionally, they include mortgage
loans of a nominal amount €1.002 million (2015: €1.004 million) in Cyprus, which are pledged as collateral for
the covered bond issued by the Company in 2011 under the Covered Bond Programme. Furthermore they
include housing loans of a nominal amount €765 million (2015: nil) in Cyprus pledged as collateral for the
funding from the ECB (Note 30). At 31 December 2016 the Company’s subsidiary Bank of Cyprus UK Ltd has
pledged €244 million (2015: nil) of loans and advances to customers with the Funding for Lending Scheme
(FLS) of the Bank of England. These are available for use as collateral for the subsidiary’s participation in the
scheme. As at 31 December 2016 the subsidiary had drawn down Treasury bills of €29 million (2015: nil) under
the FLS. These Treasury bills are not recorded on the consolidated balance sheet as ownership remains with
the Bank of England.
In August 2016, the Company cancelled two own-issued bonds guaranteed by the Republic of Cyprus of €500
million each. The bonds bore an annual fixed interest rate at 5%. The bonds were guaranteed by the Republic
of Cyprus and were issued in accordance with the relevant legislation and decrees on the ‘Granting of
Government Guarantees for the Conclusion of Loans and/or the Issue of Bonds by Credit Institutions Law’. No
liability from the issue of these bonds was presented in debt securities in issue in the consolidated balance
sheet as all the bonds were held by the Company. The bonds were listed on the CSE and were pledged as
collateral for obtaining funding from central banks. One of the bonds was released in June 2016 from the ELA
pool of collateralised assets. After taking into consideration the significant reduction of ELA funding, the Board
of Directors of the Company at its meeting held on 16 August 2016, decided to proceed with the cancellation of
the two bonds. Given the decision for the cancellation, the CBC released the second bond on 19 August 2016.
The two bonds were cancelled on 25 August 2016, following the approval/consent from the competent
authorities.
The Company maintains a Covered Bond Programme set up under the Cyprus Covered Bonds legislation and
the Covered Bonds Directive of the CBC.
Under the Programme, the Company issued in December 2011 covered bonds of €1.000 million. The covered
bonds issued had a maturity of three years with a potential extension of their repayment by one year, bore
interest at the three month Euribor plus 1,25% on a quarterly basis and were traded on the Luxemburg Bourse.
The terms of the €1.000 million covered bond secured by residential mortgage loans originated in Cyprus were
amended in June 2014 and the maturity date changed to 12 June 2017 with a potential extension of one year
and the interest rate to three month Euribor plus 3,25% on a quarterly basis. All the bonds issued are held by
the Company.
162
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
45.
Risk management – Liquidity risk and funding (continued)
Collateral requirements (continued)
On 29 September 2015, the terms of the Covered Bond Programme and the outstanding €1.000 million covered
bond were amended to a Conditional Pass–Through structure. As part of the restructuring, the outstanding
principal of the retained covered bond was reduced to €650 million with a new maturity date of 12 December
2018. The credit rating of the covered bond was upgraded to an investment grade rating and the covered bond
has become eligible collateral for the Eurosystem credit operations.
As from 2 October 2015, it has been placed as collateral for accessing funding from the ECB.
Recent developments
The credit ratings of the Republic of Cyprus by the main credit rating agencies continue to be below investment
grade. As a result, the ECB is no longer able to include Cyprus Government Bonds in its asset purchase
programme, or as eligible collateral for Eurosystem monetary operations, as was the case when the waiver for
collateral eligibility due to the country being under an economic adjustment programme existed.
In August, October and December 2016 the CBC has released loans and advances with contractual value of €2
billion, €2,5 billion and €7,3 billion respectively held as collateral for ELA.
Following the full repayment of ELA on 5 January 2017, all ELA collateralised loans have subsequently been
released, but ELA pledged properties remain pledged as of 27 March 2017.
Analysis of financial assets and liabilities based on remaining contractual maturity
The analysis of the Group’s financial assets and liabilities based on the remaining contractual maturity at 31
December is based on undiscounted cash flows, analysed in time bands according to the number of days
remaining from 31 December to the contractual maturity date.
Financial assets
The analysis of financial assets does not include any interest receivable cash flows. Financial assets have a
much longer duration than financial liabilities and non-discounted interest receivable cash flows are higher than
non-discounted interest payable cash flows (based on remaining contractual maturity). As a result, non-
discounted cash inflows from interest receivable would have greatly exceeded non-discounted cash outflows on
interest payable, thus artificially improving liquidity.
Current accounts, overdrafts and amounts in arrears are included within the first maturity time band which
reflects their contractual maturity. All other loans and advances to customers are analysed according to their
contractual repayment schedule.
Loans and advances to banks are analysed in the time bands according to the number of days remaining from
31 December, until their contractual maturity date. Amounts placed as collateral (primarily for derivatives and
loans) are assigned to different time bands based on either their maturity (in the case of loans), or
proportionally according to the maturities of derivatives (where the collateral had no fixed maturity).
Financial assets with no contractual maturity (such as equity securities) are included in the ‘over five years’
time band, unless classified as at fair value through profit or loss, in which case they are included in the ‘up to
one month’ time band.
The investments are classified in the relevant time band according to their contractual maturity.
Financial liabilities
All financial liabilities for the repayment of which notice is required, are included in the relevant time bands as if
notice had been given on 31 December, despite the fact that the Group expects that the majority of its
customers will not demand repayment of such liabilities on the earliest possible date. Fixed deposits are
classified in time bands based on their contractual maturity. Although customers may demand repayment of
time deposits (subject to penalties depending on the type of the deposit account), the Group has the discretion
not to accept such early termination of deposits.
163
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
45.
Risk management – Liquidity risk and funding (continued)
Analysis of financial assets and liabilities based on remaining contractual maturity (continued)
Financial liabilities (continued)
The amounts presented in the table below are not equal to the amounts presented on the balance sheet, since
the table below presents all cash flows (including interest to maturity) on an undiscounted basis.
Derivative financial instruments
Derivative financial instruments were classified according to whether the settlement of cash flows occurs on a
net or gross basis.
For net settled derivatives, after offset of receivable and payable amounts, the fair value of the derivatives is
included in financial assets or in financial liabilities in the time band corresponding to the remaining maturity of
the derivative.
Gross settled derivatives or net settled derivatives that are hedging instruments in cash flow hedges are
presented in a separate table and the corresponding cash flows are classified accordingly in the time bands
which relate to the number of days until their receipt or payment.
Commitments and contingent liabilities
The limits of loans and advances are commitments to provide credit to customers. The limits are granted for
predetermined periods and can be cancelled by the Group after giving relevant notice to the customers.
Usually the customers do not fully utilise the limits granted to them.
2016
Financial assets
Cash and balances with
central banks
Loans and advances to
banks
Investments at fair
value through profit or
loss
Loans and advances to
customers
Fair value of net
settled derivative
assets
Non-trading
investments
Other assets
On demand
and up to
one month
Between
one and
three
months
Between
three
months and
one year
Between
one and
five years
Over five
years
Total
€000
€000
€000
€000
€000
€000
1.446.851
26.372
29.157
4.016
-
1.506.396
871.306
13.630
14.660
172.674
15.567
1.087.837
27.971
8.740
1.686
4.069
550
43.016
6.064.296
258.139
687.253
3.627.733
5.011.980 15.649.401
17.829
2.701
59
159
87
20.835
7.941
28.761
6.453
8.955
42.008
335.288
238.938
630.628
19.477
67.944
6.674
131.811
Total financial assets
8.464.955
324.990
794.300 4.211.883 5.273.796 19.069.924
Financial liabilities
Deposits by banks
Funding from central
banks
Repurchase
agreements
Customer deposits
Fair value of net
settled derivative
liabilities
Other liabilities
Total undiscounted
financial liabilities
309.922
6.312
32.731
6.704
83.812
439.481
200.014
50.000
-
-
-
-
600.000
-
850.014
285.838
9.188
295.026
8.750.919
3.113.258
3.396.832
1.343.667
4.193 16.608.869
7.955
1.010
53
31.687
7.504
48.209
95.719
16.430
31.974
4.591
2.296
151.010
9.364.529 3.187.010
3.461.590 2.272.487
106.993 18.392.609
164
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
45.
Risk management – Liquidity risk and funding (continued)
Analysis of financial assets and liabilities based on remaining contractual maturity (continued)
2015
Financial assets
Cash and balances with
central banks
Loans and advances to
banks
Investments at fair
value through profit or
loss
Loans and advances to
customers
Fair value of net
settled derivative
assets
Non-trading
investments
On demand
and up to
one month
Between
one and
three
months
Between
three
months and
one year
Between
one and
five years
Over five
years
Total
€000
€000
€000
€000
€000
€000
1.373.351
20.898
27.943
410
-
1.422.602
1.045.275
13.865
45.027
191.869
18.344
1.314.380
28.378
-
6.719
14.769
919
50.785
6.990.238
229.696
1.043.964
3.529.475
5.398.259 17.191.632
12.615
733
593
39
43
14.023
57.136
51.367
203.219
485.305
161.475
958.502
Other assets
31.459
8.192
9.348
123.787
6.875
179.661
Total financial assets
9.538.452
324.751
1.336.813 4.345.654 5.585.915 21.131.585
Financial liabilities
Deposits by banks
181.358
Funding from central
banks
Repurchase
agreements
3.953.955
-
-
16.946
8.505
38.395
245.204
-
502.846
-
4.456.801
-
29.826
82.217
288.676
9.679
410.398
Customer deposits
7.675.374
2.273.718
3.767.389
561.323
2.658 14.280.462
Debt securities in issue
-
-
712
-
-
712
Fair value of net
settled derivative
liabilities
6.865
3.658
5.266
33.826
4.544
54.159
Other liabilities
84.527
18.475
31.366
6.278
2.338
142.984
Total undiscounted
financial liabilities
11.902.079 2.325.677
3.903.896 1.401.454
57.614 19.590.720
165
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
45.
Risk management – Liquidity risk and funding (continued)
Analysis of financial assets and liabilities based on remaining contractual maturity (continued)
2016
Gross settled
derivatives
Financial assets
Contractual amounts
receivable
Contractual amounts
payable
Financial liabilities
Contractual amounts
receivable
Contractual amounts
payable
Contingent
liabilities and
commitments
Contingent liabilities
Acceptances and
endorsements
On demand
and up to
one month
Between one
and three
months
Between
three
months and
one year
Between one
and five
years
Over five
years
Total
€000
€000
€000
€000
€000
€000
669.186
164.669
1.531
(652.202)
(161.871)
(1.497)
16.984
2.798
34
1.060.998
188.662
1.498
(1.070.866)
(190.401)
(1.526)
(9.868)
(1.739)
(28)
-
-
-
-
-
-
-
-
-
835.386
(815.570)
19.816
-
1.251.158
-
(1.262.793)
-
(11.635)
3.983
2.483
1.140
-
-
7.606
Guarantees
160.531
153.096
242.952
152.890
87.800
797.269
Commitments
Documentary credits
4.649
6.824
14.190
287
1.686
27.636
Undrawn formal
standby facilities,
credit lines and other
commitments to lend
2.020.254
14.937
-
-
-
2.035.191
2.189.417
177.340
258.282
153.177
89.486
2.867.702
166
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
45.
Risk management – Liquidity risk and funding (continued)
Analysis of financial assets and liabilities based on remaining contractual maturity (continued)
2015
Gross settled
derivatives
Financial assets
Contractual amounts
receivable
Contractual amounts
payable
Financial liabilities
Contractual amounts
receivable
Contractual amounts
payable
Contingent
liabilities and
commitments
Contingent liabilities
Acceptances and
endorsements
On demand
and up to
one month
Between one
and three
months
Between
three
months and
one year
Between one
and five
years
Over five
years
Total
€000
€000
€000
€000
€000
€000
931.730
57.648
1.196
(920.083)
(56.874)
(1.175)
11.647
774
21
408.995
160.095
167.212
(414.868)
(161.442)
(169.407)
(5.873)
(1.347)
(2.195)
-
-
-
-
-
-
-
-
-
-
-
-
990.574
(978.132)
12.442
736.302
(745.717)
(9.415)
3.587
2.750
2.048
-
-
8.385
Guarantees
66.251
140.400
245.352
254.419
86.689
793.111
Commitments
Documentary credits
2.259
8.028
4.116
2.643
1.395
18.441
Undrawn formal
standby facilities,
credit lines and other
commitments to lend
2.069.129
19.490
-
-
-
2.088.619
2.141.226
170.668
251.516
257.062
88.084
2.908.556
167
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
46.
Risk management – Insurance risk
Insurance risk is the risk that an insured event under an insurance contract occurs and the uncertainty of the
amount and the timing of the resulting claim. By the very nature of an insurance contract, this risk is random
and therefore unpredictable.
For a portfolio of insurance contracts where the theory of probability is applied to pricing and provisioning, the
principal risk that the Group faces is that the actual claims and benefit payments will exceed the carrying
amount of insurance liabilities. This could occur because the frequency or severity of claims and benefits are
greater than estimated. Insurance events are random and the actual volume and cost of claims and benefits
will vary from year to year compared to the estimate established using statistical or actuarial techniques.
The above risk exposure is mitigated by the Group through the diversification across a large portfolio of
insurance contracts. The variability of risks is also reduced by careful selection and implementation of
underwriting strategy guidelines, as well as the use of reinsurance arrangements. Although the Group has
reinsurance arrangements, it is not relieved of its direct obligations to policyholders and is thus exposed to
credit risk with respect to ceded insurance, to the extent that any reinsurer is unable to meet the obligations
assumed under such reinsurance arrangements. For that reason, the creditworthiness of reinsurers is
evaluated by considering their solvency and credit rating.
Life insurance contracts
The main factors that could affect the overall frequency of claims are epidemics, major lifestyle changes and
natural disasters.
The underwriting strategy and risk assessment is designed to ensure that risks are well diversified in terms of
type of risk and level of insured benefits. This is largely achieved through the use of medical screening in order
to ensure that pricing takes account the current medical conditions and family medical history and through the
regular review of actual claims and product pricing. The Group has the right to decline policy applications, it
can impose additional charges and it has the right to reject the payment of fraudulent claims.
The most significant risks relating to accident and health insurance contracts result from lifestyle changes and
from climate and environmental changes. The risks are mitigated by the careful use of strategic selection and
risk-taking at the underwriting stage and by thorough investigation for possible fraudulent claims.
The Group uses an analysis based on its embedded value which provides a comprehensive framework for the
evaluation and management of risks faced, the understanding of earnings volatility and operational planning.
The table below shows the sensitivity of the embedded value to assumption changes that substantially affect
the results.
Change in embedded value
Change in interest rates +0,25%
Change in expenses +10%
Change in lapsation rates +10%
Change in mortality rates+10%
2016
€000
2015
€000
84
(2.482)
(690)
(6.519)
93
(2.639)
(953)
(6.711)
The variables above are not linear. In each sensitivity calculation for changes in key economic variables, all
other assumptions remain unchanged except when they are directly affected by the revised economic
conditions.
Changes to key non–economic variables do not incorporate management actions that could be taken to
mitigate effects, nor do they take account of consequential changes in policyholder behaviour. In each
sensitivity calculation all other assumptions are therefore unchanged.
Some of the sensitivity scenarios shown in respect of changes to both economic and non–economic variables
may have a consequential effect on the valuation basis when a product is valued on an active basis which is
updated to reflect current economic conditions.
168
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
46.
Risk management – Insurance risk (continued)
Life insurance contracts (continued)
While the magnitude of these sensitivities will, to a large extent, reflect the size of closing embedded value,
each variable will have a different impact on different components of the embedded value. In addition, other
factors such as the intrinsic cost and time value of options and guarantees, the proportion of investments
between equities and bonds and the type of business written, including for example, the extent of with–profit
business versus non–profit business and to the extent to which the latter is invested in matching assets, will
also have a significant impact on sensitivities.
General insurance contracts
The risk of a general insurance contract occurs from the uncertainty of the amount and time of presentation of
the claim. Therefore the level of risk is determined by the frequency of such claims, the severity and the
evolution of claims from one period to the next.
The main risks for the general insurance business arise from major catastrophic events like natural disasters.
These risks vary depending on location, type and nature. The variability of risks is mitigated by the
diversification of risk of loss to a large portfolio of insurance contracts, as a more diversified portfolio is less
likely to be affected by changes in any subset of the portfolio. The Group’s exposure to insurance risks from
general insurance contracts is also mitigated by the following measures: adherence to strict underwriting
policies, strict review of all claims occurring, immediate review and processing of claims to minimise the
possibility of negative developments in the future, and use of effective reinsurance arrangements in order to
minimise the impact of risks, especially for catastrophic events.
47.
Capital management
The primary objective of the Group’s capital management is to ensure compliance with the relevant regulatory
capital requirements and to maintain strong credit ratings and healthy capital adequacy ratios in order to
support its business and maximise shareholder value.
The capital adequacy regulations which govern the Group’s operations are established by the CBC/ECB.
The Group has complied with the minimum capital requirements (Pillar I and Pillar II) during 2016.
In addition, the Group’s overseas banking subsidiaries comply with the regulatory capital requirements of the
local regulators in the countries in which they operate. The insurance subsidiaries of the Group comply with the
requirements of the Superintendent of Insurance including the minimum solvency ratio. The regulated
investment firms of the Group comply with the regulatory capital requirements of the CySEC laws and
regulations.
The Pillar 3 Disclosures Report (unaudited) of the Group required with respect to the requirements of the
Capital Requirement Regulation (EU) No 575/2013 is published on the Group’s website www.bankofcyprus.com
(Investor Relations).
169
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
48.
Related party transactions
Loans and advances to members of the
Board of Directors and connected persons:
- less than 1% of the Group’s
net assets per director
Loans and advances to other key
management personnel and connected
persons
Total loans and advances as at 31
December
Loans and advances as at 31 December:
- members of the Board of Directors
and other key management personnel
- connected persons
Interest income for the year
Insurance premium income for the year
Deposits as at 31 December:
- members of the Board of Directors
and other key management personnel
- connected persons
Interest expense on deposits for the year
Accruals and other liabilities as at 31
December:
- balances with entity providing key
management personnel services
Staff costs, consultancy and restructuring
expenses
2016
2015
2016
Number of directors
€000
2015
€000
10
10
9
9
314
314
369
369
2.955
3.871
3.269
4.240
2.811
458
3.269
112
107
2.981
3.559
6.540
69
3.354
886
4.240
138
118
3.366
3.147
6.513
187
3.101
5.365
11.992
11.104
The above table does not include year-end balances for members of the Board of Directors and their connected
persons who resigned during the year.
Interest income and expense are disclosed for the period during which they were members of the Board of
Directors or served as key management personnel.
In addition to loans and advances, there were contingent liabilities and commitments in respect of members of
the Board of Directors and their connected persons, mainly in the form of documentary credits, guarantees and
commitments to lend, amounting to €61 thousand (2015: €135 thousand). As at 31 December 2016 and 2015,
none of the directors or their connected persons had total loans and advances which exceeded 1% of the net
assets of the Group per director. There were also contingent liabilities and commitments to other key
management personnel and their connected persons amounting to €385 thousand (2015: €856 thousand).
The total unsecured amount of the loans and advances and contingent liabilities and commitments to members
of the Board of Directors, key management personnel and other connected persons (using forced-sale values
for tangible collaterals and assigning no value to other types of collaterals) at 31 December 2016 amounted to
€635 thousand (2015: €1.094 thousand).
170
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
48.
Related party transactions (continued)
At 31 December 2016 the Group has an investment in Invesco Euro Short Term Bond Fund, in which Mr Wilbur
L. Ross Jr. was an executive Director. The fair value of the investment at 31 December 2016 amounts to
€4.047 thousand.
At 31 December 2016 the Group has a deposit of €4.614 thousand with Piraeus Bank SA, in which Mr Arne
Berggren is a non-executive Director. The Group has also provided certain indemnities to Piraeus Bank SA as
part of the disposal of kyprou Leasing SA in 2015 (Note 50.4.3).
There were no transactions during the years ended 31 December 2016 and 2015 with connected persons of the
current members of the Board of Directors or with any members who resigned during the two years.
Connected persons include spouses, minor children and companies in which directors/other key management
personnel, hold directly or indirectly, at least 20% of the voting shares in a general meeting, or act as
executive director or exercise control of the entities in any way.
Additional to members of the Board of Directors, related parties include entities providing key management
personnel services to the Group.
All transactions with members of the Board of Directors and their connected persons are made on normal
business terms as for comparable transactions with customers of a similar credit standing. A number of loans
and advances have been extended to other key management personnel and their connected persons on the
same terms as those applicable to the rest of the Group’s employees.
Fees and emoluments of members of the Board of Directors and other key management personnel
Director emoluments
Executives
Salaries and other short term benefits
Employer’s contributions
Retirement benefit plan costs
Non-executives
Fees
Total directors’ emoluments
2016
€000
2015
€000
1.848
110
168
2.126
861
2.987
1.061
66
128
1.255
822
2.077
Other key management personnel emoluments
Salaries and other short term benefits
3.144
3.328
Termination benefits
Employer’s contributions
Retirement benefit plan costs
Total other key management personnel emoluments
Total
397
190
158
3.889
6.876
-
164
178
3.670
5.747
Fees and benefits are included for the period that they serve as members of the Board of Directors.
The termination benefits relate to compensation paid to members of the Executive Committee who left the
Group under the voluntary exit plan.
171
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
48.
Related party transactions (continued)
Fees and emoluments of members of the Board of Directors and other key management personnel
(continued)
Executive Directors
The salaries and other short term benefits of the Executive Directors are analysed as follows:
John Patrick Hourican (Chief Executive Officer)
Christodoulos Patsalides (Deputy Chief Executive Officer and
Chief Operating Officer)
2016
€000
2015
€000
1.652
196
1.848
910
151
1.061
The retirement benefit plan costs for 2016 amounting to €168 thousand (2015: €128 thousand) relate to:
Mr John Patrick Hourican €150 thousand (2015: €110 thousand) and Dr Christodoulos Patsalides €18 thousand
(2015: €18 thousand).
Non-executive Directors
Josef Ackermann
Wilbur L. Ross Jr.
Vladimir Strzhalkovskiy
Arne Berggren
Maksim Goldman
Michalis Spanos
Ioannis Zographakis
Marios Kalochoritis
Michael Heger
2016
€000
2015
€000
150
120
-
115
120
100
115
90
51
861
150
120
21
107
116
100
115
93
-
822
The fees of the non-executive Directors include fees as members of the Board of Directors of the Company and
its subsidiaries, as well as of committees of the Board of Directors.
Other key management personnel
The other key management personnel emoluments include the remuneration of the members of the Executive
Committee since the date of their appointment to the Committee and other members of the management team
who report directly to the Chief Executive Officer or to the Deputy Chief Executive Officer and Chief Operating
Officer.
172
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
49.
Group companies
The main subsidiary companies and branches included in the consolidated financial statements of the Group,
their country of incorporation, their activities and the percentage held by the Company (directly or indirectly) as
at 31 December 2016 are:
Company
Country
Activities
Bank of Cyprus Public Company Ltd
Cyprus
Commercial bank
The Cyprus Investment and Securities
Corporation Ltd (CISCO)
Cyprus
Investment banking,
asset management and brokerage
General Insurance of Cyprus Ltd
Cyprus
General insurance
EuroLife Ltd
Kermia Ltd
Cyprus
Life insurance
Cyprus
Property trading and development
Kermia Properties & Investments Ltd
Cyprus
Property trading and development
Cytrustees Investment Public Company Ltd
Cyprus
Closed-end investment company
Finerose Properties Ltd
Cyprus
Financing services
LCP Holdings and Investments Public Ltd
(formerly Laiki Capital Public Co Ltd)
JCC Payment Systems Ltd
Cyprus
Holding company
Cyprus
Card processing transaction
services
CLR Investment Fund Public Ltd
Cyprus
Investment company
Auction Yard Ltd
Cyprus
Auction company
BOC Secretarial Company Ltd
Cyprus
Secretarial services
S.Z. Eliades Leisure Ltd
Bank of Cyprus Public Company Ltd (branch
of the Company)
Cyprus
Greece
Land development and operation
of a golf resort
Administration of guarantees and
holding of real estate properties
Kyprou Zois (branch of EuroLife Ltd)
Greece
Life insurance
Kyprou Asfalistiki (branch of General
Insurance of Cyprus Ltd)
Bank of Cyprus UK Ltd
BOC Financial Services Ltd
Bank of Cyprus Romania (branch of the
Company)
Greece
General insurance
United
Kingdom
United
Kingdom
Commercial bank
Financial advisory services
Romania
Commercial bank
Cyprus Leasing S.A. (formerly Cyprus
Leasing Romania IFN SA)
Romania
MC Investment Assets Management LLC
Russia
Collection of the existing portfolio
of receivables, including third
party collections
Problem asset management
company
Kyprou Finance (NL) B.V.
Netherlands Financing services
Fortuna Astrum Ltd
Serbia
Problem asset management
company
Percentage
holding
(%)
n/a
100
100
100
100
100
54
100
67
75
20
100
100
70
n/a
n/a
n/a
100
100
n/a
100
100
100
100
173
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
49.
Group companies (continued)
In addition to the above companies, at 31 December 2016 the Company had 100% shareholding in the
companies listed below whose activity is the ownership and management of immovable property:
Cyprus: Timeland Properties Ltd, Cobhan Properties Ltd, Bramwell Properties Ltd, Birkdale Properties Ltd,
Newington Properties Ltd, Innerwick Properties Ltd, Ramendi Properties Ltd, Ligisimo Properties Ltd, Moonland
Properties Ltd, Polkima Properties Ltd, Nalmosa Properties Ltd, Smooland Properties Ltd, Emovera Properties
Ltd, Estaga Properties Ltd, Skellom Properties Ltd, Blodar Properties Ltd, Spaceglowing Properties Ltd,
Threefield Properties Ltd, Lepidoland Properties Ltd, Ecunaland Properties Ltd, Tebane Properties Ltd, Cranmer
Properties Ltd, Vieman Ltd, Les Coraux Estates Ltd, Natakon Company Ltd, Oceania Ltd, Dominion Industries
Ltd, Ledra Estate Ltd, Eurolife Properties Ltd, Laiki Lefkothea Center Ltd, Labancor Ltd, Steparco Ltd, Joberco
Ltd, Zecomex Ltd, Domita Estates Ltd, Memdes Estates Ltd, Pamaco Platres Complex Ltd, Vameron Properties
Ltd, Thryan Properties Ltd, Otoba Properties Ltd, Edoric Properties Ltd, Canosa Properties Ltd, Silen Properties
Ltd, Kernland Properties Ltd, Unduma Properties Ltd, Danoma Properties Ltd, Kimrar Properties Ltd, Jobelis
Properties Ltd, Metin Properties Ltd, Pekiro Properties Ltd, Melsolia Properties Ltd, Nimoland Properties Ltd,
Lozzaria Properties Ltd, Koralmon Properties Ltd, Petrassimo Properties Ltd, Kedonian Properties Ltd, Lasteno
Properties Ltd, Armozio Properties Ltd, Spacous Properties Ltd, Calinora Properties Ltd, Marcozaco Properties
Ltd, Soluto Properties Ltd, Solomaco Properties Ltd, Linaland Properties Ltd, Andaz Properties Ltd, Unital
Properties Ltd, Neraland Properties Ltd, Canemia Properties Ltd, Wingstreet Properties Ltd, Nolory Properties
Ltd, Lynoco Properties Ltd, Renalandia Properties Ltd, Fitrus Properties Ltd, Lisbo Properties Ltd, Mantinec
Properties Ltd, Syniga Properties Ltd, Colar Properties Ltd, Irisa Properties Ltd, Valiro Properties Ltd, Avolo
Properties Ltd, Bracando Properties Ltd, Provezaco Properties Ltd, Hillbay Properties Ltd, Jungax Properties Ltd,
Ofraco Properties Ltd, Forenaco Properties Ltd, Vidalaco Properties Ltd, Jemina Properties Ltd, Hovita Properties
Ltd, Flitous Properties Ltd, Badrul Properties Ltd, Belaland Properties Ltd, Belzeco Properties Ltd, Bothwick
Properties Ltd, Fireford Properties Ltd, Citlali Properties Ltd, Endar Properties Ltd, Astromeria Properties Ltd,
Orzo Properties Ltd, Basiga Properties Ltd, Regetona Properties Ltd, Arcandello Properties Ltd, Sylvesta
Properties Ltd, Camela Properties Ltd, Nerofarm Properties Ltd, Subworld Properties Ltd, Jongeling Properties
Ltd, Introserve Properties Ltd, Alomco Properties Ltd, Cereas Properties Ltd, Fareland Properties Ltd, Landeed
Properties Ltd, Sindelaco Properties Ltd, Barosca Properties Ltd, Fogland Properties Ltd, Tebasco Properties Ltd,
Dolapo Properties Ltd, Homirova Properties Ltd, Nabela Properties Ltd, Valecross Properties Ltd, Altco Properties
Ltd, Forsban Properties Ltd, Marisaco Properties Ltd, Olivero Properties Ltd, Cavadino Properties Ltd, Jaselo
Properties Ltd, Elosa Properties Ltd, Garveno Properties Ltd, Flona Properties Ltd, Toreva Properties Ltd,
Resoma Properties Ltd, Singleserve Properties Ltd, Consento Properties Ltd, Mostero Properties Ltd, Helal
Properties Ltd, Yossi Properties Ltd, Gozala Properties Ltd, Molla Properties Ltd, Lezanco Properties Ltd, Pendalo
Properties Ltd, Frontyard Properties Ltd, Bascot Properties Ltd, Bonsova Properties Ltd, Nasebia Properties Ltd,
Vanemar Properties Ltd, Garmozy Properties Ltd, Orasmo Properties Ltd, Palmco Properties Ltd, Crolandia
Properties Ltd, Thermano Properties Ltd, Indene Properties Ltd, Ingane Properties Ltd, Venicous Properties Ltd,
Lasmane Properties Ltd, Lorman Properties Ltd, Caruzoco Properties Ltd, Consoly Properties Ltd, Eracor
Properties Ltd, Alomnia Properties Ltd, Rulemon Properties Ltd, Thelemic Properties Ltd, Maledico Properties
Ltd, Dentorio Properties Ltd, Valioco Properties Ltd, Bascone Properties Ltd, Balisimo Properties Ltd, Artozaco
Properties Ltd, Elizano Properties Ltd and K. Athienitis Kalamon Ltd.
Romania: Otherland Properties Dorobanti SRL, Pittsburg Properties SRL, Battersee Real Estate SRL, Trecoda
Real Estate SRL, Green Hills Properties SRL, Bocaland Properties SRL, Buchuland Properties SRL, Commonland
Properties SRL, Romaland Properties SRL, Janoland Properties SRL, Blindingqueen Properties SRL, Fledgego
Properties SRL, Hotel New Montana SRL, Loneland Properties SRL, Frozenport Properties SRL, Imoreth
Properties SRL, Inroda Properties SRL, Melgred Properties SRL, Tantora Properties SRL, Zunimar Properties
SRL, Allioma Properties SRL and Nikaba Properties SRL.
Further, at 31 December 2016 the Company had 100% shareholding in Iperi Properties Ltd, Obafemi Holdings
Ltd, Stamoland Properties Ltd and Gosman Properties Ltd whose main activities are the holding of shares and
other investments and they are registered in Cyprus.
174
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
49.
Group companies (continued)
At 31 December 2016 the Company had 100% shareholding in the companies listed below which are reserved
to accept property:
Cyprus: Belvesi Properties Ltd, Warmbaths Properties Ltd, Tavoni Properties Ltd, Tezia Properties Ltd, Carnota
Properties Ltd, Demoro Properties Ltd, Primaco Properties Ltd, Amary Properties Ltd, Hamura Properties Ltd,
Gileco Properties Ltd, Meriaco Properties Ltd, Venetolio Properties Ltd, Flymoon Properties Ltd, Senadaco
Properties Ltd, Desogus Properties Ltd, Intelamon Properties Ltd, Weinar Properties Ltd, Holstone Properties
Ltd, Balasec Properties Ltd, Nouralia Properties Ltd, Mazima Properties Ltd, Diafor Properties Ltd, Prosilia
Properties Ltd, Fantasio Properties Ltd, Lancast Properties Ltd, Alepar Properties Ltd, Nelipo Properties Ltd,
Allodica Properties Ltd, Resocot Properties Ltd, Jomento Properties Ltd, Soblano Properties Ltd, Talamon
Properties Ltd, Unoplan Properties Ltd, Paradexia Properties Ltd, Rosalica Properties Ltd, Zandexo Properties
Ltd, Calandomo Properties Ltd, Paramina Properties Ltd, Cramonco Properties Ltd, Bigwaive Properties Ltd,
Tasabo Properties Ltd, Coeval Properties Ltd and Bendolio Properties Ltd.
Romania: Mirodi Properties SRL, Nallora Properties SRL and Selilar Properties SRL.
In addition, the Company holds 100% of the following intermediate holding companies:
Cyprus: Otherland Properties Ltd, Pittsburg Properties Ltd, Battersee Properties Ltd, Trecoda Properties Ltd,
Bonayia Properties Ltd, Bocaland Properties Ltd, Buchuland Properties Ltd, Commonland Properties Ltd,
Romaland Properties Ltd, BC Romanoland Properties Ltd, Blindingqueen Properties Ltd, Fledgego Properties Ltd,
Janoland Properties Ltd, Threerich Properties Ltd, Loneland Properties Ltd, Unknownplan Properties Ltd,
Frozenport Properties Ltd, Imoreth Properties Ltd, Inroda Properties Ltd, Melgred Properties Ltd, Tantora
Properties Ltd, Zunimar Properties Ltd, Selilar Properties Ltd, Mirodi Properties Ltd, Nallora Properties Ltd,
Nikaba Properties Ltd, Allioma Properties Ltd, Hydrobius Ltd and Landanafield Properties Ltd.
The Group also holds 100% of the following companies which are inactive:
Cyprus: Laiki Bank (Nominees) Ltd, Fairford Properties Ltd, Thames Properties Ltd, Paneuropean Ltd, Philiki
Ltd, Cyprialife Ltd, Imperial Life Assurance Ltd, Philiki Management Services Ltd, Nelcon Transport Co. Ltd,
Ilera Properties Ltd, Weinco Properties Ltd, Calomland Properties Ltd, Lameland Properties Ltd, BOC Asset
Management Ltd and Pariza Properties Ltd.
Greece: Kyprou Commercial SA and Kyprou Properties SA.
All Group companies are accounted for as subsidiaries using the full consolidation method.
Termination of the leasing activities of Cyprus Leasing Romania IFN SA
On 26 September 2016 the shareholders of Cyprus Leasing Romania IFN SA decided to:
deregister the company from the Registry of non-banking financial institutions held by the National Bank of
Romania,
terminate the leasing and crediting activity of the company, and
change the name of the company to Cyprus Leasing S.A.
As a consequence of the above, the main activity of the company is now the collection of the existing portfolio
of receivables, including third party collections.
The matter was approved by the National Bank of Romania on 21 November 2016.
Change in the control holding of MC Investment Assets Management LLC
In the context of the disposal of the majority of the Russian operations in September 2015, the Group
increased its controlling interest in MC Investment Assets Management LLC to 100% from 80% during 2015.
This transaction has been reflected as an equity transaction from non-controlling interests to the owners of the
Company.
Control over CLR Investment Fund Public Ltd (CLR) without substantial shareholding
The Group considers that it exercises control over CLR through control of the members of the Board of Directors
and is exposed to variable returns through its holding.
175
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
49.
Group companies (continued)
Dissolution and disposal of subsidiaries
As at 31 December 2016, the following subsidiaries were in the process of dissolution or in the process of being
struck off: Samarinda Navigation Co Ltd, Kyprou Securities SA, BOC Ventures Ltd, Tefkros Investments Ltd,
Salecom Ltd, Longtail Properties Ltd, Diners Club (Cyprus) Ltd, Leasing Finance LLC, Corner LLC, Omiks Finance
LLC, Unknownplan Properties SRL and Bank of Cyprus (Channel Islands) Ltd.
Tefkros Investments (CI) Ltd, Bank of Cyprus Mutual Funds Ltd, Laiki EDAK Ltd, Limestone Holdings Ltd and
Turnmill Properties Ltd were either dissolved or striken off during the year ended 31 December 2016. Mainport
Properties Ltd, Besadoco Properties Ltd, Odaina Properties Ltd, Icecastle Properties Ltd, Gilfront Properties Ltd,
Glodas Properties Ltd, Denmor Properties Ltd, Benely Properties Ltd, Arcozil Properties Ltd, Varony Properties
Ltd, Coramono Properties Ltd, Galozy Properties Ltd, Primantela Properties Ltd, Browneye Properties Ltd, Givolo
Properties Ltd, Kandoramo Properties Ltd and Cronaland Properties Ltd were disposed of during the year ended
31 December 2016 as part of the Company’s strategy to dispose of repossessed properties.
As part of the Group’s strategy of focusing on its core businesses and markets, the Group decided the closure
of the operations of Bank of Cyprus (Channel Islands) Ltd and to relocate its business to other Group locations.
The company’s licenses in Guernsey for banking and investment business have been surrendered, and the
company entered the process of liquidation in December 2016.
In accordance with the Group’s strategy to exit from overseas non-core operations, the operations of the Bank
of Cyprus branch in Romania are expected to be terminated during 2017, subject to regulatory approvals. The
remaining assets and liabilities of the branch will be transferred to other entities of the Group.
50.
Acquisitions and disposals
50.1
Acquisitions during 2016
50.1.1 Acquisition of S.Z. Eliades Leisure Ltd
In the context of its loan restructuring activities, the Group acquired on 15 June 2016 a 70% interest in the
share capital of S.Z. Eliades Leisure Ltd in exchange for the settlement of borrowings due from it of a total
gross amount of €52.335 thousand. S.Z. Eliades Leisure Ltd operates in land development and the operation of
a golf resort in Cyprus. The fair value of the consideration for the acquisition of the 70% share in S.Z. Eliades
Leisure Ltd amounts to €43.758 thousand. The acquisition did not include any cash consideration. The Group
considers that it controls S.Z. Eliades Leisure Ltd.
The non-controlling interest is measured at the proportionate share of the identifiable net assets acquired.
The fair value of assets and liabilities of S.Z. Eliades Leisure Ltd at the date of acquisition are presented below:
Assets
Property and equipment
Stock of property
Prepayments, accrued income and other assets
Liabilities
Deferred tax liability
Accruals, deferred income and other liabilities
Net identifiable assets acquired
Less non-controlling interest
Net assets acquired
No cash and cash equivalents were acquired.
176
€000
20.308
48.632
580
69.520
3.807
3.202
7.009
62.511
(18.753)
43.758
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
50.
Acquisitions and disposals (continued)
50.1
Acquisitions during 2016 (continued)
50.1.2 Acquisition of K. Athienitis Kalamon Ltd
In the context of the loan restructuring activities of the parent company of K. Athienitis Kalamon Ltd, the Group
acquired on 23 December 2016 a 100% interest in the share capital of K. Athientitis Kalamon Ltd. K. Athienitis
Kalamon Ltd operates in the development and rental of immovable property. The fair value of the consideration
for the acquisition of the 100% share in K. Athienitis Kalamon Ltd amounts to €4.204 thousand, which is also
the cash consideration paid for the acquisition of the company. Part of the consideration paid was used to
reduce the outstanding loan facilities of the parent company of K. Athienitis Kalamon Ltd. The Group considers
that it controls K. Athienitis Kalamon Ltd.
The fair value of assets and liabilities of K. Athienitis Kalamon Ltd at the date of acquisition are presented
below:
Assets
Stock of property
Prepayments, accrued income and other assets
Liabilities
Deposits by banks
Accruals, deferred income and other liabilities
Net identifiable assets acquired
€000
27.000
2
27.002
22.198
600
22.798
4.204
No cash and cash equivalents were acquired.
50.2
Disposal during 2016
50.2.1 Disposal of Kermia Hotels Ltd and adjacent land
In June 2016, the Group completed the sale of 100% of its subsidiary Kermia Hotels Ltd and adjacent land
which was classified as a disposal group held for sale as at 31 December 2015.
The carrying value of assets and liabilities disposed of as at the date of their disposal are presented below:
Assets
Property and equipment
Prepayments, accrued income and other assets
Cash and cash equivalent
Liabilities
Deferred tax liability
Accruals, deferred income and other liabilities
Total net assets sold
€000
27.130
678
1.132
28.940
3.677
1.308
4.985
23.955
The cash consideration received amounts to €26.500 thousand and the disposal resulted in a gain of €2.545
thousand (Note 13).
177
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
50.
Acquisitions and disposals (continued)
50.3
Acquisition during 2015
50.3.1 Acquisition of shares of Laiki Financial Services Ltd (LFS)
On 30 January 2015, the Annual General Meeting of the shareholders of LFS approved the disposal of the
shares of LFS to the Company for a consideration of €3 million. Previously, LFS was 100% owned by LCP
Holdings and Investments Public Ltd (formerly Laiki Capital Public Co Ltd), a subsidiary of the Company. As a
result, the increase of the Company’s holding from 67% to 100% in LFS is accounted for as an equity
transaction.
In November 2015, CISCO, a subsidiary of the Company issued 1.000 thousand shares of a nominal value
€1,71 each, at a total premium of €534 thousand, for the transfer of the Company’s investment in LFS to
CISCO. Following the transfer of shares, LFS was dissolved, without liquidation, under the Merger and
Reconstruction Scheme and its net assets were transferred to CISCO in accordance with a court order.
50.4
Disposals during 2015
50.4.1 Disposal of the majority of the Group’s Russian operations
On 25 September 2015, the Group completed the disposal of the majority of its Russian operations, comprising
(i) its 100% holding in its subsidiary, BOC Russia (Holdings) Ltd, its 80% holding in its Russian banking
subsidiary, CB Uniastrum Bank LLC, and its 80% holding in its Russian leasing subsidiary, Leasing Company
Uniastrum Leasing LLC and (ii) certain other Russian loan exposures.
The transaction resulted in a loss on disposal of €23.032 thousand, comprising a loss of €28.237 thousand
representing the recycling of the foreign currency translation reserve from other comprehensive income to the
consolidated income statement and a profit of €5.205 thousand against the net book value of the assets as at
the disposal date. As part of the sales agreement, the parties agreed an asset swap arrangement which
involved the exchange of certain assets between them that resulted in a €41.849 thousand receivable for the
Group on the date of the transaction.
Following the disposal of the Group’s Russian operations, the remaining net exposure as at 31 December 2016
in Russia is €44.118 thousand, comprising primarily of customer loans.
The results of the Group’s Russian operations from 1 January 2015 until the date of their disposal are presented
in Note 6 of these consolidated financial statements and are classified as discontinued operations.
178
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
50.
Acquisitions and disposals (continued)
50.4
Disposals during 2015 (continued)
50.4.1 Disposal of the majority of the Group’s Russian operations (continued)
The assets and liabilities of the Group’s Russian operations disposed of as at the date of their disposal are
presented below:
Assets
Cash and balances with central banks
Loans and advances to banks
Investments
Loans and advances to customers
Prepayments, accrued income and other assets
Liabilities
Deposits by banks
Customer deposits
Debt securities in issue
Subordinated loan stock
Accruals, deferred income and other liabilities
Net liabilities
The sale consideration is analysed below:
Net cash consideration received, of which:
- Outflow of cash and cash equivalents
€000
64.291
26.269
12.726
343.909
41.950
489.145
24.422
494.274
139
2.673
4.976
526.484
(37.339)
€000
2.896
(3.945)
The net cash flows of the Russian operations from 1 January 2015 until the date of the disposal are as follows:
Operating
Investing
Financing
Net cash outflow for the period
50.4.2 Disposal of Aphrodite group
2015
€000
(34.108)
(15.927)
(1.733)
(51.768)
In September 2015, the Group completed the sale of shares representing a 65% shareholding in the Aphrodite
Hills Resort Ltd and Aphrodite Hills (Lakkos tou Frangou) Ltd, for the amount of €500 thousand. Following the
sale, the Group retained a 10% minority equity stake in the Aphrodite group. The transaction also involved the
restructuring of the debt owed by these companies to the Group.
50.4.3 Disposal of Kyprou Leasing SA
Following the disposal of the Group’s leasing operations in Greece to Piraeus Bank SA through a Decree issued
on 26 March 2013, the Group completed the transfer of the legal ownership of its subsidiary, Kyprou Leasing
SA to Piraeus Bank SA during the first quarter of 2015.
179
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
51.
Investments in associates and joint ventures
Carrying value of the investments in associates and joint ventures
CNP Cyprus Insurance Holdings Ltd
Interfund Investments Plc
Aris Capital Management LLC
Rosequeens Properties Limited
Rosequeens Properties SRL
Tsiros (Agios Tychon) Ltd
M.S. (Skyra) Vassas Ltd
D.J. Karapatakis & Sons Limited
Rodhagate Entertainment Ltd
Fairways Automotive Holdings Ltd
Share of profit/(loss) from associates and joint ventures
CNP Cyprus Insurance Holdings Ltd
Interfund Investments Plc
Investments in associates
2016
€000
2015
€000
107.172
2.167
-
-
-
-
-
-
-
-
109.339
105.540
2.201
-
-
-
12
-
-
-
-
107.753
2016
€000
2015
€000
8.228
(34)
8.194
6.709
(786)
5.923
CNP Cyprus Insurance Holdings Ltd
As part of the acquisition of certain operations of Laiki Bank in 2013, 49,9% of CNP Cyprus Insurance Holdings
Ltd, the parent company of a group of insurance companies in Cyprus and Greece, was acquired by the Group.
The main financial highlights of the associate are as follows:
Total assets
Liabilities
Net assets, including value of in-force business
2016
€000
696.005
(481.234)
214.771
2015
€000
676.915
(465.416)
211.499
CNP Cyprus Insurance Holdings Ltd holds deposits with companies within the Group amounting to €10.310
thousand. The transactions between CNP Cyprus Insurance Holdings Ltd and the Group are presented in the
table below:
Dividend income
Interest expense paid by the Group
Other expenses paid by the Group
Other income received by the Group
2016
€000
2015
€000
6.621
197
92
-
7.580
239
239
2
180
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
51.
Investments in associates and joint ventures (continued)
Investments in associates (continued)
Interfund Investments Plc
The Group has a 23,12% interest in Interfund Investments Plc, which is a closed-end investment company in
Cyprus, listed on the CSE. The market value of the investment is €1.399 thousand (2015: €1.372 thousand).
During the years 2016 and 2015 there were no material transactions between the Group and the associate.
Rosequeens Properties Limited and Rosequeens Properties SRL
The Group effectively owns 33% of the share capital of Rosequeens Properties SRL which is incorporated in
Romania and owns a shopping mall in Romania. The shareholding was acquired after the Company took part in
a public auction for the settlement of customer loan balances amounting to approximately €21 million. The
Group’s share of net assets of the associate at 31 December 2016 and 2015 had nil accounting value as the net
assets of the associate had a negative balance.
Aris Capital Management LLC
The Group’s holding in Aris Capital Management LLC of 30% was transferred to the Group following the
acquisition of certain operations of Laiki Bank. During previous years, the Group has recognised an impairment
loss of €2.078 thousand. During the years 2016 and 2015, there were no material balances or transactions
between the Group and the associate.
M.S. (Skyra) Vassas Ltd
During the year, in the context of its loan restructuring activities, the Group acquired a 15% interest in the
share capital of M.S. (Skyra) Vassas Ltd. M.S. (Skyra) Vassas Ltd is the parent company of a group of
companies (Skyra Vassas group) with operations in the production, processing and distribution of aggregates
(crushed stone and sand) and provision of other construction materials, and services based on core products
such as ready-mix concrete, asphalt and packing of aggregates. The Group considers that it exercises
significant influence over the Skyra Vassas group as the Group has the power to have representation to the
Board of Directors and to vote for matters relating to the relevant activities of the business. The investment is
considered to be fully impaired and its value is restricted to zero.
D.J. Karapatakis & Sons Limited and Rodhagate Entertainment Ltd
During the year, in the context of its loan restructuring activities, the Group acquired a 7,5% interest in the
share capital of D.J. Karapatakis & Sons Limited and Rodhagate Entertainment Ltd, operating in leisure,
tourism, film and entertainment industries in Cyprus. The Group considers that it exercises significant influence
over the two companies as the Group has the power to have representation to the Board of Directors and to
vote for matters relating to the relevant activities of the business. The investments are considered to be fully
impaired and their value is restricted to zero.
Fairways Automotive Holdings Ltd
During the year, in the context of its loan restructuring activities, the Group acquired a 45% interest in the
share capital of Fairways Automotive Holdings Ltd. Fairways Automotive Holdings Ltd is the parent company of
Fairways Ltd operating in the import and trading of motor vehicles and spare parts. The Group considers that it
exercises significant influence over the company. The investment is considered to be fully impaired and its
value is restricted to zero.
Investment in joint venture
Tsiros (Agios Tychon) Ltd
The Group holds a 50% shareholding in Tsiros (Agios Tychon) Ltd. The shareholder agreement with the other
shareholder of Tsiros (Agios Tychon) Ltd stipulates a number of matters which require consent by both
shareholders, therefore the Group considers that it jointly controls the company. The carrying value of Tsiros
(Ayios Tychon) Ltd is restricted to zero.
181
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
52.
Country by country reporting
Article 89 of CRD IV requires banks to disclose on a consolidated basis the following information for all countries where the Group operates. The table below
provides information on the following items of the Group for year 2016:
Country
Cyprus
Russia
United Kingdom
Romania
Greece
Channel Islands
Netherlands
Total
Total operating
income/(expense)
Average
number of
employees
€000
1.010.517
7.547
(4.180)
8.116
2.650
771
(65)
4.070
5
218
35
7
1
-
1.025.356
4.336
Profit/(loss)
before tax
€000
Accounting tax
expense/(income)
on profit/(loss)
€000
Corporation tax
paid/(refunded)
€000
Public
subsidies
received
€000
149.065
(5.226)
(49.008)
(4.529)
(3.635)
(855)
(196)
85.616
10.905
13
1.357
84
(1.088)
-
457
11.728
3.406
13
1.128
133
(5.151)
-
824
353
-
-
-
-
-
-
-
-
The activities of Group companies by geographical area are disclosed in Note 49.
Total operating income: comprises net interest income, net fee and commission income, net foreign exchange gains, net gains on financial instrument transactions,
insurance income net of claims and commissions, gains/(losses) from revaluation and disposal of investment properties, gains/(losses) on disposal of stock of
property and other income.
Number of employees: the number of employees has been calculated as the average number of employees, on a quarterly basis, who were employed by the Group
during the year ended 31 December 2016.
Profit/(loss) before tax: profit/(loss) before tax represents profits/(losses) after the deduction of inter-segment revenues/(expenses).
Accounting tax expense/(income) on profit/(loss): includes corporation tax and Cyprus special defence contribution. Deferred tax charge for the year is excluded
from the above.
Corporation tax paid: includes actual payments made during 2016 for corporation tax (including insurance premium taxes) and Cyprus special defence
contribution.
182
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
53.
Events after the reporting date
53.1
New holding company and listing on the London Stock Exchange
Bank of Cyprus Holdings Public Limited Company was incorporated in the Republic of Ireland on 11 July 2016
for the purposes of the Group’s listing on the London Stock Exchange (LSE). The Republic of Ireland was
considered to be the most suitable jurisdiction as it is a FTSE eligible Eurozone country, has a common law
legal system similar to that of Cyprus and is a commonly adopted jurisdiction for companies wishing to apply
for listing on the LSE. The Company’s headquarters, management and operations remain in Cyprus. Bank of
Cyprus Holdings Public Limited Company is tax resident in Cyprus.
The Extraordinary General Meeting (EGM) of the shareholders of the Company held on 13 December 2016
approved the scheme of arrangement between the Company, Bank of Cyprus Holdings Public Limited Company
and the shareholders of the Company. The scheme of arrangement introduces Bank of Cyprus Holdings Public
Limited Company as the new holding company of the Group. Additionally the EGM authorised the directors of
the Company to take all actions necessary or appropriate to carry the scheme of arrangement into effect.
The EGM also approved:
(i)
the reduction in the issued share capital of the Company from €892.294.453,30 divided into
8.922.944.533 ordinary shares of a nominal value of €0,10 each to nil by cancelling all the shares
comprising the issued share capital of the Company (the Existing Shares) resulting in the creation of a
capital reduction reserve in the accounts of the Company, equal to the aggregate nominal value of the
Existing Shares so cancelled, and which shall be retained as a non-distributable capital reserve in
accordance with the provisions of subsection (e) of section 64 of the Companies Law, Cap. 113 (the
‘Reduction of Capital’);
(ii) the increase in the authorised share capital of the Company to €4.767.759.272,00 divided into
47.677.592.720 ordinary shares with a nominal value of €0,10 each through the creation of 8.922.944.533
new but unissued ordinary shares with a nominal value of €0,10 each, each of which shall have the same
rights and shall rank pari passu with the existing ordinary shares of the Company;
(iii) to apply the reserve arising in the books of account of the Company as a result of the cancellation of the
Existing Shares in paying up in full at par 8.922.944.533 new ordinary shares with a nominal value of
€0,10 each in the capital of the Company, which shall be issued and allotted, credited as fully paid, to Bank
of Cyprus Holdings Public Limited Company or its nominee(s) in accordance with the Scheme; and
(iv) the authorization of the directors of the Company to give effect to this special resolution.
The scheme of arrangement was sanctioned by the District Court of Nicosia on 21 December 2016 and the
Existing Shares of the Company were suspended from trading on the CSE and ATHEX with effect from and
including 10 January 2017.
Following the submission of the Court Order to the Registrar of Companies and the Registration, by the latter,
of the reduction of capital, the scheme of arrangement became effective on 18 January 2017. As a result, all of
the shares comprising the issued share capital of the Company were cancelled and the Company issued and
allotted 8.922.944.533 new ordinary shares of nominal value €0,10 each, credited as fully paid to Bank of
Cyprus Holdings Public Limited Company; and Bank of Cyprus Holdings Public Limited Company issued and
allotted New Shares and procured the issue of Depositary Interests representing New Shares, in accordance
with the terms of the scheme of arrangement. Each one New Share or one Depository Interest represents one
New Share for each individual holding of 20 Existing Shares.
On 19 January 2017 the total issued share capital of 446.199.933 ordinary shares of nominal value €0,10 each
of Bank of Cyprus Holdings Public Limited Company was admitted to the standard listing segment of the official
list of the United Kingdom’s Financial Conduct Authority, to trading on the Main Market for listed securities of
the LSE, under the ticker symbol “BOCH”, to listing on the CSE and to trading on the Main Market of the CSE
under the ticker symbol “BOCH/ΤΡΚΗ”, with ISIN IE00BD5B1Y92.
53.2
Share - based payments – share options
The Long Term Incentive Plan approved by the shareholders at the annual general meeting on 24 November
2015 as described in Note 34, was replaced on 18 January 2017 by the Share Option Plan implemented by
Bank of Cyprus Holdings Public Limited Company following the introduction of Bank of Cyprus Holdings Public
Limited Company as the new holding company of the Group. The Share Option plan is identical to the Long
Term Incentive Plan except that the number of shares in Bank of Cyprus Holdings Public Limited Company to be
issued pursuant to an exercise of options under the Share Option Plan should not exceed 8.922.945 ordinary
shares of a nominal value of €0,10 each and the exercise price was set at €5,00 per share. The exercise date
was also extended from 3 years to between 4-10 years after the grant date.
183
BANK OF CYPRUS GROUP Annual Financial Report 2016
Notes to the Consolidated Financial Statements
53.
Events after the reporting date (continued)
53.3
Full repayment of ELA
ELA was fully repaid on 5 January 2017. All ELA collateralised loans have subsequently been released, but ELA
pledged properties remain pledged as of 27 March 2017.
53.4
Issue of Tier 2 Capital
In January 2017, the Company issued a €250 million unsecured and subordinated Tier 2 Capital Note (Note)
under the Company’s EMTN Programme. The Note was priced at par with a coupon of 9,25%. The Note
matures on 19 January 2027. The Company has the option to redeem the Note early on 19 January 2022,
subject to applicable regulatory consents.
53.5
Funding through the new series of TLTRO II
In March 2017 the Company has borrowed an additional amount of €230 million through the new series of
TLTRO II, to be received on 29 March 2017.
184
Ernst & Young Cyprus Ltd
Jean Nouvel Tower
6 Stasinou Avenue
P.O.Box 21656
1511 Nicosia, Cyprus
Tel: +357 22209999
Fax: +357 22209998
ey.com/cy
Independent Auditor’s Report
To the Members of Bank of Cyprus Public Company Ltd
Report on the Consolidated Financial Statements
Opinion
We have audited the consolidated financial statements of Bank of Cyprus Public Company Ltd
(the ‘Company’) and its subsidiaries (together with the Company the ‘Group’) on pages 16 to
184, which comprise the consolidated balance sheet as at 31 December 2016, and the
consolidated income statement, the consolidated statement of comprehensive income, the
consolidated statement of changes in equity and the consolidated statement of cash flows for
the year then ended, and the notes to the consolidated financial statements, including a
summary of significant accounting policies.
In our opinion, the consolidated financial statements give a true and fair view of the financial
position of the Group as at 31 December 2016, and of its financial performance and its cash
flows for the year then ended in accordance with International Financial Reporting Standards
as adopted by the European Union and the requirements of the Cyprus Companies Law, Cap.
113.
Basis of opinion
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our
responsibilities under those standards are further described in the Auditor’s Responsibilities
for the Audit of the Consolidated Financial Statements section of our report. We are
independent of the Group in accordance with the International Ethics Standards Board for
Accountants’ Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled
our other ethical responsibilities in accordance with the IESBA Code. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Material uncertainty related to going concern
We draw your attention to note 3 “Going concern” to the consolidated financial statements
which discusses management’s assessment as to the ability of the Group to continue as a
going concern and the fact that the Company is currently not in compliance with its regulatory
liquidity requirements with respect to its operations in Cyprus and the Group is currently not
in compliance with its regulatory liquidity requirements with respect to the Liquidity Coverage
Ratio (LCR), which indicates the existence of a material uncertainty of the Group’s ability to
continue as a going concern. Our opinion is not modified in respect of this matter.
185
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the consolidated financial statements of the current period. In
addition to the matter described in the material uncertainty related to going concern section
of our report, we have determined the matters described below to be the key audit matters
to be communicated in our report. These matters were addressed in the context of our audit
of the consolidated financial statements as a whole, and in forming our opinion thereon, and
we do not provide a separate opinion on these matters. For each matter included in Appendix
A, our description of how our audit addressed the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of
the consolidated financial statements section of our report, including in relation to these
matters. Accordingly, our audit included the performance of procedures designed to respond
to our assessment of the risks of material misstatement of the consolidated financial
statements. The results of our audit procedures, including the procedures performed to
address the matters below, provide the basis for our audit opinion on the accompanying
financial statements.
The areas of highest risk to the audit and where we focused most effort and resources were:
Impairment of customer loans and advances
•
• Recoverability of deferred tax assets
• Valuation of stock of property
The nature of Key Audit Matters and the procedures performed to support our discussions
and conclusions are described in Appendix A of this report.
Other information included in the annual report
The Board of Directors is responsible for the other information. The other information
comprises the information included in the Annual Report, but does not include the
consolidated financial statements and our auditor’s report thereon.
Our opinion on the consolidated financial statements does not cover the other information
and we do not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to
read the other information and, in doing so, consider whether the other information is
materially inconsistent with the consolidated financial statements or our knowledge obtained
in the audit or otherwise appears to be materially misstated. If, based on the work we have
performed, we conclude that there is a material misstatement of this other information, we
are required to report that fact. We have nothing to report in this regard.
186
Responsibilities of the Board of Directors for the Consolidated Financial Statements
The Company’s Board of Directors is responsible for the preparation of consolidated financial
statements that give a true and fair view in accordance with International Financial Reporting
Standards as adopted by the European Union and the requirements of the Cyprus Companies
Law, Cap. 113, and for such internal control as the Board of Directors determines is necessary
to enable the preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the Board of Directors is responsible for
assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of accounting unless the Board of
Directors either intends to liquidate the Group or to cease operations, or has no realistic
alternative but to do so.
The Board of Directors is responsible for overseeing the Group’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial
statements as a whole are free from material misstatement, whether due to fraud or error,
and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level
of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will
always detect a material misstatement when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in the aggregate, they could reasonably
be expected to influence the economic decisions of users taken on the basis of these
consolidated financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgment and maintain
professional scepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the consolidated financial
statements, whether due to fraud or error, design and perform audit procedures
responsive to those risks, and obtain audit evidence that is sufficient and appropriate to
provide a basis for our opinion. The risk of not detecting a material misstatement resulting
from fraud is higher than for one resulting from error, as fraud may involve collusion,
forgery, intentional omissions, misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Group’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by the Board of Directors.
187
Conclude on the appropriateness of the Board of Directors’ use of the going concern basis
of accounting and, based on the audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant doubt on the Group’s ability
to continue as a going concern. If we conclude that a material uncertainty exists, we are
required to draw attention in our auditor’s report to the related disclosures in the
consolidated financial statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained up to the date of our
auditor’s report. However, future events or conditions may cause the Group to cease to
continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial
statements, including the disclosures, and whether the consolidated financial statements
represent the underlying transactions and events in a manner that achieves a true and fair
view.
Obtain sufficient appropriate audit evidence regarding the financial information of the
entities or business activities within the Group to express an opinion on the consolidated
financial statements. We are responsible for the direction, supervision and performance
of the group audit. We remain solely responsible for our audit opinion.
We communicate with the Board of Directors through its Audit Committee regarding, among
other matters, the planned scope and timing of the audit and significant audit findings,
including any significant deficiencies in internal control that we identify during our audit.
We also provide the Board of Directors through its Audit Committee with a statement that we
independence, and to
have complied with relevant ethical requirements regarding
communicate with them all relationships and other matters that may reasonably be thought
to bear on our independence, and where applicable, related safeguards.
From the matters communicated with the Board of Directors, we determine those matters
that were of most significance in the audit of the consolidated financial statements of the
current period and are therefore the key audit matters. We describe these matters in our
auditor’s report unless law or regulation precludes public disclosure about the matter or when,
in extremely rare circumstances, we determine that a matter should not be communicated in
our report because the adverse consequences of doing so would reasonably be expected to
outweigh the public interest benefits of such communication.
Report on other legal requirements
Pursuant to the additional requirements of the Auditors and Statutory Audits of Annual and
Consolidated Accounts Laws of 2009 to 2016, we report the following:
We have obtained all the information and explanations we considered necessary for the
purposes of our audit.
In our opinion, proper books of account have been kept by the Company, so far as appears
from our examination of these books.
The consolidated financial statements are in agreement with the books of account.
188
In our opinion and to the best of our information and according to the explanations given
to us, the consolidated financial statements give the information required by the Cyprus
Companies Law, Cap. 113, in the manner so required.
In our opinion, the management report has been prepared in accordance with the
requirements of the Cyprus Companies Law, Cap. 113, and the information given is
consistent with the consolidated financial statements.
In our opinion, and in the light of the knowledge and understanding of the Group and its
environment obtained in the course of the audit, we have not identified material
misstatements in the management report.
In our opinion, the information included in the corporate governance statement in
accordance with the requirements of subparagraphs (iv) and (v) of paragraph 2(a) of Article
151 of the Cyprus Companies Law, Cap. 113, and which is included as a specific section of
the management report, have been prepared in accordance with the requirements of the
Cyprus Companies Law, Cap, 113, and is consistent with the consolidated financial
statements.
In our opinion, and in the light of the knowledge and understanding of the Group and its
environment obtained in the course of the audit, we have not identified material
misstatements in the corporate governance statement in relation to the information
disclosed for items (iv) and (v) of subparagraph 2(a) of Article 151 of the Cyprus
Companies Law, Cap. 113.
In our opinion, the corporate governance statement includes all information referred to in
subparagraphs (i), (ii), (iii) and (vi) of paragraph 2(a) of Article 151 of the Cyprus
Companies Law, Cap. 113.
Other matter
This report, including the opinion, has been prepared for and only for the Company's members
as a body in accordance with Section 34 of the Auditors and Statutory Audits of Annual and
Consolidated Accounts Laws of 2009 to 2016 and for no other purpose. We do not, in giving
this opinion, accept or assume responsibility for any other purpose or to any other person to
whose knowledge this report may come to.
Savvas Pentaris
Certified Public Accountant and Registered Auditor
for and on behalf of
Ernst & Young Cyprus Limited
Certified Public Accountants and Registered Auditors
Nicosia
27 March 2017
189
APPENDIX A – Key Audit Matters
Impairment of customer loans and advances
Nature of the key audit matter
Provisions for credit losses is the area which involves the highest level of critical judgment.
They are calculated on a collective basis for portfolios of loans of similar credit risk
characteristics and on an individual basis for significant loans. The determination of the
provision for loan losses requires the exercise of significant judgment and assumptions by
management. We consider this as a key audit matter since this is an accounting estimate
with high estimation uncertainty, the balances of the provisions are material and the nature
of the calculation is subjective.
The Group disclosures regarding provisions for credit losses are included in notes 5.1, 16
and 43 to the consolidated financial statements.
How our audit addressed the key audit matter
Among others, we have performed the following procedures:
• We assessed and tested the design and operating effectiveness of the controls over
impairment provisions data and calculations. These controls included those over the
identification of which loans and advances were impaired, the data transfer from source
systems to impairment models and model output to the general ledger, and the
calculation of the impairment provisions. In addition, we tested IT controls for systems
used for impairment calculation. We determined that we could rely on these controls for
the purposes of our audit.
• We obtained an understanding of the estimation process for the provisions for credit
losses.
• For collective impairment provisions the appropriateness of the methodology was
independently assessed by reference to IFRS and market practices and model
calculations were tested through re-performance. The underlying logic of data
preparation, transformation and related formulas for computing collective provisions
was assessed via a source code review of the related IT components involved.
• The appropriateness of management’s judgements was also independently considered
in respect of segmentation, economic factors and judgemental overlays and the
valuation of recovering the collateral.
• For
individual
impairment provisions, the appropriateness of provisioning was
independently assessed for a sample of loans selected on the basis of risk.
• We engaged specialists to review the model developed by the Group for forecasting
future property prices movement over the period of realization of collateral.
• We performed data integrity validation checks to ensure that the inputs used by the
Group in the calculation of provisions are correct.
190
Recoverability of deferred tax assets
Nature of the key audit matter
The Group has recognized deferred tax assets in respect of tax losses that may be carried
forward to future years. The recoverability of the deferred tax assets requires
management’s estimation on the future profitability of the Group so as to assess whether
sufficient taxable profits will be generated against which the tax losses carried forward
(which is the largest part of the deferred tax assets recognized by the Group) may be
utilized. For this assessment, management prepares a forecast for the following years and
this forecast is a result of management’s best estimates and expectations regarding the
Group’s future performance. The estimation of future taxable profits is inherently
judgmental, particularly when this extends beyond the normal planning cycle. We consider
this as a key audit matter due to the materiality of the balances and the subjective nature
of the calculation.
The Group disclosures regarding the deferred tax assets are included in notes 5.7 and 17
to the consolidated financial statements.
How our audit addressed the key audit matter
Among others, we have performed the following procedures:
• We updated our understanding of the process for evaluating the recoverability of the
deferred tax assets. The main management controls are review type controls.
• In order to obtain sufficient audit evidence that it was probable that sufficient taxable
profits would exist to utilize the deferred tax assets, we tested the supporting calculations
based on the Group’s 3 year plan which formed the basis of the projections until 2028
(expiry date of the majority of the tax losses) and the tax rates applied.
• The basis for management’s assessment of recoverability including the profit projections
and underlying assumptions and the calculations performed to arrive at taxable profits
from these projections, was challenged using our knowledge of the business, future
strategy and past performance. We utilized the services of valuation specialists to assist
in performing our substantive audit procedures related to the Group’s recoverability
exercise. The specialists were involved in the review of key assumptions used in the
valuation.
• The range of reasonably possible alternative outcomes was assessed
• The completeness and accuracy of the disclosures was also assessed.
191
Valuation of stock of property
Nature of the key audit matter
The Group has acquired a significant number of properties over the last couple of years as
a result of restructuring agreements with clients. These properties are classified by the
Group as stock of property in accordance with IAS 2. Given the large increase in the number
of properties acquired and the high estimation uncertainty in the property valuation to
determine the net realizable value, especially taking into account the current liquidity of
the property market in Cyprus, we consider this a key audit matter.
The Group disclosures regarding stock of property are included in notes 5.10 and 27 to the
consolidated financial statements.
How our audit addressed the key audit matter
Among others, we have performed the following procedures:
• We obtained an understanding of the valuation process of stock of property.
• We assessed and tested the design and operating effectiveness of the controls over the
valuation process of stock of property.
• For a sample of properties, we obtained the valuation reports received by the Group from
independent valuers and ensured that the fair value used in the calculation of the net
realizable value (“NRV”) is in accordance with these valuations.
• We obtained from the Group the comparison of the cost with the NRV and ensured that
the lower of the two was recorded as the value of the stock of property as at the reporting
date.
• We assessed the reasonableness of the selling costs incorporated in the Group’s
calculation of the NRV.
• We assessed the reasonableness of the external valuers’ assumptions used in the
valuations by utilizing the services of an independent valuation specialist.
• We performed substantive analytical review procedures.
192
BANK OF CYPRUS PUBLIC COMPANY LTD
Statement by the Members of the Board of Directors
and the Company Officials Responsible for the Drafting
of the Financial Statements
Annual Financial Report 2016
We, the members of the Board of Directors and the Company officials responsible for the drafting of the
financial statements of Bank of Cyprus Public Company Ltd (the ‘Company’) for the year ended 31 December
2016, the names of which are listed below, confirm that, to the best of our knowledge:
(a)
the Company’s financial statements on pages 194 to 318:
(i) have been prepared in accordance with the International Financial Reporting Standards (IFRS) as
adopted by the European Union (EU) and the requirements of the Cyprus Companies Law,
(ii) give a true and fair view of the assets, liabilities, financial position and profit or loss of the
Company and the undertakings included in the financial statements taken as a whole, and
(b)
the Management Report provides a fair review of the developments and performance of the business
and the position of the Company and the undertakings included in the financial statements taken as a
whole, together with a description of the principal risks and uncertainties that they face.
Prof. Dr. Josef Ackermann
Chairman
Maksim Goldman
Vice Chairman
Arne Berggren
Non-executive Director
Lyn Grobler
Non-executive Director
Dr. Michael Heger
Non-executive Director
Marios Kalochoritis
Non-executive Director
Michalis Spanos
Non-executive Director
Ioannis Zographakis
Non-executive Director
John Patrick Hourican
Executive Director
Dr. Christodoulos Patsalides
Executive Director
Eliza Livadiotou
Finance Director
27 March 2017
193
FINANCIAL STATEMENTS
194
BANK OF CYPRUS PUBLIC COMPANY LTD
Financial Statements – Contents
for the year ended 31 December 2016
Annual Financial Report 2016
Income Statement
Statement of Comprehensive Income
Balance Sheet
Statement of Changes in Equity
Statement of Cash Flows
Notes to the Financial Statements
1. Corporate information
2. Summary of significant accounting policies
3. Going concern
4. Operating environment
5. Significant judgements, estimates and
Page
196
197
198
199
201
202
202
203
204
40. Analysis of assets and liabilities by expected
maturity
41. Risk management – Credit risk
42. Risk management – Market risk
43. Risk management – Liquidity risk and
funding
44. Capital management
45. Related party transactions
46. Group companies
47. Acquisitions and disposals
48. Events after the reporting date
Page
267
268
293
299
309
309
312
316
317
assumptions
Interest income
Interest expense
Fee and commission income and expense
6.
7.
8.
9. Net foreign exchange gains
10. Net gains on financial instrument transactions
206
211
212
212
212
and dissolution/disposal of subsidiaries
11. Other income
12. Staff costs
13. Other operating expenses
14. Impairment of financial and non-financial
instruments and gain on derecognition of
loans and advances to customers and
changes in expected cash flows
15. Income tax
16. Earnings per share
17. Cash, balances with central banks and
loans and advances to banks
18. Investments
19. Derivative financial instruments
20. Fair value measurement
21. Loans and advances to customers
22. Balances and transactions with Group
companies
23. Investments in associates
24. Property and equipment
25. Intangible assets
26. Stock of property
27. Prepayments, accrued income and other
213
214
214
220
221
222
225
226
226
232
234
244
245
247
249
251
251
assets
253
28. Non-current assets classified as held for sale 253
254
29. Funding from central banks
30. Customer deposits
254
31. Accruals, deferred income and other liabilities 256
257
32. Share capital
258
33. Dividends
258
34. Accumulated losses
258
35. Fiduciary transactions
259
36. Contingent liabilities and commitments
264
37. Net cash flow from operating activities
38. Cash and cash equivalents
266
39. Operating leases
– The Company as lessee
266
195
BANK OF CYPRUS PUBLIC COMPANY LTD Annual Financial Report 2016
Income Statement
for the year ended 31 December 2016
Turnover
Interest income
Interest expense
Net interest income
Fee and commission income
Fee and commission expense
Net foreign exchange gains
Dividend income from subsidiaries and associates
Net gains on financial instrument transactions and
dissolution/disposal of subsidiaries
Gains/(losses) from revaluation and disposal of
investment properties
Gains on disposal of stock of property
Other income
Staff costs
Other operating expenses
Gain on derecognition of loans and advances to
customers and changes in expected cash flows
Provisions for impairment of loans and advances to
customers and other customer credit losses
Impairment of other financial instruments
Impairment of non-financial instruments
Profit/(loss) before tax
Income tax
Profit/(loss) for the year
Notes
2016
€000
2015
€000
6
7
8
8
9
22
10
20
11
12
13
14
14
14
14
15
1.181.934
1.231.142
851.416
1.084.545
(189.065)
(269.123)
662.351
157.841
(9.793)
81.177
107.856
34.802
815.422
145.279
(8.460)
11.571
33.542
24.166
3.987
(35.550)
399
7.097
-
11.146
1.045.717
997.116
(250.411)
(202.379)
(184.330)
(194.088)
610.976
600.649
63.315
305.089
(423.626)
(1.229.627)
(45.965)
(69.041)
(36.543)
(40.452)
168.157
(433.382)
(9.899)
(4.272)
158.258
(437.654)
Basic and diluted earnings/(losses) per share
(cent)
16
1,8
(4,9)
196
BANK OF CYPRUS PUBLIC COMPANY LTD Annual Financial Report 2016
Statement of Comprehensive Income
for the year ended 31 December 2016
Profit/(loss) for the year
158.258
(437.654)
Notes
2016
€000
2015
€000
Other comprehensive income (OCI)
OCI to be reclassified in the income statement in
subsequent periods
Foreign currency translation reserve
(Loss)/profit on translation of net investments in foreign
branches
Available-for-sale investments
Net gains from fair value changes before tax
Transfer to the income statement on impairment
Transfer to the income statement on sale
OCI not to be reclassified in the income statement
in subsequent periods
Property revaluation
Fair value loss before tax
Tax
24
15
(1.412)
41
1.033
336
33.342
1.515
(28.467)
(1.846)
(27.098)
(28.510)
33.011
33.052
-
(6.072)
(61)
(61)
4.038
(2.034)
695
(1.339)
31.713
Actuarial (losses)/gains on the defined benefit plans
Remeasurement (losses)/gains on defined benefit plans
12
(13.582)
Other comprehensive (loss)/income after tax
(13.643)
(42.153)
Total comprehensive income/(loss) for the year
116.105
(405.941)
197
BANK OF CYPRUS PUBLIC COMPANY LTD Annual Financial Report 2016
Balance Sheet
as at 31 December 2016
Assets
Cash and balances with central banks
Loans and advances to banks
Derivative financial assets
Investments
Investments pledged as collateral
Loans and advances to customers
Balances with Group companies
Prepayments, accrued income and other assets
Stock of property
Investment properties
Property and equipment
Intangible assets
Investments in associates
Investments in subsidiaries
Deferred tax assets
Non-current assets held for sale
Total assets
Liabilities
Deposits by banks
Funding from central banks
Repurchase agreements
Derivative financial liabilities
Customer deposits
Balances with Group companies
Accruals, deferred income and other liabilities
Debt securities in issue
Deferred tax liabilities
Total liabilities
Equity
Share capital
Share premium
Capital reduction reserve
Revaluation and other reserves
Accumulated losses
Total equity
Total liabilities and equity
Notes
2016
€000
2015
€000
17
17
19
18
18
21
22
27
26
20
24
25
23
46
15
28
29
19
30
22
31
15
32
32
32
1.267.353
1.111.354
984.876
1.112.337
20.834
333.270
299.765
14.022
512.631
421.032
14.352.560
16.005.878
1.364.982
153.335
494.998
11.625
735.579
167.486
276.095
11.688
199.888
198.227
17.681
97.293
198.708
450.350
346
14.773
97.293
207.781
456.479
9.767
20.247.864
21.352.422
427.737
237.860
850.014
4.452.850
257.367
368.151
48.840
54.408
15.045.090
12.694.130
502.645
256.660
-
568.486
233.084
712
20.533
19.868
17.408.886
18.629.549
892.294
551.368
892.294
551.368
1.952.486
1.952.486
76.430
76.462
34
(633.600)
(749.737)
2.838.978
2.722.873
20.247.864
21.352.422
Prof. Dr. J. Ackermann Chairman
Mr. J. P. Hourican
Chief Executive Officer
Mr. I. Zographakis Director
Mrs. E. Livadiotou
Finance Director
198
BANK OF CYPRUS PUBLIC COMPANY LTD
Statement of Changes in Equity
for the year ended 31 December 2016
Annual Financial Report 2016
Share
capital
(Note 32)
Share
premium
(Note 32)
Capital
reduction
reserve
(Note 32)
Treasury
shares
(Note 32)
Accumulated
losses
(Note 34)
Property
revaluation
reserve
Revaluation
reserve of
available-
for-sale
investments
Other
reserves
Foreign
currency
translation
reserve
Total
equity
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
1 January 2016
892.294 551.368 1.952.486 (36.849)
(749.737)
72.503
32.734
6.059
2.015 2.722.873
Profit for the year
Other comprehensive loss
after tax for the year
Total comprehensive
income/(loss) for the year
Disposals of treasury shares
Transfer of realised profits
on disposal of properties
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
31 December 2016
892.294 551.368 1.952.486
-
-
-
158.258
-
-
(13.582)
(61)
(27.098)
144.676
(61)
(27.098)
36.849
(36.849)
-
8.310
(8.310)
-
-
-
-
-
-
-
-
-
-
158.258
(1.412)
(42.153)
(1.412)
116.105
-
-
-
-
(633.600)
64.132
5.636
6.059
603 2.838.978
199
BANK OF CYPRUS PUBLIC COMPANY LTD
Statement of Changes in Equity
for the year ended 31 December 2016
Annual Financial Report 2016
Share
capital
(Note 32)
Share
premium
(Note 32)
Capital
reduction
reserve
(Note 32)
Shares
subject to
interim
orders
Treasury
shares
(Note 32)
Accumulated
losses
(Note 34)
Property
revaluation
reserve
Revaluation
reserve of
available-
for-sale
investments
Other
reserves
Foreign
currency
translation
reserve
Total
equity
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
1 January 2015
892.238 551.289 1.952.486
441
(65.499)
(273.281)
74.537
(277)
6.059
(9.314) 3.128.679
Loss for the year
Other comprehensive
income/(loss) after tax for
the year
Total comprehensive
(loss)/income for the year
Issue of shares
Disposals of treasury shares
Transfers between reserves
-
-
-
56
-
-
-
-
-
79
-
-
-
-
-
-
-
-
31 December 2015
892.294 551.368 1.952.486
-
-
-
-
-
-
-
-
-
-
(437.654)
-
-
695
(2.034)
33.011
(436.959)
(2.034)
33.011
(441)
28.650
(28.209)
-
(11.288)
-
-
-
-
-
-
-
-
-
-
-
-
-
- (437.654)
41
31.713
41 (405.941)
-
-
11.288
135
-
-
(36.849)
(749.737)
72.503
32.734
6.059
2.015 2.722.873
200
BANK OF CYPRUS PUBLIC COMPANY LTD Annual Financial Report 2016
Statement of Cash Flows
for the year ended 31 December 2016
Net cash flow from operating activities
37
3.268.849
2.605.260
Cash flows from investing activities
Purchases of debt securities and equity securities
(203.246)
(5.549)
Note
2016
€000
2015
€000
Proceeds on disposal/redemption of investments:
- debt securities
- equity securities
Interest received from debt securities
Dividend income received
Cash consideration paid for acquisition/increase in holding of
subsidiaries
Amounts paid on disposal of subsidiaries and operations
Proceeds from the reduction of share capital of subsidiary
Proceeds on disposal of joint ventures
Purchases of property and equipment
Proceeds on disposals of property and equipment and
intangible assets
Purchases of intangible assets
Proceeds on disposal of investment properties and investment
properties held for sale
24
25
455.907
1.536.815
33.782
27.845
109.891
(4.288)
-
1.799
-
(8.961)
165
5.588
14.637
25.674
(3.000)
(3.445)
-
89.011
(5.635)
147
(9.486)
(7.424)
12.550
12.794
Net cash flow from investing activities
415.958
1.659.613
Cash flows from financing activities
Proceeds from the issue of shares
-
135
Net repayment of funding from central banks
(3.602.836)
(3.830.923)
Redemption of debt securities in issue
Interest on funding from central banks
(712)
-
(29.656)
(78.187)
Net cash flow used in financing activities
(3.633.204)
(3.908.975)
Net increase in cash and cash equivalents for the year
51.603
355.898
Cash and cash equivalents
1 January
Foreign exchange adjustments
Net increase in cash and cash equivalents for the year
1.843.493
1.486.608
(441)
51.603
987
355.898
31 December
38
1.894.655
1.843.493
Details on the non-cash transactions are presented in Note 37.
201
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
1.
Corporate information
Bank of Cyprus Public Company Ltd (the Company) was the holding company of the Bank of Cyprus Group (the
Group) during 2016 and as at the balance sheet date. The principal activities of the Company during the year
continued to be the provision of banking, financial services and management and disposal of property generally
acquired in debt satisfaction.
The Company is a limited liability company incorporated in 1930 under the Cyprus Companies Law. As at the
balance sheet date the Company had a primary listing on the Cyprus Stock Exchange (CSE) and a secondary
listing on the Athens Exchange (ATHEX). Its shares were suspended from trading on the CSE and ATHEX with
effect from and including 10 January 2017 and were subsequently cancelled pursuant to a Scheme of
Arrangement that became effective on 18 January 2017. On the same date Bank of Cyprus Holdings Public
Limited Company became the sole shareholder of the Company, and on 19 January 2017 Bank of Cyprus
Holdings Public Limited Company was admitted to listing and trading on the London Stock Exchange (LSE) and
the CSE. Further information is disclosed in Note 48.1. The Company remains a public company for the
purposes of the Cyprus Income Tax Laws.
The financial statements are available at the Bank of Cyprus Public Company Ltd Registered Office (51
Stassinos Street, Ayia Paraskevi, Strovolos, P.O. Box 24884, 1398 Nicosia, Cyprus) and on the Group’s website
www.bankofcyprus.com (Investor Relations).
Financial statements
The financial statements of Bank of Cyprus Public Company Ltd for the year ended 31 December 2016 were
authorised for issue by a resolution of the Board of Directors on 27 March 2017.
2.
2.1
Summary of significant accounting policies
Basis of preparation
The financial statements have been prepared on a historical cost basis, except for properties held for own use
and investment properties, available-for-sale investments, derivative financial instruments and financial assets
at fair value through profit or loss, that have been measured at fair value, non-current assets held for sale
measured at fair value less costs to sell and stock of property measured at net realisable value where this is
lower than cost. The carrying values of recognised assets and liabilities that are hedged items in fair value
hedges, and otherwise carried at cost, are adjusted to record changes in fair value attributable to the risks that
are being hedged.
Presentation of financial statements
The financial statements are presented in Euro (€) and all amounts are rounded to the nearest thousand,
except where otherwise indicated. A dot is used to separate thousands and a comma is used to separate
decimals.
The Company presents its balance sheet broadly in order of liquidity. An analysis regarding expected recovery
or settlement of financial assets and liabilities within twelve months after the balance sheet date and more than
twelve months after the balance sheet date is presented in Note 40.
These are the financial statements of the holding company Bank of Cyprus Public Company Ltd and include
branches of the Company in Greece and Romania.
Statement of compliance
The financial statements have been prepared in accordance with the International Financial Reporting
Standards (IFRSs) as adopted by the EU and the requirements of the Cyprus Companies Law, Cap. 113.
2.2
Changes in accounting policies and disclosures
The accounting policies adopted in preparing the financial statements of the Company are consistent with those
adopted in preparing the consolidated financial statements of the Group, a summary of which is presented in
Note 2 of the consolidated financial statements of the Group for the year ended 31 December 2016.
In addition the following policies are adopted:
202
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
2.
2.2
Summary of significant accounting policies (continued)
Changes in accounting policies and disclosures (continued)
Investments in subsidiaries, associates and joint ventures
Investments in subsidiaries, associates and joint ventures are measured at cost less impairment.
The accounting policies adopted are consistent with those of the previous financial year, except for the adoption
of new and amended standards and interpretations as explained in Note 2.2.1 of the consolidated financial
statements of the Group for the year ended 31 December 2016.
3.
Going concern
Management has made an assessment of the Company’s and the Group’s ability to continue as a going concern.
The conditions that existed during 2016 and the developments up to the date of approval of these financial
statements that have been considered in management’s going concern assessment include, amongst others,
the operating environment in Cyprus and of the Company (Note 4).
Management believes that the Group and the Company are taking all necessary measures to maintain their
viability and the development of their business in the current economic environment.
Management, taking into consideration the factors described below and the uncertainties that existed at the
reporting date, is satisfied that the Group has the resources to continue in business for the foreseeable future
and, therefore, the going concern principle is appropriate for the reasons set out below, despite the fact that, as
disclosed in Notes 4.2.3 and 43, the Company is currently not in compliance with its liquidity regulatory
requirements with respect to its operations in Cyprus and the Group is currently not in compliance with its
regulatory liquidity requirements with respect to the Liquidity Coverage Ratio (LCR), which can be considered
as a material uncertainty as to its ability to continue as a going concern.
Τhe Group’s Common Equity Tier 1 (CET1) ratio at 31 December 2016 stands at 14,5% (transitional) and
the total capital at 14,6%, higher than the minimum required ratios (Note 4.2.1).
The improving funding structure of the Group as a result of the continuing positive customer flows in
Cyprus.
The increase in Group customer deposits by €2.329 million during 2016. Group’s customer deposits stood
at €16.510 million at 31 December 2016.
The Emergency Liquidity Assistance (ELA) funding, was repaid in full on 5 January 2017. ELA stood at €200
million at 31 December 2016 compared to €3,8 billion at 31 December 2015 and €11,4 billion at its peak
level in April 2013 (Note 4.2.3).
The improved ratings of both the Company (Fitch Ratings upgrade of Long-term Issuer Default Rating from
‘CCC’ to ‘B-’ in April 2016 with stable outlook, and Moody’s Investor Service upgrade of long-term deposit
rating from Caa3 with stable outlook to Caa3 with positive outlook in June 2016 and to Caa2 with positive
outlook in December 2016) and the Republic of Cyprus (Fitch Ratings upgrade by one notch to BB- with a
positive outlook in October 2016, S&P Global Rating by one notch to BB with a positive outlook in
September 2016 and by one notch to BB+ with a stable outlook in March 2017 and Moody’s Investors
Service by two notches to B1 with a stable outlook in November 2015. In November 2016 Moody’s
Investors Service improved the outlook on the Republic of Cyprus from stable to positive).
The Company has returned to the debt capital markets in January 2017 with the issue of unsecured and
subordinated Tier 2 (Capital Note of €250 million).
203
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
4.
4.1
Operating environment
Cyprus
Cyprus exited its economic adjustment programme at the end of March 2016 after a successful return to
markets and having utilised only about 70% of the €10 billion funding resources made available by the
European Union (EU) and the International Monetary Fund (IMF). Based on the Ministry of Finance Stability
Programme 2016-2019 (May 2016), in the area of public finances, the government carried out a strong fiscal
adjustment and the budget returned to near balance, public spending was reduced and tax collection was made
more efficient.
Unemployment dropped to 13,3% during 2016 compared to an average unemployment rate of 14,9% for 2015
as a whole and a peak of 16,5% in the fourth quarter of 2014 as per the Cyprus Statistical Service.
Real GDP rose by 2,8% in 2016 according to the Cyprus Statistical Service, compared to an increase of 1,7%
during 2015.
Consumer prices continued to decline for the fourth consecutive year, down by 1,4% in 2016, as per the Cyprus
Statistical Service.
Tourist arrivals increased by 19,8% during 2016. The index of industrial production increased by 8,7% in 2016.
In real gross value added terms, industrial output in 2016 increased by 5,9% in the first three quarters of
2016 after an increase of 2,9% in 2015 as per data by the Cyprus Statistical Service.
In the property market, the Central Bank’s residential property price index continued to decline year-on-year
but at a slowing pace. The index dropped by 1,3% in the third quarter of 2016 after dropping by 1,7% and
1,6% in the second and first quarter respectively.
Downside risks to the growth projections are associated with high levels of non-performing loans, loss of
momentum in structural reforms with associated risks for public finances, and a return of inflation. Downside
risks may also be associated with a deterioration of the external environment for Cyprus. These would involve
slower growth in the UK with a weakening of the pound following the Brexit referendum. Political uncertainty in
Europe triggered by a British exit or by the refugee crisis could also lead to increased economic uncertainty and
undermine economic confidence.
Upside risks to the outlook relate to a possible better growth performance in the EU and stronger investment
spending as property prices are stabilising and various projects especially in tourism are implemented.
The international credit rating agencies have upgraded the rating of the country. Fitch Ratings upgraded the
rating of the Republic of Cyprus one notch to BB- with a positive outlook in October 2016, S&P Global Rating by
one notch to BB with a positive outlook in September 2016 and by one notch to BB+ with a stable outlook in
March 2017 and Moody’s Investors Service by two notches to B1 with a stable outlook in November 2015. In
November 2016 Moody’s Investors Service improved the outlook on the Republic of Cyprus from stable to
positive.
In July 2016 the Cyprus government accessed international capital markets for the third time since the start of
the economic adjustment programme to date, issuing a seven year Eurobond of €1 billion at a yield of 3,8%.
204
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
4.
4.2
Operating environment (continued)
The Company
4.2.1 Regulatory capital ratios
The CET1 ratio of the Group at 31 December 2016 stands at 14,5% (transitional) and the total capital at
14,6%.
The minimum Pillar I total capital requirement is 8,0% and may be met, in addition to the 4,5% CET1
requirement, with up to 1,5% by Additional Tier 1 capital and with up to 2,0% by Tier 2 capital.
The Group is also subject to additional capital requirements for risks which are not covered by the Pillar I
capital requirements (Pillar II add-ons). Following the enactment of the amendments in the Cypriot Banking
Law in February 2017 regarding the gradual phase-in of the Capital Conservation Buffer (CCB) and based on
the Supervisory Review and Evaluation Process (SREP) performed by the European Central Bank (ECB) in 2016,
the Group’s minimum CET1 capital ratio as from 1 January 2017 has been reduced to 9,50% compared to
10,75% fully phased-in of CCB (minimum CET1 capital ratio at 31 December 2016: 11,75% fully phased-in of
CCB), comprising of a 4,5% Pillar I requirement, a 3,75% Pillar II requirement and a phased-in CCB of 1,25%.
The ECB has also provided non-public guidance for an additional Pillar II CET1 buffer.
The overall Total Capital Ratio requirement as from 1 January 2017 following the amendments in the Cypriot
Banking Law in February 2017 regarding the gradual phase-in of CCB, has been reduced to 13,00% compared
to 14,25% (fully phased-in of CCB), comprising of a Pillar I requirement of 8% (of which up to 1,5% can be in
the form of Additional Tier 1 capital and up to 2,0% in the form of Tier 2 capital), a Pillar II requirement of
3,75% (in the form of CET1), as well as a phased-in CCB of 1,25%.
The minimum CET1 requirement including Pillar II, applicable for the year 2016 was determined by the ECB at
11,75% in November 2015 and includes CCB on a fully loaded basis.
The Group's capital position at 31 December 2016 exceeds both its Pillar I and its Pillar II add-on capital
requirements. However, the Group's Pillar II add-on capital requirements are a point-in-time assessment and
therefore are subject to change over time.
4.2.2 Asset quality
The Group’s loans that are individually impaired or past due for more than 90 days (90+ DPD) have decreased
by 27% during 2016 and totalled €8.309 million at 31 December 2016, representing 41% of gross loans before
fair value adjustment on initial recognition (Note 43 in the consolidated financial statements). The provisioning
coverage ratio improved to 54% at 31 December 2016 compared to 48% at 31 December 2015. The Group
non-performing exposures (NPEs), as defined by the European Banking Authority (EBA), totalled €11.034
million at 31 December 2016 and accounted for 55% of gross loans. The provisioning coverage ratio of NPEs
totalled 41% at 31 December 2016 compared to 39% at 31 December 2015.
The Group addresses the asset quality challenge through the operation of the Restructuring and Recoveries
Division which is actively seeking to find innovative solutions to manage distressed exposures. The Group has
been successful in engineering restructuring solutions across the spectrum of its loan portfolio. 90+ DPD have
decreased by 36% since their peak of €13.003 million as at 31 December 2013. NPEs have decreased by 27%
since their peak of €15.175 million as at 31 December 2013.
4.2.3 Liquidity
The funding position of the Company continues to improve with customer deposits increasing by €2.351 million
or 19% in the year ended 31 December 2016.
Customer deposits in Cyprus reached €15.043 million at 31 December 2016 compared to €12.691 million at 31
December 2015. Customer deposits stood at 74% of total assets as at 31 December 2016 (compared to 60%
at 31 December 2015). The net loans to deposit ratio of the Company stood at 95% as at 31 December 2016
(compared to 126% at 31 December 2015).
205
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
4.
4.2
Operating environment (continued)
The Company (continued)
4.2.3 Liquidity (continued)
The level of ELA funding at 31 December 2016 amounted to €200 million (Note 29), down from €3,8 billion at
31 December 2015 and its peak level of €11,4 billion in April 2013. ELA was fully repaid on 5 January 2017.
ELA is available to solvent Euro area credit institutions and although the Company has received no specific
assurance, management expects that the Company will continue to have access to the central bank liquidity
facilities, in line with applicable rules if it were to face a ‘stress event’ that gave rise to temporary liquidity
problems. If a stress event were to occur in the future, the Company would seek to utilise ELA funding,
assuming it has sufficient available eligible collateral at the time.
It is noted that the Group’s Restructuring Plan approved in 2013 by the Central Bank of Cyprus (CBC) included
ELA funding throughout the Restructuring Plan period (2013-2017).
The Council of Ministers and the Committee on Financial and Budgetary Affairs of the House of Representatives
had approved in January 2014 the issuance of up to €2,9 billion of guarantees for bonds/loans issued by credit
institutions under the ‘Granting of Government Guarantees for Loans and/or issuance of Bonds by Credit
Institutions Law of 2012’. The European Commission announced in June 2016 the eighth extension of the bank
guarantee scheme, which continued until 31 December 2016. Based on the prevailing conditions, the Ministry of
Finance has not applied for a further extension of the bank guarantee scheme.
The credit ratings of the Republic of Cyprus by the main credit rating agencies albeit improving continue to be
below investment grade. As a result, the ECB is not able to include Cyprus Government bonds in its asset
purchase programme, or as eligible collateral for Eurosystem monetary operations, as was the case when the
waiver for collateral eligibility due to the country being under an economic adjustment programme existed.
In January 2017 the Company issued €250 million unsecured and subordinated Tier 2 Capital Note under the
Company’s EMTN Programme. The note was priced at par, with a coupon of 9,25% (Note 48.4).
The Company is currently not in compliance with the regulatory liquidity requirements with respect to its
operations in Cyprus and the Group is currently not in compliance with its regulatory liquidity requirements with
respect to the LCR and is therefore dependent on continuing regulatory forbearance. Additional information on
liquidity and details on certain liquidity ratios are disclosed in Note 43.
4.2.4 Pending litigation, claims and regulatory matters
The management has considered the potential impact of pending litigation, claims and investigations and
regulatory matters against the Company. The Company has obtained legal advice in respect of these claims.
Despite the novelty of many of the claims such as the bail-in depositors and the absorption of losses by the
holders of equity and debt instruments of the Company and the uncertainties inherent in a unique situation,
based on the information available at present and on the basis of the law as it currently stands, management
considers that the said claims as well as other pending litigation, claims and regulatory matters are unlikely to
have a material adverse impact on the financial position and capital adequacy of the Company (Note 36).
5.
Significant judgements, estimates and assumptions
The preparation of the financial statements requires the Company’s Board of Directors and management to
make judgements, estimates and assumptions that can have a material impact on the amounts recognised in
the financial statements and the accompanying disclosures, as well as the disclosures of contingent liabilities.
Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment
to the carrying amount of assets or liabilities affected in future periods.
The key assumptions concerning the future and other key sources of estimation of uncertainty at the reporting
date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and
liabilities are described below. The Company based its assumptions and estimates on parameters available
when the financial statements were prepared. Existing circumstances and assumptions about future
developments may, however, change due to market changes or circumstances beyond the control of the
Company. Such changes are reflected in the assumptions when they occur.
206
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
5.
Significant judgements, estimates and assumptions (continued)
5.1 Provision for impairment of loans and advances to customers
The Company reviews its loans and advances to customers to assess whether a provision for impairment should
be recorded in the income statement. In particular, management is required to estimate the amount and
timing of future cash flows in order to determine the amount of provision required and the calculation of the
impairment allowance involves the use of judgement. Such estimates are based on assumptions about a
number of factors and therefore actual impairment losses may differ.
The carrying amount of the loan is reduced through the use of a provision account and the amount of the loss is
recognised in the income statement. Loans together with the associated provisions are written off when there
is no realistic prospect of future recovery. Partial write-offs, including non-contractual write-offs, may also
occur when it is considered that there is no realistic prospect for the recovery of the contractual cash flows. In
addition, write-offs may reflect restructuring activity with customers and are part of the terms of the agreement
and subject to satisfactory performance.
The Company may change certain estimates from period to period, however it is impracticable to estimate the
effect of such individual estimates due to interdependencies between estimates and as the profile of the
population of loans changes from period to period.
A very important factor for the estimation of provisions is the timing and net recoverable amount from
repossession or realisation of collaterals which mainly comprise real estate assets.
Assumptions have been made about the future changes in property values, as well as the timing for the
realisation of the collateral and for taxes and expenses on the repossession and subsequent sale of the
collateral. Indexation has been used to estimate updated market values of properties, while assumptions were
made on the basis of a macroeconomic scenario for future changes in property values. The timing of recovery
from real estate collaterals has been estimated to be on average 3 years, with the exception of specific cases
for which, based on specific facts and circumstances, a different period has been used and for customers in
Debt Recovery where an average 6 year period has been used. In accordance with the Loan Impairment and
Provisioning Procedures Directives of 2014 and 2015 of the CBC, the cumulative average future change in
property values during the year has been capped to zero. The average liquidity haircut and selling expenses
used in the provisions calculation is 10% of the current market value of the property for those collaterals for
which the increase in their value is capped to zero and 10% of the projected market value of the property for
those collaterals for which their value is expected to drop.
The above assumptions are also influenced by the ongoing regulatory dialogue the Company maintains with its
lead regulator, the ECB, and other regulatory guidance and interpretations issued by various regulatory and
industry bodies such as the ECB and EBA, which provide guidance and expectations as to relevant definitions
and the treatment/classification of certain parameters/assumptions used in the estimation of provisions.
Any changes in these assumptions or difference between assumptions made and actual results could result in
significant changes in the amount of required provisions for impairment of loans and advances.
207
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
5.
Significant judgements, estimates and assumptions (continued)
5.1 Provision for impairment of loans and advances to customers (continued)
For individually significant assets, impairment allowances are calculated on an individual basis and all relevant
considerations that have a bearing on the expected future cash flows are taken into account (for example, the
business prospects for the customer, the realisable value of collateral, the Company’s position relative to other
claimants, the reliability of customer information and the likely cost and duration of the work-out process). The
level of the impairment allowance is the difference between the value of the discounted expected future cash
flows (discounted at the loan’s original effective interest rate) and its carrying amount. Subjective judgements
are made in the calculation of future cash flows. Furthermore, judgements change with time as new information
becomes available or as work-out strategies evolve, resulting in frequent revisions to the impairment allowance
as individual decisions are taken. Changes in these estimates would result in a change in the allowances and
have a direct impact on the impairment charge.
In addition to provisions for impairment on an individual basis, the Company also makes collective impairment
provisions. The Company adopts a formulaic approach for collective provisions, which includes assigning
probabilities of default and loss given default for portfolios of loans. This methodology is subject to estimation
uncertainty, partly because it is not practicable to identify losses on an individual loan basis because of the
large number of loans in each portfolio. In addition, the use of historical information for probabilities of default
and loss rates is supplemented with significant management judgement to assess whether current economic
and credit conditions are such that the actual level of incurred losses is likely to be greater or less than that
suggested by historical experience.
Impairment assessment also includes off-balance sheet credit exposures represented by guarantees given and
by irrevocable commitments to disburse funds. Off-balance sheet credit exposures of the individually assessed
assets require assumptions on the probability, timing and amount of cash outflows; otherwise the provision is
calculated on a collective basis, taking into account the probability of loss for the portfolio in which the
customer is included for on-balance sheet exposures impairment assessment. The Company may change
certain estimates from period to period, however it is impracticable to estimate the effect of such individual
estimates due to interdependencies between estimates and as the profile of the population of off-balance sheet
exposure changes from period to period.
In normal circumstances, historical experience provides the most objective and relevant information from which
to assess inherent loss within each portfolio. In certain circumstances, historical loss experience provides less
relevant information about the incurred loss in a given portfolio at the reporting date, for example, where there
have been changes in economic, regulatory or behavioural conditions such that the most recent trends in the
portfolio risk factors are not fully reflected. In these circumstances, such risk factors are taken into account
when calculating the appropriate levels of impairment allowances, by adjusting the provision for impairment
derived solely from historical loss experience.
The total amount of the Company’s provision for impairment of loans and advances is inherently uncertain
because it is highly sensitive to changes in economic and credit conditions across a number of geographical
areas.
Loans subject to collective impairment assessment whose terms have been renegotiated are no longer
considered past due, but are treated as up to date loans for measurement purposes. Loans subject to
collective impairment assessment whose terms have been renegotiated are taken into account in determining
the inputs for collective impairment calculation. Loans subject to individual impairment assessment, whose
terms have been renegotiated, are subject to ongoing review to determine whether they remain impaired. The
carrying amounts of loans that have been classified as renegotiated retain this classification in accordance with
the rules of the technical standard of the EBA.
208
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
5.
Significant judgements, estimates and assumptions (continued)
5.1 Provision for impairment of loans and advances to customers (continued)
Economic and credit conditions within geographical areas are influenced by many factors with a high degree of
interdependency so that there is no one single factor to which the Company’s loan impairment provisions as a
whole are particularly sensitive. Different factors are applied in each country to reflect the local economic
conditions, laws and regulations and the assumptions underlying this judgement are highly subjective. The
methodology and the assumptions used in calculating impairment losses are reviewed regularly. It is possible
that the actual results could be different from the assumptions made, resulting in a material adjustment to the
carrying amount of loans and advances.
Further details on impairment allowances and related credit information are set out in Note 41.
5.2
Fair value of investments and derivatives
The best evidence of fair value is a quoted price in an actively traded market. If the market for a financial
instrument is not active, a valuation technique is used. The majority of valuation techniques employed by the
Company use only observable market data and so the reliability of the fair value measurement is relatively
high.
However, certain financial instruments are valued on the basis of valuation techniques that feature one or more
significant inputs that are not observable. Valuation techniques that rely on non-observable inputs require a
higher level of management judgement to calculate a fair value than those based wholly on observable inputs.
Valuation techniques used to calculate fair values include comparisons with similar financial instruments for
which market observable prices exist, discounted cash flow analysis and other valuation techniques commonly
used by market participants. Valuation techniques incorporate assumptions that other market participants
would use in their valuations, including assumptions about interest rate yield curves, exchange rates, volatilities
and default rates. When valuing instruments by reference to comparable instruments, management takes into
account the maturity, structure and rating of the instrument with which the position held is being compared.
The Company only uses models with unobservable inputs for the valuation of certain unquoted equity
investments. In these cases, estimates are made to reflect uncertainties in fair values resulting from a lack of
market data inputs, for example, as a result of illiquidity in the market. Inputs into valuations based on
unobservable data are inherently uncertain because there is little or no current market data available from
which to determine the level at which an arm’s length transaction would occur under normal business
conditions. Unobservable inputs are determined based on the best information available.
Further details on the fair value of assets and liabilities are disclosed in Note 20.
5.3
Impairment of available-for-sale investments
Available-for-sale investments in equity securities are impaired when there has been a significant or prolonged
decline in their fair value below cost. The determination of what is significant or prolonged requires judgement
by management. Management has assessed that a loss of 25% or more is considered significant, except in the
cases of investment companies where higher limits are set. Prolonged has been assessed by management to
be a period of 12 months or more. The factors which are evaluated include the expected volatility in share
prices. In addition, impairment may be appropriate when there is evidence that significant adverse changes
have taken place in the technological, market, economic or legal environment in which the investee operates.
Available-for-sale investments in debt securities are impaired when there is objective evidence of impairment
as a result of one or more events that occurred after the initial recognition of the investment and the event (or
events) has an impact on the estimated future cash flows of the investment. Such impairment review takes
into account a number of factors such as the financial condition of the issuer, any breach of contract, the
probability that the issuer will enter bankruptcy or other financial reorganisation, which involves a high degree
of judgement, as well as changes in the fair value of individual instruments such as when their fair value at the
reporting date falls below 90% of the instruments’ amortised cost.
Further details on impairment of available-for-sale investments are presented in Notes 14 and 18.
209
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
5.
Significant judgements, estimates and assumptions (continued)
5.4 Retirement benefits
The cost of defined benefit pension plans is determined using actuarial valuations. The actuarial valuations
involve making assumptions about discount rates, the expected rate of return on plan assets, future salary
increases, mortality rates as well as future pension increases where necessary. The Company’s management
sets these assumptions based on market expectations at the reporting date using its best estimates for each
parameter covering the period over which the obligations are to be settled. In determining the appropriate
discount rate, management considers the yield curve of high quality corporate bonds. In determining other
assumptions, a certain degree of judgement is required. Future salary increases are based on expected future
inflation rates for the specific country plus a margin to reflect the best possible estimate relating to parameters
such as productivity, workforce maturity and promotions. The expected return on plan assets is based on the
composition of each fund’s plan assets, estimating a different rate of return for each asset class. Estimates of
future inflation rates on salaries and expected rates of return of plan assets represent management’s best
estimates for these variables. These estimates are derived after consultation with the Company’s advisors, and
involve a degree of judgement. Due to the long-term nature of these plans, such estimates are inherently
uncertain.
Further details on retirement benefits are disclosed in Note 12.
5.5
Tax
The Company operates and is therefore subject to tax in various countries. Estimates are required in
determining the provision for taxes at the reporting date. The Company recognises income tax liabilities for
transactions and assessments whose tax treatment is uncertain. Where the final tax is different from the
amounts initially recognised in the income statement, such differences will impact the income tax expense, the
tax liabilities and deferred tax assets or liabilities of the period in which the final tax is agreed with the relevant
tax authorities.
Deferred tax assets are recognised by the Company in respect of tax losses to the extent that it is probable that
future taxable profits will be available against which the losses can be utilised. Judgement is required to
determine the amount of deferred tax assets that can be recognised, based upon the likely timing and level of
future taxable profits, together with future tax-planning strategies. These variables have been established on
the basis of significant management judgement and are subject to uncertainty. It is possible that the actual
future events could be different from the assumptions made, resulting in a material adjustment to the carrying
amount of deferred tax assets.
The assumptions with greater influence on deferred tax are disclosed in Note 15.
5.6 Classification of properties
The Company determines whether a property is classified as investment property or stock of property as
follows:
Investment properties comprise land and buildings that are not occupied for use by, or in the operations
of, the Company, nor for sale in the ordinary course of business, but are held primarily to earn rental
income and capital appreciation. These buildings are substantially rented to tenants and not intended to
be sold in the ordinary course of business.
Stock of property comprises real estate assets held with an intention to be disposed of. This principally
relates to properties acquired through debt-for-property swaps and properties acquired through the
acquisition of certain operations of Laiki Bank in 2013. The Company has set up the ‘Real Estate
Management Unit (REMU) in late 2015, to manage these assets (including selective investments and
development) and to execute exit strategies in order to monetise these assets.
5.7
Fair value of properties held for own use and investment properties
The Company’s accounting policy for property held for own use, as well as for investment property requires that
it is measured at fair value. In the case of property held for own use, valuations are carried out periodically so
that the carrying value is not materially different from the fair value, whereas in the case of investment
properties, the fair value is established at each reporting date. Valuations are carried out by qualified valuers
by applying valuation models recommended by the Royal Institution of Chartered Surveyors and the
International Valuation Standards Council.
210
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
5.
Significant judgements, estimates and assumptions (continued)
5.7
Fair value of properties held for own use and investment properties (continued)
In arriving at their estimates of the fair values of properties, the valuers used their market knowledge and
professional judgement and did not rely solely on historical transactional comparables, taking into consideration
that there is a greater degree of uncertainty than that which exists in a more active market. Depending on the
nature of the underlying asset and available market information, the determination of the fair value of property
may require the use of estimates such as future cash flows from assets and discount rates applicable to those
assets. All these estimates are based on local market conditions existing at the reporting date.
Further information on inputs used is disclosed in Note 20.
5.8 Stock of property – estimation of net realisable value
Stock of property is measured at the lower of cost and net realisable value. The net realisable value is
determined with reference to the fair value of properties adjusted for any impact of specific circumstances on
the sale process of each property. Depending on the value of the underlying asset and available market
information, the determination of costs to sell may require professional judgement which involves a large
degree of uncertainly due to the relatively low level of market activity.
More details on the stock of property are presented in Note 26.
5.9 Provisions
Judgement is involved in determining whether a present obligation exists and in estimating the probability,
timing and amount of any outflows. Provisions for pending litigations, claims or regulatory matters usually
require a higher degree of judgement than other types of provisions. It is expected that the Company will
continue to have a material exposure to litigation and regulatory proceedings and investigations relating to
legacy issues in the medium term. The matters for which the Company determines that the probability of a
future loss is more than remote, will change from time to time, as will the matters as to which a reliable
estimated can be made and the estimated possible loss for such matters. Actual results may prove to be
significantly higher or lower than the estimate of possible loss in those matters, where an estimate was made.
In addition, loss may be incurred in matters with respect to which the Company believed the probability of loss
was remote.
For a detailed description of the nature of uncertainties and assumptions and the effect on the amount and
timing of pending litigation, claims and regulatory matters refer to Note 36.
6.
Interest income
Loans and advances to customers
Loans and advances to banks and central banks
Investments available-for-sale
Investments classified as loans and receivables
Derivative financial instruments
Other investments at fair value through profit or loss
2016
€000
2015
€000
815.670
967.081
7.580
10.749
11.209
9.445
13.494
88.455
845.208
1.078.475
5.571
637
5.331
739
851.416
1.084.545
Interest income from loans and advances to customers includes interest on the recoverable amount of impaired
loans and advances as defined in Note 41 amounting to €201.604 thousand (2015: €215.145 thousand).
211
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
7.
Interest expense
Customer deposits
Funding from central banks and deposits by banks
Repurchase agreements
Derivative financial instruments
8.
Fee and commission income and expense
Fee and commission income
Credit-related fees and commissions
Other banking commissions
Mutual funds and asset management fees
Other commissions
2016
€000
2015
€000
124.319
140.724
40.812
6.476
171.607
17.458
189.065
99.041
7.583
247.348
21.775
269.123
2016
€000
2015
€000
82.193
72.976
1.882
790
82.133
61.487
1.534
125
157.841
145.279
Mutual funds and asset management fees include income of €1.820 thousand (2015: €1.534 thousand) relating
to fiduciary and other similar activities.
Fee and commission expense
Banking commissions
Mutual funds and asset management fees
2016
€000
2015
€000
9.591
202
9.793
8.276
184
8.460
9.
Net foreign exchange gains
Net foreign exchange gains comprise the conversion of monetary assets in foreign currency at the reporting
date, realised exchange gains/(losses) from transactions in foreign currency settled during the year and the
revaluation of foreign exchange derivatives.
212
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
10.
Net gains on financial instrument transactions and dissolution/disposal of subsidiaries
Trading portfolio:
- equity securities
- debt securities
- derivative financial instruments
Other investments at fair value through profit or loss:
2016
€000
2015
€000
(472)
3
910
179
14
(13.257)
- debt securities
(400)
464
Net gains/(losses) on disposal of available-for-sale
investments:
- equity securities
- debt securities
Net gains on disposal/repayment of loans and receivables:
- debt securities
Realised gains on disposal of loans
Revaluation of financial instruments designated as fair value
hedges:
- hedging instruments
- hedged items
Loss on dissolution/disposal of subsidiaries
Gain on disposal of joint ventures
37.013
-
8.419
64
4.017
(4.033)
(10.719)
-
34.802
1.060
(11)
49.513
35
9.354
(11.099)
(25.612)
13.526
24.166
The gains on disposal of available-for-sale equity securities for 2016, primarily relate to gain on sale of shares
held in Visa Europe Limited following the approved purchase of Visa Europe Limited by Visa Inc.
The gains on disposal of debt securities classified as loans and receivables for 2016, related to the Company’s
participation in the Cyprus Government buyback process of Cyprus government bonds.
The loss on dissolution of subsidiaries in 2016, relates to loss incurred from the closure of the operations of
Bank of Cyprus (Channel Islands) Ltd, which is in the process of liquidation.
In the comparative period, the gain on disposal of joint ventures mainly related to the disposal of Marfin
Diversified Strategy Fund Plc (MDSF) in April 2015.
The loss on disposal of subsidiaries in 2015, relates to the loss on disposal of the Company’s subsidiaries in
relation to Russian operations disposed of (Note 47.3.1) and profit on disposal of Aphrodite group
(Note 47.3.2).
213
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
11.
Other income
Dividend income – third parties
Loss on sale and write-off of property and equipment and
intangible assets
Rental income from investment properties
Rental income from stock of property
Other income
12.
Staff costs
Salaries
Employer’s contributions to state social insurance
Retirement benefit plan costs
Restructuring costs – voluntary exit plans
2016
€000
2015
€000
217
(54)
1.302
1.460
4.172
7.097
571
(41)
595
-
10.021
11.146
2016
€000
2015
€000
153.998
159.769
23.811
13.682
25.432
17.178
191.491
202.379
58.920
-
250.411
202.379
The number of persons employed by
the Company as at 31 December 2016 was 3.662
(2015: 4.045). In February and June 2016 the Company proceeded with voluntary exit plans for its employees
in Cyprus, the cost of which is included in staff costs and amounted to €58.920 thousand. In total, 405
employees accepted the voluntary exit plan and left the Company during the year.
Retirement benefit plan costs
In addition to the employer’s contributions to state social insurance, the Company operates plans for the
provision of additional retirement benefits as described below:
Defined benefit plans
Defined contribution plans
2016
€000
2015
€000
121
13.561
13.682
91
17.087
17.178
Cyprus
The main retirement plan for the Company’s permanent employees in Cyprus (99% of total Company
employees) is a defined contribution plan. This plan provides for employer contributions of 9% (2015: 14% up
until 31 May 2015 and 9% thereafter) and employee contributions of 3%-10% of the employees’ gross salaries.
This plan is managed by a Committee appointed by the members.
A small number of employees who do not participate in the main retirement plan, are members of a pension
scheme that is closed to new entrants and may receive part or all of their retirement benefit entitlement by way
of a pension for life. This plan is managed by an Administrative Committee composed of representatives of
both the members and the employer.
214
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
12.
Staff costs (continued)
Retirement benefit plan costs (continued)
Greece
After the disposal of the Greek operations in 2013, a small number of employees of the Company’s Greek
branch continue to be members of the defined benefit plans.
United Kingdom
The Company has assumed in prior years the obligation of the defined benefit plan of its employees in the
United Kingdom which was closed in December 2008 to future accrual of benefits for active members.
Romania
The Company does not operate any retirement benefit plans in Romania.
Analysis of the results of the actuarial valuations for the defined benefit plans
Amounts recognised in the balance sheet
Liabilities (Note 31)
Assets (Note 27)
2016
€000
2015
€000
22.743
-
22.743
12.559
(20)
12.539
One of the plans has a funded status surplus of €14.000 thousand (2015: €15.065 thousand) that is not
recognised as an asset on the basis that the Company has no unconditional right to future economic benefits
either via a refund or a reduction in future contributions.
The amounts recognised in the balance sheet and the movements in the net defined benefit obligation over the
years are presented below:
215
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
12.
Staff costs (continued)
Retirement benefit plan costs (continued)
Analysis of the results of the actuarial valuations for the defined benefit plans (continued)
1 January 2016
Current service cost
Loss on curtailment and settlement
Net interest expense/(income)
Total amount recognised in the income statement
Remeasurements:
- Return on plan assets, excluding amounts included in
net interest expense
- Actuarial loss from changes in financial assumptions
- Experience adjustments
- Change in asset ceiling
Total amount recognised in the OCI
Exchange differences
Contributions:
- Employer
Benefits paid from the plans
Benefits paid directly by the employer
31 December 2016
Present value
of obligation
Fair value of
plan assets
Net amount
before impact
of asset
ceiling
Impact of
minimum
funding
requirement/
asset ceiling
Net defined
benefit
liability
€000
€000
€000
€000
€000
82.653
(85.179)
(2.526)
15.065
12.539
20
51
50
121
(6.407)
21.063
(9)
-
14.647
(1.679)
(1.771)
-
(49)
8.743
-
-
-
-
-
-
-
(1.065)
(1.065)
-
-
-
-
20
51
50
121
(6.407)
21.063
(9)
(1.065)
13.582
(1.679)
(1.771)
-
(49)
14.000
22.743
20
51
2.674
2.745
-
-
(2.624)
(2.624)
-
(6.407)
21.063
(9)
-
21.054
(9.706)
-
(4.553)
(49)
-
-
-
(6.407)
8.027
(1.771)
4.553
-
92.144
(83.401)
216
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
12.
Staff costs (continued)
Retirement benefit plan costs (continued)
Analysis of the results of the actuarial valuations for the defined benefit plans (continued)
Present value
of obligation
Fair value of
plan assets
Net amount
before impact
of asset
ceiling
Impact of
minimum
funding
requirement/
asset ceiling
Net defined
benefit
liability
€000
€000
€000
€000
€000
1 January 2015
Current service cost
Gains on curtailment and settlement
Net interest expense/(income)
Total amount recognised in the income statement
Remeasurements:
- Return on plan assets, excluding amounts included in
net interest expense
- Actuarial gain from changes in financial assumptions
- Experience adjustments
- Change in asset ceiling
Total amount recognised in the OCI
Exchange differences
Contributions:
- Employer
Benefits paid from the plans
31 December 2015
1.768
22
(190)
259
91
2.292
(3.600)
(531)
-
(1.839)
951
(3.497)
-
13.921
-
-
-
-
-
-
-
1.144
1.144
-
-
-
15.689
22
(190)
259
91
2.292
(3.600)
(531)
1.144
(695)
951
(3.497)
-
(85.179)
(2.526)
15.065
12.539
84.508
(82.740)
22
(190)
2.905
2.737
-
-
(2.646)
(2.646)
-
2.292
-
-
-
2.292
(3.037)
(3.497)
4.449
(3.600)
(531)
-
(4.131)
3.988
-
(4.449)
82.653
217
BANK OF CYPRUS PUBLIC COMPANY LTD Annual Financial Report 2016
Notes to the Financial Statements
12.
Staff costs (continued)
Retirement benefit plan costs (continued)
Analysis of the results of the actuarial valuations for the defined benefit plans (continued)
The actual return on plan assets for year 2016 was a gain of €9.031 thousand (2015: gain of €354 thousand).
The assets of funded plans are generally held in separately administered entities, either as specific assets or as
a proportion of a general fund, or as insurance contracts and are governed by local regulations and practice in
each country.
Pension plan assets are invested in different asset classes in order to maintain a balance between risk and
return. Investments are well diversified to limit the financial effect of the failure of any individual investment.
Through its defined benefit plans, the Company is exposed to a number of risks as outlined below:
Interest rate risk
Changes in bond yields
Inflation risk
Asset volatility
The Company is exposed to interest rate risk due to the mismatch of the
duration of assets and liabilities.
A decrease in corporate bond yields will increase the liabilities, although this will
be partially offset by an increase in the value of bond holdings.
The Company faces inflation risk, since the liabilities are either directly (through
increases in pensions) or indirectly (through wage increases) exposed to inflation
risks. Investments to ensure inflation-linked returns (i.e. real returns through
investments such as equities, index-linked bonds and assets whose return
increase with increasing inflation) could be used for better match with the
expected increases in liabilities.
The liabilities are calculated using a discount rate set with reference to corporate
bond yields; if assets underperform this yield, a deficit will be created.
The major categories of plan assets as a percentage of total plan assets are as follows:
Equity securities
Debt securities
Loans and advances to banks
2016
2015
46%
44%
10%
42%
46%
12%
100%
100%
The assets held by the funded plans include equity securities issued by the Company, the fair value of which is
as at 31 December 2016 €2.276 thousand (2015: €2.407 thousand).
The Company expects to make contributions to defined benefit plans of €1.691 thousand during 2017.
At the end of the reporting period, the average duration of the defined benefit obligation was 18,8 years.
218
BANK OF CYPRUS PUBLIC COMPANY LTD Annual Financial Report 2016
Notes to the Financial Statements
12.
Staff costs (continued)
Retirement benefit plan costs (continued)
Principal actuarial assumptions used in the actuarial valuations
The present value of the defined benefit obligations of the retirement plans is estimated annually using the
Projected Unit Credit Method of actuarial valuation, carried out by independent actuaries. The principal
actuarial assumptions used for the valuations of the retirement plans of the Company during 2016 and 2015
are set out below:
2016
Discount rate
Inflation rate
Future salary increases
Rate of pension increase
Life expectancy for pensioners at age 60
Cyprus
Greece
UK
1,56%
1,75%
2,00%
2,00%
23,5 years M
29,6 years F
1,50%
1,75%
2,00%
n/a
n/a
Life expectancy for pensioners at age 65
n/a
n/a
2015
Discount rate
Inflation rate
Future salary increases
Rate of pension increase
Life expectancy for pensioners at age 60
2,32%
2,30%-2,80%
1,75%
0% for 2016
and 2%
thereafter
0% for 2016
and 2%
thereafter
23,5 years M
29,6 years F
1,75%
0% for 2016
and 2%
thereafter
n/a
n/a
n/a
Life expectancy for pensioners at age 65
n/a
The discount rate used in the actuarial valuations reflects the rate at which liabilities could effectively be settled
and is set by reference to market yields at the reporting date in high quality corporate bonds of suitable
maturity and currency. For the Company’s plans in the Eurozone (Cyprus and Greece) which comprise 15% of
the defined benefit obligations, the Company adopted a full yield curve approach using AA- rated corporate
bond data from the iBoxx Euro Corporates AA10+ index. For the Company’s plan in the UK which comprises
85% of the defined benefit obligations, the Company adopted a full yield curve approach using the discount
rate that has been set based on the yields on AA- rated corporate bonds with duration consistent with the
scheme’s liabilities. Under this approach, each future liability payment is discounted by a different discount
rate that reflects its exact timing.
To develop the assumptions relating to the expected rates of return on plan assets, the Company, in
consultation with its actuaries, uses forward-looking assumptions for each asset class reflecting market
conditions and future expectations at the reporting date. Adjustments are made annually to the expected rate
of return assumption based on revised expectations of future investment performance of asset classes, changes
to local legislation that may affect investment strategy, as well as changes to the target strategic asset
allocation.
A quantitative sensitivity analysis for significant assumptions as at 31 December 2016 and 2015 is presented
below:
219
2,70%
3,30%
n/a
3,15%
n/a
23,9 years M
25,4 years F
3,90%
3,10%
n/a
3,05%
n/a
23,9 years M
25,4 years F
BANK OF CYPRUS PUBLIC COMPANY LTD Annual Financial Report 2016
Notes to the Financial Statements
12.
Staff costs (continued)
Retirement benefit plan costs (continued)
Principal actuarial assumptions used in the actuarial valuations (continued)
Variable
Discount rate
Inflation growth rate
Salary growth rate
Pension growth rate
2016
2015
Change
+0,5%
Change
-0,5%
Change
+0,5%
Change
-0,5%
-10,4%
8,8%
0%
0,9%
11,3%
-8,1%
0%
-0,8%
-9,1%
6,5%
0%
0,9%
9,7%
-6,1%
0%
-0,9%
Plus 1 year Minus 1 year
Plus 1 year
Minus 1 year
Life expectancy
-1,5%
1,9%
-1,4%
1,8%
The above sensitivity analysis (with the exception of the inflation sensitivity) is based on a change in one
assumption while holding all other assumptions constant. In practice this is unlikely to occur and some changes
of the assumptions may be correlated. The inflation sensitivity above includes changes to any inflation-linked
benefit increases. When calculating the sensitivity of the defined benefit obligation to significant assumptions,
the same method has been applied as when calculating the pension liability recognised on the balance
sheet. The methods and types of assumptions used in preparing the sensitivity analysis did not change
compared to previous years.
13.
Other operating expenses
Repairs and maintenance of property and equipment
Other property-related costs
Operating lease rentals for property and equipment
Special levy on deposits of credit institutions in Cyprus
Consultancy and other professional services fees
Insurance
Advertising and marketing
Depreciation of property and equipment (Note 24)
Amortisation of intangible assets (Note 25)
Communication expenses
(Reversal of provisions)/provisions and settlements of litigations,
claims and provisions for regulatory matters (Note 31)
Printing and stationery
Local cash transfer expenses
Other operating expenses
Advisory and other restructuring costs
220
2016
€000
2015
€000
15.711
12.990
9.872
19.968
11.822
10.451
15.752
7.550
6.110
6.860
(2.936)
3.023
2.848
19.361
14.851
10.199
17.347
14.643
14.603
11.778
8.237
5.756
7.237
7.316
3.445
2.749
17.659
13.436
137.680
150.958
46.650
43.130
184.330
194.088
BANK OF CYPRUS PUBLIC COMPANY LTD Annual Financial Report 2016
Notes to the Financial Statements
13.
Other operating expenses (continued)
Advisory and other restructuring costs comprise mainly: (a) fees of external advisors in relation to: (i)
customer loan restructuring activities which are not part of the effective interest rate, (ii) the listing on the
London Stock Exchange, (iii) disposal of operations and non-core assets and (b) litigation provisions related to
the operations of Laiki Bank acquired in 2013.
Consultancy and other professional services fees and advisory and other restructuring costs include fees
(including taxes) to the independent auditors of the Company, for audit and other professional services
provided both in Cyprus and overseas, as follows:
Audit of the financial statements of the Company
Other audit-related services
Tax services
Services related to the listing on the London Stock Exchange
Other services
2016
€000
2015
€000
1.866
339
404
4.879
1.027
8.515
1.173
424
305
1.491
331
3.724
14.
Impairment of financial and non-financial instruments and gain on derecognition of loans
and advances to customers and changes in expected cash flows
2016
€000
2015
€000
Gain on derecognition of loans and advances to customers and
changes in expected cash flows
(63.315)
(305.089)
Provisions net of reversals of provisions for impairment of
loans and advances to customers and other customer credit
losses
Loans and advances to customers (Note 41)
429.778
1.271.030
Financial guarantees and commitments (Note 31)
(6.152)
(41.403)
Impairment/(reversal of impairment) of other financial
instruments
Available-for-sale equity securities
Available-for-sale mutual funds
Loans and receivables debt securities
Impairment of balances with Group companies (Note 22)
Loans and advances to banks
Other receivables
221
423.626
1.229.627
336
56
-
33.356
13.820
(1.603)
45.965
1.291
1.206
(169)
27.039
19.604
20.070
69.041
BANK OF CYPRUS PUBLIC COMPANY LTD Annual Financial Report 2016
Notes to the Financial Statements
14.
Impairment of financial and non-financial instruments and gain on derecognition of loans
and advances to customers and changes in expected cash flows (continued)
Impairment of non-financial instruments
Stock of property (Note 26)
Property held for own use (Note 24)
Investments in subsidiaries (Note 46)
15.
Income tax
Current tax:
- Cyprus
Cyprus special defence contribution
Deferred tax
Prior years’ tax adjustments
Other tax charges
2016
€000
2015
€000
11.745
-
24.798
36.543
9.709
288
30.455
40.452
2016
€000
2015
€000
-
23
6.733
1.943
1.200
9.899
1.565
11
687
2.009
-
4.272
The reconciliation between the income tax expense and the profit/(loss) before tax as estimated using the
current income tax rates is set out below:
Profit/(loss) before tax
Income tax at the normal tax rates in Cyprus
Income tax effect of:
- expenses not deductible for income tax purposes
- income not subject to income tax
- differences between overseas income tax rates and Cyprus
income tax rates
- reversal of previously recognised deferred tax
Prior years’ tax adjustments
Other tax charges
2016
€000
2015
€000
168.157
(433.382)
21.044
(54.162)
12.582
(30.344)
18.823
(15.177)
(124)
3.598
6.756
1.943
1.200
9.899
2.187
50.592
2.263
2.009
-
4.272
The loss on disposal of the Russian subsidiaries and Aphrodite group in 2015 is included in ‘Net gains on
financial instrument transactions and dissolution/disposal of subsidiaries’ and is partially income tax deductible
(Note 10).
Income tax in Cyprus is calculated at the rate of 12,5% on taxable income (2015: 12,5%).
222
BANK OF CYPRUS PUBLIC COMPANY LTD Annual Financial Report 2016
Notes to the Financial Statements
15.
Income tax (continued)
Special defence contribution is payable on rental income at a rate of 3% (2015: 3%) and on interest income
from activities outside the ordinary course of business at a rate of 30% (2015: 30%).
The Company’s profits from overseas operations are taxed at the rates prevailing in the respective countries,
which for 2016 were: Greece 29% (2015: 29%) and Romania 16% (2015: 16%).
The Company is subject to income taxes in the various jurisdictions it operates and the calculation of the
Company’s income tax charge and provisions for income tax necessarily involves a degree of estimation and
judgement. There are transactions and calculations for which the ultimate income tax treatment is uncertain
and cannot be determined until resolution has been reached with the relevant tax authority. The Company has
a number of open income tax returns with various income tax authorities and liabilities relating to these open
and judgemental matters, which are based on estimates of whether additional income taxes will be due. In
case the final income tax outcome of these matters is different from the amounts that were initially recorded,
such differences will impact the current and deferred income tax assets and liabilities in the period in which
such determination is made.
The accumulated income tax losses are presented in the table below:
2016
Total income
tax losses
Income tax
losses for
which a
deferred tax
asset was
recognised
Income tax
losses for
which no
deferred tax
asset was
recognised
€000
€000
€000
Expiring within 4 years
4.611.469
266.800
4.344.669
Expiring between 5 and 10 years
16.306
-
16.306
Expiring between 11 and 15 years
7.378.801
3.336.000
4.042.801
12.006.576
3.602.800
8.403.776
2015
Expiring within 4 years
4.293.207
295.584
3.997.623
Expiring between 5 and 10 years
400.992
-
400.992
Expiring between 11 and 15 years
7.378.801
3.336.000
4.042.801
12.073.000
3.631.584
8.441.416
The majority of the deferred tax asset relates to the Laiki Bank income tax losses transferred to the Company
as a result of the acquisition of certain operations on 29 March 2013. The income tax losses were transferred
under ‘The Resolution of Credit and Other Institutions Law’ which states that any accumulated losses of the
transferring credit institution at the time of the transfer, are transferred to the acquiring credit institution and
may be used by it for a period of up to 15 years from the end of the year during which the transfer took place.
In the case of the Company’s acquisition of certain operations of Laiki Bank, these losses can be utilised up to
2028. The income tax losses transferred are still subject to review and agreement with the income tax
authorities in Cyprus. The deferred tax asset recognised on these specific losses can be set off against the
future profits of the Company by 2028 at an income tax rate of 12,5%.
Recognition of deferred tax assets on unutilised income tax losses is supported by management’s business
forecasts, taking into account available information and making various assumptions on future growth rates of
customer loans, deposits, funding evolution, loan impairment and pricing, and considering the recoverability of
the deferred tax assets within their expiry period.
223
BANK OF CYPRUS PUBLIC COMPANY LTD Annual Financial Report 2016
Notes to the Financial Statements
15.
Income tax (continued)
The Company performed its regular assessment regarding the recoverability of its deferred tax asset as at 31
December 2016, taking into account the actual results for the year ended 31 December 2016, the declining
trend of loans that are impaired or past due for more than 90 days, the improved funding structure with the
loans to deposits ratio of 95%, the significant inflow of deposits and the significant decrease of ELA funding.
The Company performed its assessment for the recoverability of its deferred tax asset as at 31 December 2016
taking into account the Company’s actual performance, the key objectives of the Company’s strategy as well as
the macroeconomic environment in Cyprus, analytical financial projections up to the end of 2019 which had
been also used to roll out assumptions thereafter until year 2028. The key assumptions, amongst others,
include the following:
New loan originations and repayments
Loan and deposit interest income/expense evolution
Funding structure and associated cost
Diversified income streams
Level of operating expenses
Level of loans that are impaired or past due for more than 90 days (new defaults, curing, cost of risk)
The financial projections have taken into account the key objectives of the Company’s strategy which are set
out below:
Materially reduce the level of delinquent loans
Normalise the funding structure and fully repay the ELA in January 2017
Focus on the core markets in Cyprus by providing credit to promising sectors and exit from non-core
markets
Achieve a lean operating model
Maintain an appropriate capital position by internally generating capital through profitability,
deleveraging and disposing of non-core assets
Deliver value to shareholders and other stakeholders
Based on the above, management has concluded that the deferred tax asset of €450.350 thousand for the
Company as at 31 December 2016 is recoverable.
The tax losses of prior years utilised during 2016 amount to €28.784 thousand (2015: nil).
The income tax losses relate to the same jurisdiction to which the deferred tax asset relates.
Deferred tax
The net deferred tax assets arises from:
Difference between capital allowances and depreciation
Property revaluation
2016
€000
2015
€000
7.122
13.411
6.518
13.350
Unutilised income tax losses carried forward
(450.350)
(453.948)
Other temporary differences
Net deferred tax assets
Deferred tax assets
Deferred tax liabilities
Net deferred tax assets
The deferred tax assets relate to operations in Cyprus.
224
-
(2.531)
(429.817)
(436.611)
(450.350)
(456.479)
20.533
19.868
(429.817)
(436.611)
BANK OF CYPRUS PUBLIC COMPANY LTD Annual Financial Report 2016
Notes to the Financial Statements
15.
Income tax (continued)
Deferred tax (continued)
The movement of the net deferred tax assets is set out below:
1 January
2016
€000
2015
€000
(436.611)
(433.260)
Deferred tax recognised in the income statement
6.733
687
Deferred tax recognised in the statement of comprehensive
income
31 December
61
(4.038)
(429.817)
(436.611)
The Company offsets income tax assets and liabilities if and only if, it has a legally enforceable right to set off
current income tax assets and current income tax liabilities.
The analysis of the net deferred tax expense recognised in the income statement is set out below:
Difference between capital allowances and depreciation
Unutilised income tax losses carried forward
Other temporary differences
2016
€000
2015
€000
604
3.598
2.531
6.733
687
-
-
687
The analysis of the net deferred tax recognised in the statement of comprehensive income is set out below:
2016
€000
2015
€000
Timing differences on property revaluation - expense/(income)
61
(4.038)
16. Earnings per share
2016
€000
2015
€000
Basic and diluted earnings/(losses) per share
Profit/(loss) for the year (€ thousand)
158.258
(437.654)
Weighted average number of shares in issue during the year,
excluding treasury shares (thousand)
8.922.945
8.922.923
Basic and diluted earnings/(losses) per share (€ cent)
1,8
(4,9)
225
BANK OF CYPRUS PUBLIC COMPANY LTD Annual Financial Report 2016
Notes to the Financial Statements
17.
Cash, balances with central banks and loans and advances to banks
Cash
Balances with central banks
Cash and balances with central banks
2016
€000
2015
€000
132.180
1.135.173
153.742
957.612
1.267.353
1.111.354
Loans and advances to banks
984.876
1.112.337
Balances with central banks include obligatory deposits for liquidity purposes as at 31 December 2016 which
amount to €142.002 thousand (2015: €122.347 thousand).
The credit rating analysis of balances with central banks and loans and advances to banks by independent
credit rating agencies is set out in Note 41.
Loans and advances to banks earn interest based on the interbank rate of the relevant term and currency.
18.
Investments
Investments
Investments at fair value through profit or loss
Investments available-for-sale
Investments classified as loans and receivables
2016
€000
2015
€000
11.802
253.394
68.074
333.270
19.727
55.969
436.935
512.631
The amounts pledged as collateral under repurchase agreements with banks are shown below:
2016
€000
2015
€000
Investments pledged as collateral
Investments available-for-sale
299.765
421.032
All investments pledged as collateral under repurchase agreements can be sold or repledged by the
counterparty.
The maximum exposure to credit risk for debt securities is disclosed in Note 41.
226
BANK OF CYPRUS PUBLIC COMPANY LTD Annual Financial Report 2016
Notes to the Financial Statements
18.
Investments (continued)
Investments at fair value through profit or loss
Trading investments
Other investments at fair
value through profit or
loss
Total
2016
€000
2015
€000
2016
€000
2015
€000
2016
€000
2015
€000
-
1.376
1.376
-
-
-
10.426
17.430
10.426
17.430
2.297
2.297
-
-
-
-
1.376
2.297
10.426
17.430
11.802
19.727
10.426
17.430
10.426
17.430
10.426
17.430
10.426
17.430
1.376
2.297
-
-
1.376
2.297
Debt securities
Equity securities
Debt securities
Cyprus government
Listed on the Cyprus
Stock Exchange
Equity securities
Listed on the Cyprus
Stock Exchange
The debt securities classified as other investments at fair value through profit or loss were originally classified
as such, to eliminate an accounting mismatch with derivatives used to economically hedge these instruments.
Investments available-for-sale
Debt securities
Equity securities
Mutual funds
2016
€000
2015
€000
540.551
12.329
279
437.402
39.258
341
553.159
477.001
227
BANK OF CYPRUS PUBLIC COMPANY LTD Annual Financial Report 2016
Notes to the Financial Statements
18.
Investments (continued)
Investments available-for-sale (continued)
Debt securities
Cyprus government
French government
Other governments
Banks and other corporations
Listed on the Cyprus Stock Exchange
Listed on other stock exchanges
Geographic dispersion by country of issuer
Cyprus
France
Germany
Italy
Other European countries
European Financial Stability Facility and European Investment
Fund
Supranational organisations
Other countries
Equity securities
Listed on the Cyprus Stock Exchange
Listed on other stock exchanges
Unlisted
2016
€000
2015
€000
178.479
287.324
41.887
32.861
4.437
290.205
130.832
11.928
540.551
437.402
178.479
362.072
540.551
4.437
432.965
437.402
178.479
4.437
287.324
290.205
-
12.507
10.473
11.823
9.365
30.580
45.686
23.234
61.912
11.928
-
-
540.551
437.402
4.156
430
7.743
12.329
4.663
271
34.324
39.258
At 31 December 2016 and 2015 there were no available-for-sale investments in debt securities which have
been determined to be individually impaired.
Available-for-sale mutual funds are unlisted and issued in other countries.
228
BANK OF CYPRUS PUBLIC COMPANY LTD Annual Financial Report 2016
Notes to the Financial Statements
18.
Investments (continued)
Investments classified as loans and receivables
Debt securities
Cyprus government
Listed on the Cyprus Stock Exchange
Geographic dispersion by country of issuer
2016
€000
2015
€000
68.074
68.074
68.074
436.935
436.935
436.935
Cyprus
68.074
436.935
Loans and receivables at 31 December 2016 include €49.185 thousand (2015: €146.444 thousand) of debt
securities which have been determined to be individually impaired.
Reclassification of investments
Reclassification of trading investments to loans and receivables
On 1 April 2010, in light of the crisis prevailing in global markets, the Company identified the investments
which it had no intention to trade or sell in the foreseeable future. These investments in debt securities were
reclassified from trading investments to loans and receivables.
Reclassification of available-for-sale investments to loans and receivables
On 1 October 2008 and 30 June 2011 the Company reclassified certain available-for-sale debt securities to
investments classified as loans and receivables, in view of the fact that there was no active market for these
debt securities and the Company had the intention and ability to hold these securities in the foreseeable future.
Reclassification of held–to-maturity investments to available-for-sale investments
On 1 November 2012, the Company reassessed its policies in respect of the management of its investment
portfolio in view of its efforts to strengthen its liquidity and capital adequacy ratios and decided to reclassify all
debt securities previously classified as held-to-maturity to investments available-for-sale, in order to be able to
sell these securities as and when required. As a result, in accordance with the Company’s accounting policies
and IFRSs, the Company was not allowed to classify any investments as held-to-maturity until November 2014.
229
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
18.
Investments (continued)
Reclassification of investments (continued)
The table below presents the debt securities reclassified by the Company, by date of reclassification.
31 December
2016
31 December
2015
Reclassification
date
Carrying and
fair value on
reclassification
date
Carrying
value
Fair
value
Carrying
value
Fair value
Year 2016
Additional
profit in the
income
statement
had the debt
securities not
been
reclassified
Additional gain
in other
comprehensive
income had the
debt securities
not been
reclassified
Effective
interest rate on
reclassification
date
€000
€000
€000
€000
€000
€000
€000
Reclassification of
available-for-sale
investments to:
- loans and receivables
1 October 2008
49.800
49.185
50.329
48.021
50.232
-
1.144
4,6%-4,7%
230
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
18.
Investments (continued)
Reclassification of investments (continued)
The table below presents the debt securities reclassified by the Company, by date of reclassification.
31 December
2015
31 December
2014
Reclassification
date
Carrying and
fair value on
reclassification
date
Carrying
value
Fair value
Carrying
value
Fair value
Year 2015
Additional
profit in the
income
statement had
the debt
securities not
been
reclassified
Additional
gain/(loss) in
other
comprehensive
income had the
debt securities
not been
reclassified
Effective
interest rate
on
reclassification
date
€000
€000
€000
€000
€000
€000
€000
Reclassification of
trading investments
to:
- loans and receivables
1 April 2010
34.810
35.255
35.227
36.722
35.056
171
-
1,2%-4,4%
Reclassification of
available-for-sale
investments to:
- loans and receivables
1 October 2008
129.497
119.683
126.913
120.235
120.289
- loans and receivables
30 June 2011
151.967
90.600
87.327
92.613
84.046
Reclassification of
held-to-maturity
investments to:
- available-for-sale
1 November
2012
42.151
41.763
41.763
43.358
43.358
-
-
-
7.230
4,6%-4,7%
(3.273)
2,8%-6,3%
-
0,4%-3,1%
231
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
19.
Derivative financial instruments
The contract amount and fair value of the derivative financial instruments is set out below:
Contract
amount
2016
Fair value
Assets
Liabilities
Contract
amount
2015
Fair value
Assets
Liabilities
€000
€000
€000
€000
€000
€000
43.709
793
589
208.729
1.112
1.774.976
15.875
8.430
1.484.763
12.235
230.874
7.986
-
-
480
85
-
-
1.901
198
-
-
34.511
175
1.515
6.562
141
8
477
-
5.666
5.729
2.305
167
441
53
2.057.545
17.233
11.118
1.736.255
13.973
14.361
418.293
87
37.463
425.900
45
39.570
Trading derivatives
Forward exchange rate
contracts
Currency swaps
Interest rate swaps
Currency options
Equity options
Interest rate caps/floors
Derivatives qualifying
for hedge accounting
Fair value hedges
- interest rate swaps
Net investments
– forward exchange rate
contracts
Total
2.654.443
20.834
48.840
2.195.541
14.022
178.605
3.514
259
33.386
596.898
3.601
37.722
459.286
4
49
477
40.047
54.408
The use of derivatives is an integral part of the Company’s activities. Derivatives are used to manage the
Company’s own exposure to fluctuations in interest rates, exchange rates and equity price indices. Derivatives
are also sold to customers as risk management products.
Forward exchange rate contracts are irrevocable agreements to buy or sell a specified quantity of foreign
currency on a specified future date at an agreed rate.
Currency swaps include simple currency swaps and cross-currency swaps. Simple currency swaps involve the
exchange of two currencies at the current market rate and the commitment to re-exchange them at a specified
rate upon maturity of the swap. Cross-currency swaps are interest rate swaps in which the cash flows are in
different currencies.
Interest rate swaps are contractual agreements between two parties to exchange fixed rate and floating rate
interest, by means of periodic payments, based upon a notional principal amount and the interest rates defined
in the contract.
Currency options are contracts that grant the holder the right, but not the obligation, to buy or sell currency at
a specified exchange rate during a specified period of time.
232
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
19.
Derivative financial instruments (continued)
Interest rate, currency and equity options provide the buyer with the right but not the obligation, to either
purchase or sell the underlying values at a specified price or level on or before a specified date.
Interest rate caps/floors protect the holder from fluctuations of interest rates above or below a specified
interest rate for a specified period of time.
The credit exposure of derivative financial instruments represents the cost to replace these contracts at the
reporting date. The exposure arising from these transactions is managed as part of the Company’s credit risk
management process for credit facilities granted to customers and financial institutions.
The contract amount of certain types of derivative financial instruments provides a basis for comparison with
other instruments recognised on the balance sheet, but does not necessarily indicate the amounts of future
cash flows involved or the current fair value of the instruments and, consequently, does not indicate the
Company’s exposure to credit or market risk.
The fair value of the derivatives can be either positive (asset) or negative (liability) as a result of fluctuations in
market interest rates, foreign exchange rates or equity price indices, in accordance with the terms of the
relevant contract. The aggregate net fair value of derivatives may fluctuate significantly over time.
Hedge accounting
The Company applies fair value hedge accounting using derivatives when the required criteria for hedge
accounting are met. The Company also uses derivatives for economic hedging (hedging the changes in interest
rates, exchange rates or other risks) which do not meet the criteria for hedge accounting. As a result, these
derivatives are accounted for as trading derivatives and the gains or losses arising from revaluation are
recognised in the income statement.
Changes in the fair value of derivatives designated as fair value hedges and the fair value of the item in
relation to the risk being hedged are recognised in the income statement.
Fair value hedges
The Company uses interest rate swaps to hedge the interest rate risk arising as a result of the possible adverse
movement in the fair value of fixed rate available-for-sale debt securities and fixed rate customer loans and
deposits.
Hedges of net investments
The Company’s balance sheet is affected by foreign exchange differences between the Euro and all non-Euro
functional currencies of overseas branches. The Company hedges its structural currency risk when it considers
that the cost of such hedging is within an acceptable range (in relation to the underlying risk). This hedging is
effected by financing with borrowings in the same currency as the functional currency of the overseas branches
and forward exchange rate contracts.
As at 31 December 2016, deposits and forward exchange rate contracts amounting to €100.756 thousand and
€178.605 thousand respectively (2015: €178.101 thousand and €33.386 thousand respectively) have been
designated as hedging instruments.
233
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
20.
Fair value measurement
The following table presents the carrying value and fair value of the Company’s financial assets and liabilities.
2016
2015
Carrying
value
€000
Fair value
€000
Carrying
value
€000
Fair value
€000
Financial assets
Cash and balances with central banks
1.267.353
1.267.353
1.111.354
1.111.354
Loans and advances to banks
984.876
960.937
1.112.337
1.102.191
Investments at fair value through profit or loss
11.802
11.802
19.727
19.727
Investments available-for-sale
553.159
553.159
477.001
477.001
Investments classified as loans and receivables
68.074
69.451
436.935
445.521
Derivative financial assets
20.834
20.834
14.022
14.022
Loans and advances to customers
14.352.560 15.493.752
16.005.878 16.999.781
Balances with Group companies
1.364.982
1.364.982
735.579
735.579
Other assets
96.068
96.068
145.977
145.977
18.719.708 19.838.338
20.058.810 21.051.153
Financial liabilities
Obligations to central banks and deposits by
banks
1.277.751
1.277.751
4.690.710
4.690.710
Repurchase agreements
257.367
292.752
368.151
406.014
Derivative financial liabilities
48.840
48.840
54.408
54.408
Customer deposits
15.045.090 15.029.167
12.694.130 12.700.673
Balances with Group companies
502.645
502.645
568.486
568.486
Debt securities in issue
Other liabilities
-
-
712
712
129.413
129.413
106.788
106.788
17.261.106 17.280.568
18.483.385 18.527.791
The fair value of financial assets and liabilities in the above table is as at the reporting date and does not
represent any expectations about their future value.
The Company uses the following hierarchy for determining and disclosing fair value:
Level 1: investments valued using quoted prices in active markets.
Level 2: investments valued using models for which all inputs that have a significant effect on fair value are
market observable.
Level 3: investments valued using models for which inputs that have a significant effect on fair value are not
based on observable market data.
For assets and liabilities that are recognised in the financial statements at fair value, the Company determines
whether transfers have occurred between levels in the hierarchy by re-assessing categorisation at the end of
each reporting period.
234
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
20.
Fair value measurement (continued)
The following is a description of the determination of fair value for financial instruments and non-financial
assets which are recorded at fair value on a recurring and on a non-recurring basis and for financial
instruments and non-financial assets which are not measured at fair value but for which fair value is disclosed,
using valuation techniques. These incorporate the Company’s estimate of assumptions that a market
participant would make when valuing the instruments.
Derivative financial instruments
Derivative financial instruments valued using a valuation technique with market observable inputs are mainly
interest rate swaps, currency swaps, currency rate options, forward foreign exchange rate contracts, equity
options and interest rate collars. The most frequently applied valuation techniques include forward pricing and
swap models, using present value calculations. The models incorporate various inputs including the credit
quality of counterparties, foreign exchange spot and forward rates and interest rate curves.
Credit Valuation Adjustments (CVA) and Debit Valuation Adjustments (DVA)
The CVA and DVA are incorporated into derivative valuations to reflect the impact on fair value of counterparty
risk and the Company’s own credit quality respectively.
The Company calculates the CVA by applying the probability of default (PD) of the counterparty, conditional on
the non-default of the Company, to the Company’s expected positive exposure to the counterparty and
multiplying the result by the loss expected in the event of default. Conversely, the Company calculates the DVA
by applying its own PD, conditional on the non-default of the counterparty, to the expected positive exposure of
the counterparty to the Company and multiplying the result by the loss expected in the event of default. Both
calculations are performed over the life of the potential exposure.
The expected exposure of derivatives is calculated as per the Capital Requirement Regulations (CRR) and takes
into account the netting agreements where they exist. A standard loss given default (LGD) assumption in line
with industry norms is adopted. Alternative LGD assumptions may be adopted when both the nature of the
exposure and the available data support this.
The Company does not hold any significant derivative instruments which are valued using a valuation technique
with significant non-market observable inputs.
Investments available-for-sale and other investments at fair value through profit or loss
Available-for-sale investments and other investments at fair value through profit or loss which are valued using
a valuation technique or pricing models, primarily consist of unquoted equity securities and debt securities.
These assets are valued using valuation models which sometimes only incorporate market observable data and
at other times use both observable and non-observable data.
Loans and advances to customers
The fair value of loans and advances to customers is based on the present value of expected future cash flows.
Future cash flows have been based on the future expected loss rate per loan portfolio, taking into account
expectations for the credit quality of the borrowers. The discount rate includes components that capture the
funding cost and the cost of capital.
Customer deposits
The fair value of customer deposits is determined by calculating the present value of future cash flows. The
discount rate takes into account current market rates and the credit profile of the Company. The fair value of
deposits repayable on demand and deposits protected by the Deposit Protection Guarantee Scheme are
approximated by their carrying values.
Repurchase agreements
Repurchase agreements are collateralised bank takings. Given that the collateral provided by the Company is
greater than the amount borrowed, the fair value calculation of these repurchase agreements only takes into
account the time value of money.
Loans and advances to banks
Loans and advances to banks with maturity over one year are discounted using an appropriate risk free rate
plus the credit spread of each counterparty. For short-term lending, the fair value is approximated by the
carrying value.
235
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
20.
Fair value measurement (continued)
Deposits by banks
Since almost all deposits by banks are very short-term, the fair value is an approximation of the carrying value.
Investment properties
The fair value of investment properties is determined using valuations performed by external accredited,
independent valuers and internal accredited valuers. Further information on the techniques applied is disclosed
in the remainder of this Note.
Property and equipment
The freehold land and buildings consist of offices and other commercial properties. The fair value of the
properties is determined using valuations performed by external, accredited, independent valuers and internal
accredited valuers. Further information on the techniques applied is disclosed in the remainder of this Note.
Model inputs for valuation
Observable inputs to the models for the valuation of unquoted equity and debt securities include, where
applicable, current and expected market interest rates, market expected default rates, market implied country
and counterparty credit risk and market liquidity discounts.
The following table presents the fair value measurement hierarchy of the Company’s assets and liabilities
recorded at fair value or for which fair value is disclosed, by level of the fair value hierarchy:
2016
Assets measured at fair value
Investment properties
Offices and other commercial properties
Investment properties held for sale
Offices and other commercial properties
Freehold property
Offices and other commercial properties
Trading derivatives
Forward exchange rate contracts
Currency swaps
Interest rate swaps
Currency options
Derivatives qualifying for hedge accounting
Fair value hedges-interest rate swaps
Net investments-forward exchange rate
contracts
Investments at fair value through profit or
loss
Trading investments
Other investments at fair value through
profit or loss
Investments available-for-sale
Level 1
€000
Level 2
€000
Level 3
€000
Total
€000
-
11.625
11.625
346
-
346
-
181.754
181.754
793
15.875
480
85
17.233
87
3.514
3.601
-
10.426
10.426
-
31.606
-
-
-
-
-
-
-
-
-
-
-
7.400
200.779
793
15.875
480
85
17.233
87
3.514
3.601
1.376
10.426
11.802
553.159
779.520
-
-
-
-
-
-
-
-
-
-
-
1.376
-
1.376
545.759
547.135
236
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
20.
Fair value measurement (continued)
Model inputs for valuation (continued)
2016
Other financial assets not measured at
fair value
Loans and advances to banks
Loans and receivables - investments
Loans and advances to customers
Level 1
€000
Level 2
€000
Level 3
€000
Total
€000
-
-
-
-
960.937
69.451
-
-
960.937
69.451
-
15.493.752 15.493.752
1.030.388
15.493.752 16.524.140
For available-for-sale equity securities categorised as Level 3, for one investment with a carrying amount of
€5.532 thousand, a change in the conversion factor by 10% would result in a change in the value of the equity
securities by €553 thousand.
2016
Liabilities measured at fair value
Trading derivatives
Forward exchange rate contracts
Currency swaps
Interest rate swaps
Currency options
Derivatives qualifying for hedge accounting
Fair value hedges-interest rate swaps
Net investments-forward exchange rate
contracts
Other financial liabilities not measured
at fair value
Deposits by banks
Repurchase agreements
Customer deposits
Level 1
€000
Level 2
€000
Level 3
€000
Total
€000
-
-
-
-
-
-
-
-
-
-
-
-
-
589
8.430
1.901
198
11.118
37.463
259
37.722
48.840
427.737
292.752
-
-
-
-
-
-
-
-
-
-
-
589
8.430
1.901
198
11.118
37.463
259
37.722
48.840
427.737
292.752
-
15.029.167 15.029.167
720.489
15.029.167 15.749.656
237
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
20.
Fair value measurement (continued)
Model inputs for valuation (continued)
2015
Assets measured at fair value
Investment properties
Offices and other commercial properties
Investment properties classified as held for
sale
Residential
Offices and other commercial properties
Freehold property
Offices and other commercial properties
Trading derivatives
Forward exchange rate contracts
Currency swaps
Interest rate swaps
Currency options
Equity options
Derivatives qualifying for hedge accounting
Fair value hedges-interest rate swaps
Net investments-forward exchange rate
contracts
Level 1
Level 2
Level 3
€000
€000
€000
Total
€000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
11.688
11.688
2.095
5.222
7.317
-
2.450
2.450
2.095
7.672
9.767
-
180.994
180.994
1.112
12.235
141
8
477
13.973
45
4
49
-
-
-
-
-
-
-
-
-
-
-
-
-
1.112
12.235
141
8
477
13.973
45
4
49
2.297
17.430
19.727
Investments at fair value through profit or
loss
Trading investments
2.297
Other investments at fair value through
profit or loss
-
17.430
2.297
17.430
Investments available-for-sale
442.336
-
34.665
477.001
444.633
38.769
229.797
713.199
238
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
20.
Fair value measurement (continued)
Model inputs for valuation (continued)
2016
Other financial assets not measured at
fair value
Loans and advances to banks
Loans and receivables-investments
Loans and advances to customers
Level 1
Level 2
Level 3
€000
€000
€000
Total
€000
-
-
-
-
1.102.191
424.070
-
-
1.102.191
424.070
-
16.999.781 16.999.781
1.526.261
16.999.781 18.526.042
For available-for-sale equity securities categorised as Level 3, for one investment with a carrying amount of
€32.489 thousand, a change in the conversion factor by 10% would result in a change in the value of the
equity securities by €475 thousand.
2015
Liabilities measured at fair value
Trading derivatives
Forward exchange rate contracts
Currency swaps
Interest rate swaps
Currency options
Equity options
Interest rate caps/floors
Derivatives qualifying for hedge accounting
Fair value hedges-interest rate swaps
Net investments-forward exchange rate
contracts
Other financial liabilities not measured
at fair value
Deposits by banks
Repurchase agreements
Customer deposits
Level 1
Level 2
Level 3
€000
€000
€000
Total
€000
5.666
5.729
2.305
167
441
53
14.361
39.570
477
40.047
54.408
237.860
406.014
-
-
-
-
-
-
-
-
-
-
-
-
-
5.666
5.729
2.305
167
441
53
14.361
39.570
477
40.047
54.408
237.860
406.014
-
12.700.673 12.700.673
643.874
12.700.673 13.344.547
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
239
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
20.
Fair value measurement (continued)
Model inputs for valuation (continued)
The cash and balances with central banks, the funding from central banks and the treasury bills are financial
instruments whose carrying value is a reasonable approximation of fair value, because they are mostly
short-term in nature or are repriced to current market rates frequently. Other assets, other liabilities and the
balances with Group companies are of a financial nature and their carrying value is a close approximation of
fair value.
During the years 2016 and 2015 there were no significant transfers between Level 1 and Level 2.
240
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
20.
Fair value measurement (continued)
Movements in Level 3 financial instruments measured at fair value
Transfers from Level 3 to Level 2 occur when the market for some securities becomes more liquid, which eliminates the need for the previously required significant
unobservable valuation inputs. Following a transfer to Level 2 the instruments are valued using valuation models incorporating observable market inputs. Transfers
into Level 3 reflect changes in market conditions as a result of which instruments become less liquid. Therefore, the Company requires significant unobservable inputs
to calculate their fair value.
The movement in Level 3 assets which are measured at fair value is presented below:
1 January
Additions
Disposals
Transfers from own use properties to
investment properties
Transfers to non-current assets
classified as held for sale
Transfers to stock of property (Note 26)
Transfers on disposal of Kyprou Leasing
SA to Greek branch
Transfers to Level 2
Net (losses)/gains from fair value
changes recognised in the statement of
other comprehensive income
Depreciation charge for the year
Impairment charge for the year (Note
24)
Revaluation losses
Foreign exchange adjustments
31 December
Investment
properties
€000
11.688
-
-
-
-
-
-
-
-
-
-
(63)
-
11.625
2016
2015
Investment
properties
held for sale
€000
Own use
properties
€000
Available-
for-sale
investments
€000
Investment
properties
€000
Investment
properties held
for sale
€000
Own use
properties
€000
Available-
for-sale
investments
€000
2.450
180.994
34.665
250.888
1.367
201.671
-
2.312
5.435
(32.489)
-
-
-
-
-
(21)
-
-
-
39.343
(3.853)
13.690
-
1.099
(9.946)
-
-
(13.690)
(17.081)
17.081
(282.855)
43.454
-
-
-
-
(247)
4.286
(7.317)
-
-
-
-
-
-
-
-
(1.726)
(288)
(32.271)
(2.774)
(6.072)
2.598
-
(33)
-
-
-
-
-
31.845
-
-
-
(190)
7.400
373
11.688
-
-
255
2.450
180.994
34.665
(2.450)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1.552)
-
-
-
181.754
241
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
20.
Fair value measurement (continued)
Valuation policy and sensitivity analysis
Investment properties, investment properties held for sale and own use properties
The valuation technique mainly applied by the Company, is the market comparable approach, adjusted for market and property specific conditions. In certain cases,
the Company also utilises the income capitalisation approach. The key inputs used for the valuations of the investment properties, investment properties held for
sale and own use properties are presented in the tables below.
Analysis of investment properties and investment properties held for sale
Type and country
2016
Estimated
rental value
per m2 per
annum
Rent
growth
per
annum
Estimated
building cost
per m2
Yield
Estimated
fair value
per m2
Estimated
land value
per m2
Land
Building
area
Age of
building
Offices and other commercial
properties
Cyprus
UK
Total
Analysis of own use properties
Type and country
Offices and other commercial
properties
€000
11.625
346
11.971
2016
€000
€73
€97
n/a
n/a
€1.130
n/a
4%
n/a
€1.660
n/a
€125
n/a
30.001
n/a
7.078
304
14
87
m2
m2
Years
Estimated
rental
value per
m2 per
annum
Rent
growth
per
annum
Estimated
building
cost per
m2
Yield
Estimated
fair value
per m2
Estimated
land value
per m2
Land
Building
area
Age of
building
m2
m2
Years
Cyprus
181.754
€27-€434
n/a €588-€2.102
5%-6% €566-€8.860 €139-€3.007
390-53.155 94-10.985
9-37
242
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
20.
Fair value measurement (continued)
Valuation policy and sensitivity analysis (continued)
Analysis of investment properties and investment properties held for sale
Type and country
2015
Estimated
rental
value per
m2 per
annum
Rent
growth
per
annum
Estimated
building
cost per
m2
Yield
Estimated
fair value
per m2
Estimated
land value
per m2
Land
Building
area
Age of
building
€000
m2
m2
Years
2.095
€548
n/a
n/a
n/a
€12.965
n/a
n/a
156
Residential
UK
Offices and other commercial
properties
Cyprus
Greece
UK
Total
Analysis of own use properties
Type and country
Offices and other commercial
properties
11.688
2.450
€117
€480
5.222
€110-€230
n/a
n/a
n/a
€1.302
n/a
4%
7%-10%
n/a
n/a
€2.773
€3.926
€1.013-
€3.123
€152
n/a
n/a
30.001
447
4.323
624
n/a
233-954
26-116
19.360
21.455
Estimated
rental
value per
m2 per
annum
2015
€000
Rent
growth
per
annum
Estimated
building
cost per
m2
Yield
Estimated
fair value
per m2
Estimated
land
value per
m2
Land
Building
area
Age of
building
m2
m2
Years
46
13
8
Cyprus
180.994
€23-€434
n/a
€674-
€2.102
5%-6%
€566-
€8.860
€138-
€3.007
390-
53.155
94-10.985
8-36
243
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
20.
Fair value measurement (continued)
Valuation policy and sensitivity analysis (continued)
Sensitivity analysis
Most of the Company’s property valuations have been classified as Level 3. Significant increases/decreases in
estimated values per square meter for properties valued with the comparable approach or significant
increases/decreases in estimated rental values or yields for properties valued with the income capitalisation
approach would result in a significantly higher/lower fair value of the properties.
21.
Loans and advances to customers
2016
€000
2015
€000
Gross loans and advances to customers
17.745.707
19.986.349
Provisions for impairment of loans and advances to customers
(Note 41)
(3.393.147)
(3.980.471)
14.352.560
16.005.878
Loans and advances to customers pledged as collateral are disclosed in Note 43.
Additional analysis and information regarding credit risk and analysis of the provisions for impairment of loans
and advances to customers are set out in Note 41.
244
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
22.
Balances and transactions with Group companies
Debit balances with Group companies
Name of Group company
2016
€000
2015
€000
The Cyprus Investment and Securities Corporation Ltd (CISCO)
2.042
General Insurance of Cyprus Ltd
EuroLife Ltd
Kermia Ltd
Finerose Properties Ltd
Hydrobius Ltd
Bank of Cyprus (Channel Islands) Ltd
Kyprou Commercial SA
Cyprus Leasing S.A.
MC Investment Assets Management LLC
Kyprou Finance (NL) B.V.
Bank of Cyprus UK Ltd
Obafemi Holdings Ltd
S.Z. Eliades Leisure Ltd
K. Athienitis Kalamon Ltd
Fortuna Astrum Ltd
Stamoland Properties Ltd
Group property companies in Cyprus
Group property companies in Romania
Other Group companies in Cyprus
Total
Neither past due nor impaired
Impaired
Total
855
400
1.978
216
42.453
3
55
10.093
2.631
1.072
2.251
4.393
1.978
38.935
-
24.905
-
12.491
2.631
317.136
317.142
66.966
6.684
3.386
22.662
4.238
5.671
71.010
6.822
-
-
-
-
807.339
186.055
69.229
945
64.853
1.041
1.364.982
735.579
2016
€000
750.057
614.925
1.364.982
2015
€000
143.345
592.234
735.579
The provision for impairment for intercompany balances recognised during 2016 amounts to €33.356 thousand
(2015: €27.039 thousand) (Note 14). The provision for impairment recognised during 2016 mainly relates to a
receivable arising from the disposal of the Russian operations in 2015 and funding provided to Group property
companies of which the value of the underlying asset has decreased
245
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
22.
Balances and transactions with Group companies (continued)
Credit balances with Group companies
Name of Group company
2016
€000
2015
€000
JCC Payment Systems Ltd
25.015
20.663
The Cyprus Investment and Securities Corporation Ltd (CISCO)
General Insurance of Cyprus Ltd
EuroLife Ltd
Kermia Properties & Investments Ltd
Kermia Ltd
Bank of Cyprus (Channel Islands) Ltd
Kyprou Zois (branch of EuroLife Ltd)
Kyprou Securities SA
Cyprus Leasing S.A.
MC Investment Assets Management LLC
Cytrustees Investment Public Company Ltd
Kyprou Finance (NL) B.V.
Bank of Cyprus UK Ltd
Obafemi Holdings Ltd
Group property companies in Romania
Other Group companies in Cyprus
Total
3.677
31.823
20.112
6.035
2.300
1.823
2.411
1.651
1.687
2.297
851
3.788
33.129
31.143
5.526
685
59.620
2.094
1.650
296
8.077
1.041
369.553
369.316
29.250
28.624
175
1.493
2.492
122
671
2.041
502.645
568.486
246
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
22.
Balances and transactions with Group companies (continued)
Dividends received from subsidiary companies and associates
Bank of Cyprus (Channel Islands) Ltd
Kermia Ltd
JCC Payment Systems Ltd
EuroLife Ltd
General Insurance of Cyprus Ltd
LCP Holdings and Investments Public Ltd
Labancor Ltd
CNP Cyprus Insurance Holdings Ltd
Transactions with Group companies
Interest income
Interest expense
Fee and commission income
Fee and commission expense
Other income
Other operating expenses
23.
Investments in associates
Carrying value of the investments in associates
CNP Cyprus Insurance Holdings Ltd
Interfund Investments Plc
Aris Capital Management LLC
Rosequeens Properties Limited
Rosequeens Properties SRL
M.S. (Skyra) Vassas Ltd
D.J. Karapatakis & Sons Limited
Rodhagate Entertainment Ltd
Fairways Automotive Holdings Ltd
2016
€000
2015
€000
39.235
24.000
15.000
13.000
10.000
-
-
6.621
-
-
3.000
13.500
6.000
1.904
1.558
7.580
107.856
33.542
2016
€000
2015
€000
20.609
21.314
4.211
4.366
78
242
6.249
2.943
-
280
1.963
1.106
2016
€000
2015
€000
95.068
2.225
95.068
2.225
-
-
-
-
-
-
-
-
-
-
-
-
-
-
97.293
97.293
247
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
23.
Investments in associates (continued)
Investments in associates
CNP Cyprus Insurance Holdings Ltd
As part of the acquisition of certain operations of Laiki Bank in 2013, 49,9% of CNP Cyprus Insurance Holdings
Ltd, the parent company of a group of insurance companies in Cyprus and Greece, was acquired by the
Company.
The main financial highlights of the associate are as follows:
Total assets
Liabilities
2016
€000
2015
€000
696.005
676.915
(481.234)
(465.416)
Net assets, including value of in-force business
214.771
211.499
CNP Cyprus Insurance Holdings Ltd holds deposits with the Company amounting to €10.310 thousand. The
transactions between CNP Cyprus Insurance Holdings Ltd and the Company are presented in the table below:
Interest expense paid by the Company
Other expenses paid by the Company
Other income received by the Company
2016
€000
2015
€000
197
92
-
239
239
2
Interfund Investments Plc
The Company has a 23,12% interest in Interfund Investments Plc, which is a closed-end investment company
in Cyprus, listed on the CSE. The market value of the investment is €1.399 thousand (2015: €1.372 thousand).
During the years 2016 and 2015 there were no material transactions between the Company and the associate.
Rosequeens Properties Limited and Rosequeens Properties SRL
The Company effectively owns 33% of the share capital of Rosequeens Properties SRL which is incorporated in
Romania and owns a shopping mall in Romania. The shareholding was acquired after the Company took part in
a public auction for the settlement of customer loan balances amounting to approximately €21 million. The
Company fully impaired its investment during previous years.
248
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
23.
Investments in associates (continued)
Investment in associates (continued)
Aris Capital Management LLC
The Company’s holding in Aris Capital Management LLC of 30% was transferred to the Company following the
acquisition of certain operations of Laiki Bank. During the years 2016 and 2015, there were no material
transactions between the Company and the associate. The Company fully impaired its investment during
previous years.
M.S. (Skyra) Vassas Ltd
During the year, in the context of its loan restructuring activities, the Company acquired a 15% interest in the
share capital of M.S. (Skyra) Vassas Ltd. M.S. (Skyra) Vassas Ltd is the parent company of a group of
companies (Skyra Vassas group) with operations in the production, processing and distribution of aggregates
(crushed stone and sand) and provision of other construction materials, and services based on core products
such as ready-mix concrete, asphalt and packing of aggregates. The Company considers that it exercises
significant influence over the Skyra Vassas group as the Company has the power to have representation to the
Board of Directors and to vote for matters relating to the relevant activities of the business. The investment is
considered to be fully impaired and its value is restricted to zero.
D.J. Karapatakis & Sons Limited and Rodhagate Entertainment Ltd
During the year, in the context of its loan restructuring activities, the Company acquired a 7,5% interest in the
share capital of D.J. Karapatakis & Sons Limited and Rodhagate Entertainment Ltd, operating in leisure,
tourism, film and entertainment industries in Cyprus. The Company considers that it exercises significant
influence over the two companies as the Company has the power to have representation to the Board of
Directors and to vote for matters relating to the relevant activities of the business. The investments are
considered to be fully impaired and their value is restricted to zero.
Fairways Automotive Holdings Ltd
During the year, in the context of its loan restructuring activities, the Company acquired a 45% interest in the
share capital of Fairways Automotive Holdings Ltd. Fairways Automotive Holdings Ltd is the parent company of
Fairways Ltd operating in the import and trading of motor vehicles and spare parts. The Company considers
that it exercises significant influence over the company. The investment is considered to be fully impaired and
its value is restricted to zero.
24.
Property and equipment
2016
Property
Equipment
€000
€000
Total
€000
Net book value at 1 January
183.594
14.633
198.227
Additions
Transfers from intangible assets (Note 25)
Disposals and write-offs
2.777
-
(59)
6.184
456
(148)
8.961
456
(207)
Depreciation charge for the year (Note 13)
(2.572)
(4.978)
(7.550)
Foreign exchange adjustments
1
-
1
Net book value at 31 December
183.741
16.147
199.888
1 January 2016
Cost or valuation
Accumulated depreciation
Net book value
217.821
100.845
318.666
(34.227)
(86.212)
(120.439)
183.594
14.633
198.227
249
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
24.
Property and equipment (continued)
31 December 2016
Cost or valuation
Accumulated depreciation
Net book value
2015
Property
Equipment
€000
€000
Total
€000
219.939
105.716
325.655
(36.198)
(89.569)
(125.767)
183.741
16.147
199.888
Net book value at 1 January
205.340
15.766
221.106
Additions
Revaluation
Transfers to investment properties (Note 20)
1.769
(6.072)
(13.726)
3.866
5.635
-
-
(6.072)
(13.726)
Disposals and write-offs
-
(188)
(188)
Depreciation charge for the year (Note 13)
(3.426)
(4.811)
(8.237)
Impairment charge for the year (Note 14)
Foreign exchange adjustments
(288)
(3)
-
-
(288)
(3)
Net book value at 31 December
183.594
14.633
198.227
1 January 2015
Cost or valuation
237.871
104.113
341.984
Accumulated depreciation
(32.531)
(88.347)
(120.878)
Net book value
205.340
15.766
221.106
31 December 2015
Cost or valuation
Accumulated depreciation
Net book value
The net book value of the Company’s property comprises:
Freehold property
Improvements on leasehold property
217.821
100.845
318.666
(34.227)
(86.212)
(120.439)
183.594
14.633
198.227
2016
€000
2015
€000
181.754
180.994
1.987
2.600
183.741
183.594
Freehold property includes land amounting to €77.127 thousand (2015: €74.816 thousand) for which no
depreciation is charged.
250
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
24.
Property and equipment (continued)
The Company’s policy is to revalue its properties periodically (between 3 to 5 years) but more frequent
revaluations may be performed where there are significant and volatile movements in values. As a
consequence of the economic conditions in Cyprus, and their impact on the real estate market, the Company
performed revaluations as at 31 December 2015. As a result, a net loss on revaluation of €6.072 thousand
was recognised in the statement of comprehensive income and an impairment loss of €288 thousand was
recognised in the income statement for the year ended 31 December 2015. The valuations are carried out by
qualified valuers, on the basis of market value using observable prices and/or recent market transactions
depending on the location of the property. Details on valuation techniques and inputs are presented in Note
20.
The net book value of freehold property, on a cost less accumulated depreciation basis, as at 31 December
2016 would have amounted to €130.699 thousand (2015: €129.940 thousand).
25.
Intangible assets
Computer software
Net book value at 1 January
Additions
Transfers to equipment (Note 24)
Disposals and write-offs
Amortisation charge for the year (Note 13)
Net book value at 31 December
1 January
Cost
Accumulated amortisation
Net book value
31 December
Cost
Accumulated amortisation
Net book value
26.
Stock of property
2016
€000
2015
€000
14.773
9.486
(456)
(12)
(6.110)
17.681
13.105
7.424
-
-
(5.756)
14.773
106.143
98.726
(91.370)
(85.621)
14.773
13.105
121.187
106.143
(103.506)
(91.370)
17.681
14.773
The carrying value of stock is determined as the lower of cost and net realisable value. Impairment is
recognised if the net realisable value is below the cost of the stock of property. During 2016 an impairment
loss of €11.745 thousand was recognised in ‘Impairment of non-financial instruments’ in the income statement
arising from measuring items at lower of cost and net realisable value (2015: impairment of €9.709 thousand).
At 31 December 2016, stock of €272.261 thousand (2015: €274.214 thousand) is carried at net realisable
value which is approximately the fair value less costs to sell.
The stock of property includes residential properties, offices and other commercial properties, manufacturing
and industrial properties, hotels, land (fields and plots) and properties under construction. The stock of
property pledged as collateral for central bank funding facilities under Eurosystem monetary policy operations
and ELA amounts to €22.055 thousand (2015: €21.875 thousand).
251
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
26.
Stock of property (continued)
The carrying value of the stock of property is analysed in the tables below:
Net book value at 1 January
Additions
Disposals
Transfers from investment properties (Note 20)
Transfers from disposal group held for sale (Note 20)
Impairment (Note 14)
Net book value at 31 December
2016
€000
276.095
258.555
(27.907)
2015
€000
822
1.880
-
-
-
282.855
247
(11.745)
(9.709)
494.998
276.095
Analysis by type and country
Cyprus
Greece
Romania
2016
Residential properties
Offices and other commercial properties
Manufacturing and industrial properties
Hotels
Land (fields and plots)
Properties under construction
Total
2015
Total
€000
€000
€000
€000
70.543
51.463
6.643
17.929
195.159
365
36.766
55.676
53.735
544
5.617
-
-
107.309
558
107.697
-
-
-
-
60.378
18.473
200.776
365
342.102
152.338
558
494.998
Residential properties
Offices and other commercial properties
Manufacturing and industrial properties
Hotels
Land (fields and plots)
Properties under construction
15.221
30.127
1.001
18.763
38.598
365
39.176
63.934
59.279
2.221
6.210
-
-
54.397
1.200
95.261
-
-
-
-
60.280
20.984
44.808
365
Total
104.075
170.820
1.200
276.095
252
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
27.
Prepayments, accrued income and other assets
Receivables relating to disposal of operations
Taxes refundable
Debtors
Prepaid expenses
Retirement benefit plan assets (Note 12)
Other assets
2016
€000
2015
€000
57.056
31.007
315
209
-
98.454
35.340
259
268
20
64.748
33.145
153.335
167.486
As at 31 December 2016, the receivables relating to disposal of operations related to the disposal of the
Ukrainian operations during 2014 which is secured and repayable in June 2019, whereas at 31 December 2015
they related to the disposal of the Ukrainian and Russian operations during 2014 and 2015 respectively.
During 2016, a reversal of impairment of €1.603 thousand was recognised in relation to other assets
(2015: impairment loss of €20.070 thousand) (Note 14).
28.
Non-current assets classified as held for sale
2016
€000
2015
€000
Investment properties held for sale
346
9.767
The following non-current assets were classified as held for sale as at 31 December 2016 and 2015:
Investment properties
The investment properties classified as held for sale are properties which management is committed to sell and
has proceeded with an active programme to complete this plan. The disposals are expected to take place
within 12 months from the date of classification. Investment properties classified as held for sale are measured
at fair value. The results of the fair value changes are presented within ‘Gains/(losses) from revaluation and
disposal of investment properties’ in the income statement. An analysis of investment properties classified as
held for sale by country and key valuation inputs are disclosed in Note 20.
253
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
29.
Funding from central banks
Funding from central banks comprises funding from the ECB under Eurosystem monetary policy operations and
ELA from the CBC, as set out in the table below:
Emergency Liquidity Assistance (ELA)
Main Refinancing Operations (MRO)
Longer-Term Refinancing Operations (LTRO)
Targeted Longer-Term Refinancing Operations (TLTRO)
2016
€000
2015
€000
200.014
3.802.058
-
150.000
50.000
600.000
850.014
-
500.792
4.452.850
In 2014, the Company participated in the TLTRO of the ECB for an amount of €500 million. On 29 June 2016
the Company repaid the amount borrowed through the TLTRO amounting to €500 million and borrowed the
same amount from the MRO. In December 2016, the Company borrowed an amount of €600 million through
the new series of TLTRO (TLTRO II) announced by the ECB in March 2016. Additionally, an amount of €50
million was borrowed through the LTRO. As a result, in December 2016 all the ECB funding that was borrowed
through the MRO, was switched to longer term funding.
In May 2016, the Company raised new funding from the ECB using as collateral a pool of housing loans that
satisfy the criteria of the Additional Credit Claims as set out in accordance with the Implementation of the
Eurosystem Monetary Policy Framework Directives of 2015 and 2016.
The interest rate applied to TLTRO II will be fixed for each operation at the rate applied in the MRO prevailing
at the time of allotment and is subject to a lower rate for counterparties whose eligible net lending in the pre-
specified period exceeds their benchmark. This lower rate will be linked to the interest rate on the deposit
facility prevailing at the time of the allotment of each operation.
The Company’s ELA funding bears interest at a rate equal to the ruling marginal lending facility rate (MLF rate)
of the Eurosystem, plus a margin. ELA funding was repaid in full by the Group on 5 January 2017.
Details on encumbered assets related to the above funding facilities are disclosed in Note 43.
30.
Customer deposits
By type of deposit
Demand
Savings
Time or notice
By geographical area
Cyprus
Romania
2016
€000
2015
€000
5.883.141
4.675.564
831.872
762.993
8.330.077
7.255.573
15.045.090
12.694.130
15.043.362
12.691.090
1.728
3.040
15.045.090
12.694.130
254
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
30.
Customer deposits (continued)
By customer sector
2016
Corporate
SMEs
Retail
Restructuring
– Corporate
– SMEs
Recoveries
– Corporate
International banking services
Wealth management
2015
Corporate
SMEs
Retail
Restructuring
– Corporate
– SMEs
Recoveries
– Corporate
International banking services
Wealth management
Cyprus
€000
Romania
€000
Total
€000
1.184.681
1.446
1.186.127
566.172
7.778.136
192.442
27.685
11.176
4.494.755
788.315
178
104
566.350
7.778.240
-
-
-
-
-
192.442
27.685
11.176
4.494.755
788.315
15.043.362
1.728
15.045.090
978.672
455.133
6.995.757
189.196
35.363
7.865
3.710.742
318.362
2.242
980.914
461
337
455.594
6.996.094
-
-
-
-
-
189.196
35.363
7.865
3.710.742
318.362
12.691.090
3.040
12.694.130
Deposits by geographical area are based on the originator country of the deposit.
255
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
31.
Accruals, deferred income and other liabilities
Income tax payable and related provisions
Special defence contribution payable
Retirement benefit plans liabilities (Note 12)
Provisions for pending litigation, claims and regulatory matters
(Note 36)
Provisions for financial guarantees and commitments
(Notes 14 and 36)
Accrued expenses and other provisions
Deferred income
Items in the course of settlement
Other liabilities
2016
€000
2015
€000
17.067
5.719
22.743
22.978
38.196
50.132
7.139
49.522
43.164
15.387
6.354
12.559
33.772
44.348
51.324
7.278
29.905
32.157
256.660
233.084
Provisions for pending litigation, claims and regulatory matters
The movement for the year in the provisions for pending litigation, claims and regulatory matters is as follows:
1 January
Transfer on disposal of Kyprou Leasing SA (Note 47.3.3)
Increase of provisions (Note 13)
Utilisation of provisions
Release of provisions (Note 13)
Foreign exchange adjustments
31 December
2016
€000
2015
€000
33.772
-
4.988
(7.858)
(7.924)
-
17.987
8.500
11.616
(30)
(4.300)
(1)
22.978
33.772
The provisions for pending litigation, claims and regulatory matters are analysed as follows:
Pending litigation or claims
Regulatory matters
31 December
2016
€000
2015
€000
19.978
3.000
22.978
30.772
3.000
33.772
Further details on the pending litigations, claims and regulatory matters are disclosed in Note 36.
256
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
32.
Share capital
Authorised
2016
2015
Shares
(thousand)
€000
Shares
(thousand)
€000
Ordinary shares of €0,10 each
47.677.593
4.767.759
47.677.593
4.767.759
Issued
1 January
Issue of shares
31 December
Issued share capital
8.922.945
892.294
8.922.378
892.238
-
-
567
56
8.922.945
892.294
8.922.945
892.294
2016
There were no changes to the issued share capital during the year 2016. The changes to the issued share
capital following the resolutions of the Extraordinary General Meeting which took place on 13 December 2016,
effective on 18 January 2017, are disclosed in Note 48.1.
2015
During 2015, the issued share capital was increased by 567 thousand shares of a nominal value of €0,10 each.
All issued ordinary shares carry the same rights.
Share premium reserve
The share premium reserve is maintained pursuant to the provisions of section 55 of the Companies Law, Cap.
113 and is not available for distribution to equity holders in the form of a dividend.
The share premium was created in 2014 and 2015 by the issuance of 4.167.234 thousand shares of a nominal
value of €0,10 each of a subscription price of €0,24 each, and was reduced by the relevant transaction costs of
€32.044 thousand.
Capital reduction reserve
The capital reduction reserve is maintained pursuant to the provisions of section 55 of the Companies Law,
Cap. 113 and is not available for distribution to equity holders in the form of a dividend.
The capital reduction reserve was created upon the reduction of the nominal value of ordinary shares from
€1,00 each to €0,10 each in 2014. The reduction in capital amounted to €4.280.140 thousand, of which an
amount of €2.327.654 thousand was applied against accumulated losses and an amount of €1.952.486
thousand was credited to the capital reduction reserve.
Treasury shares of the Company
Shares of the Company held by the Company are deducted from equity on the purchase, sale, issue or
cancellation of such shares. No gain or loss is recognised in the income statement. During 2016 all treasury
shares have been disposed of, therefore there were no treasury shares as at 31 December 2016 (2015: 684
thousand of a nominal value of €0,10 each). The total cost of acquisition of treasury shares at 31 December
2015 was €36.849 thousand.
Share-based payments - share options
On 24 November 2015, the Annual General Meeting of the Company’s shareholders authorised the Board of
Directors to establish and implement a Long Term Incentive Plan and allowed the Company the flexibility to
increase the ratio of variable remuneration relative to fixed remuneration up to a maximum of 100% of fixed
remuneration for members of senior management (‘Shareholder Resolution’). The authorised Long Term
Incentive Plan involved the granting of options for the acquisition of shares to a defined group of employees of
the Group and under the current terms of the Shareholder Resolution:
257
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
32.
Share capital (continued)
Share-based payments - share options (continued)
(i)
the total amount of shares that may be issued and allotted under the Long Term Incentive Plan shall not
exceed 178.458.891 ordinary shares of nominal value of €0,10 each,
(ii) the exercise price shall be set at €0,25 per share,
(iii) the vested share options will only be able to be exercised three years after the grant date, and
(iv) any share options not exercised by 31 March 2026 will lapse.
The options would be designed to vest only if certain key performance conditions were met, including amongst
other things, the full repayment of ELA, the lifting of dividend restrictions, the cancellation of government
guarantee and the performance of eligible employees.
The original proposed grant date of 31 March 2016 as per the Shareholder Resolution, was postponed until
such time that all relevant approvals were obtained.
Following the final SREP 2016 decision received in December 2016, the ECB’s prohibition on variable pay was
lifted and replaced with a limitation on variable remuneration to 10% of net revenues.
Following the incorporation of Bank of Cyprus Holdings Public Limited Company and its introduction as the new
holding company of the Company in January 2017, the Long Term Incentive Plan was replaced by the Share
Option Plan which operates at the level of Bank of Cyprus Holdings Public Limited Company. Further
information is disclosed in Note 48.2.
No share options were issued until the date of replacement of the Long Term Incentive Plan by the Share
Option Plan at the level of Bank of Cyprus Holdings Public Limited Company.
33.
Dividends
The Company is currently under a regulatory dividend distribution prohibition and therefore no dividend was
declared or paid during years 2016 and 2015.
34.
Accumulated losses
Retained earnings are the only distributable reserve.
Companies, tax resident in Cyprus, which do not distribute at least 70% of their profits after tax as defined by
the Special Defence Contribution Law during the two years after the end of the year of assessment to which the
profits refer, will be deemed to have distributed this amount as dividend. Special defence contribution at 17%
is payable on such deemed dividend distribution to the extent that the shareholders of the Company
(individuals who are domiciled in Cyprus and companies), at the end of the period of two years from the end of
the year of assessment to which the profits refer, are directly or indirectly Cyprus tax residents. Deemed
distribution does not apply in respect of profits that are directly or indirectly attributable to shareholders that
are non-Cyprus tax residents and individual shareholders who are not domiciled in Cyprus.
The amount of this deemed dividend distribution is reduced by any actual dividend paid out of the profits of the
relevant year.
This special defence contribution is paid by the Company on account of the shareholders.
During 2016 and 2015 no deemed dividend distribution was paid by the Company.
35.
Fiduciary transactions
The Company offers fund management and custody services that result in holding or investing financial assets
on behalf of its customers. The Company is not liable to its customers for any default by other banks or
organisations. The assets under management and custody are not included in the balance sheet of the
Company unless they are placed with the Company. Total assets under management and custody at 31
December 2016 amounted to €847.564 thousand (2015: €768.995 thousand).
258
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
36.
Contingent liabilities and commitments
As part of the services provided to its customers, the Company enters into various irrevocable commitments
and contingent liabilities. These consist of financial guarantees, letters of credit and other undrawn
commitments to lend.
Even though these obligations may not be recognised on the balance sheet, they do contain credit risk and are
therefore part of the overall credit risk exposure of the Company (Note 41).
36.1
Capital commitments
Capital commitments for the acquisition of property, equipment and intangible assets as at 31 December 2016
amount to €13.536 thousand (2015: €12.673 thousand).
36.2
Pending litigation, claims and regulatory matters
The Company in the ordinary course of business is subject to enquiries and examinations, requests for
information, audits, investigations and legal and other proceedings by regulators, governmental and other
public bodies, actual and threatened, relating to the suitability and adequacy of advice given to clients or the
absence of advice, lending and pricing practices, selling and disclosure requirements, record keeping, filings
and a variety of other matters. In addition, as a result of the deterioration of the Cypriot economy and banking
sector in 2012 and the subsequent Restructuring of the Company in 2013 as a result of the Bail-in Decrees, the
Company is subject to a large number of proceedings and investigations that either precede, or result from the
events that occurred during the period of the Bail-in Decrees. Most ongoing investigations and proceedings of
significance relate to matters arising during the period prior to the issue of the Bail-in Decrees.
Apart from what is described below, the Company considers that none of these matters is material, either
individually or in aggregate. The Company has not disclosed an estimate of the potential financial effect on its
contingent liabilities arising from these matters where it is not practicable to do so because it is too early or the
outcome is too uncertain or, in cases where it is practicable, where disclosure could prejudice conduct of the
matters. Provisions have been recognised for those cases where the Company is able to estimate probable
losses. Where an individual provision is material, the fact that a provision has been made is stated. Any
provision recognised does not constitute an admission of wrongdoing or legal liability. While the outcome of
these matters is inherently uncertain, management believes that, based on the information available to it,
appropriate provisions have been made in respect of legal proceedings and regulatory matters as at 31
December 2016 and hence it is not believed that such matters, when concluded, will have a material impact
upon the financial position of the Company.
36.2.1 Pending litigation and claims
Investigations and litigation relating to securities issued by the Company
A number of institutional and retail customers have filed various separate actions against the Company alleging
that the Company is guilty of misselling in relation to securities issued by the Company between 2007 and
2011. Remedies sought include the return of the money investors paid for these securities. Claims are currently
pending before the courts in Cyprus and in Greece, as well as the decisions and fines imposed upon the
Company in related matters by Cyprus Securities and Exchange Commission (CySEC) and/or Hellenic Capital
Market Commission (HCMC).
The bonds and capital securities in respect of which claims have been brought are the following: 2007 Capital
Securities, 2008 Convertible Bonds, 2009 Convertible Capital Securities (CCS) and 2011 Convertible Enhanced
Capital Securities (CECS).
The Company is defending these claims, particularly with respect to institutional investors and retail purchasers
who received investment advice from independent investment advisors. In the case of retail investors, if it can
be documented that the relevant Company officers 'persuaded' them to proceed with the purchase and/or
purported to offer 'investment advice', the Company may face significant difficulties. To date, a small number
of cases have been tried in Greece. The Company has appealed against any such cases which were not ruled
in its favour. The resolution of the claims brought in the courts of Greece is expected to take a number of
years. Provision has been made based on management's best estimate of probable outflows based on advice of
legal counsel.
259
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
36.
Contingent liabilities and commitments (continued)
36.2
Pending litigation, claims and regulatory matters (continued)
36.2.1 Pending litigation and claims (continued)
Bail-in related litigation
Depositors
A number of the Company's depositors, who allege that they were adversely affected by the bail-in, filed claims
against the Company and other parties (such as the CBC and the Ministry of Finance of Cyprus) on the grounds
that, inter alia, the ‘Resolution Law of 2013’ and the Bail-in Decrees were in conflict with the Constitution of the
Republic of Cyprus and the European Convention on Human Rights. They are seeking damages for their alleged
losses resulting from the bail-in of their deposits. The Company is defending these actions.
Shareholders
Numerous claims were filed by shareholders in 2013 (some of whom are current shareholders of the Company)
against the Government and the CBC before the Supreme Court in relation to the dilution of their shareholding
as a result of the recapitalisation pursuant to the Resolution Law and the Bail-in Decrees issued thereunder.
These proceedings sought the cancellation and setting aside of the Bail-in Decrees as unconstitutional and/or
unlawful and/or irregular. The Company appeared in these proceedings as an interested party to support the
position that the cases should be adjudicated upon in the context of private law. The Supreme Court ruled in
these cases in October 2014 that the proceedings fall within private and public law and thus fall within the
jurisdiction of the District Courts.
As at the present date, both the Resolution Law and the Bail-in Decrees have not been annulled by a court of
law and thus remain legally valid and in effect. It is expected that actions for damages will be instituted by the
shareholders in due course before the District Courts of Cyprus.
Claims based on set-off
Certain claims have been filed by customers against the Company alleging that the implementation of the bail-
in under the Bail-in Decrees was not carried out correctly in relation to them and, in particular, that their rights
of set-off were not properly respected. The Company intends to contest such claims.
Laiki Bank depositors and shareholders
The Company has been joined as a defendant with regards to certain claims which have been brought against
Laiki Bank by its depositors, shareholders and holders of debt securities. These claims have been brought on
grounds similar to the claims brought by the Company’s bailed-in depositors and shareholders as described
above. The Company, inter alia, maintains the position that it should not be a party to these proceedings.
Implementation of Decrees
Occasionally, other claims are brought against the Company in respect of the implementation of the Decrees
issued following the adoption of the Resolution Law (as regards the way and methodology whereby such
Decrees have been implemented).
Legal position of the Company
All above claims are being vigorously disputed by the Company, in close consultation with the appropriate state
and governmental authorities. The position of the Company is that the Resolution Law and the Decrees take
precedence over all other laws. As matters now stand, both the Resolution Law and the Decrees issued
thereunder are constitutional and lawful, in that they were properly enacted and have not so far been annulled
by any court.
260
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
36.
Contingent liabilities and commitments (continued)
36.2
Pending litigation, claims and regulatory matters (continued)
36.2.1 Pending litigation and claims (continued)
CNP Arbitration
The French entity CNP Assurances S.A. had certain exclusive arrangements with Laiki Bank with respect to
insurance products offered in, inter alia, Cyprus through the formation of a local company (CNP Cyprus
Insurance Holdings Ltd (a company in which the Company now has a 49,9% shareholding, acquired as part of
the acquisition of certain operations of Laiki Bank pursuant to Regulatory Administrative Act 104/2013)). CNP
Assurances S.A. held 50,1% of the shares of CNP Cyprus Insurance Holdings Ltd and Laiki Bank held 49,9% of
the shares. In the context of the total arrangement between the parties, two agreements were in place
between CNP Assurances S.A. and Laiki Bank, a Shareholders’ Agreement and a Distribution Agreement (to
which Distribution Agreement CNP Cyprus Insurance Holdings Ltd was also a party).
Following the resolution of Laiki Bank, CNP Assurances S.A. and CNP Cyprus Insurance Holdings Ltd instituted
arbitration proceedings in London under the rules of arbitration of the International Chamber of Commerce,
alleging that the Company was a successor to Laiki Bank in respect of both the Shareholders’ and Distribution
Agreements and that the said Agreements were violated by the Company. The claims of CNP Assurances S.A.
and CNP Cyprus Insurance Holdings Ltd amounted to approximately €240 million (including adjustments for
taxes and pre-award interest as at March 2015). The Tribunal award was issued in September 2016, rejecting
all claims made by the Claimants with costs in favour of the Company.
Provident fund cases
A number of claims which were pending before the Cypriot Labour Disputes Tribunal by certain of the
Company's former employees with respect to their retirement benefits were withdrawn unreservedly and
dismissed by the court in April 2016, following an out-of-court settlement to the satisfaction of the Company,
utilising part of the provisions for pending litigation in place.
In December 2015, the Bank of Cyprus Employees Provident Fund (the Provident Fund) filed an action against
the Company claiming €70 million allegedly owed as part of the Company's contribution by virtue of an
agreement with the union dated 31 December 2011. Based on facts currently known, it is not practicable at
this time for the Company to predict the resolution of this matter, including the timing or any possible impact
on the Company, however at this stage the Company does not expect a material impact on its financial
position.
Employment litigation
Former senior officers of the Company have instituted a total of three claims for unfair dismissal and for
Provident Fund entitlements against the Company and Trustees of the Provident Fund. As at the present date
one case had been dismissed as filed out of time, but the plaintiff has appealed against this ruling. The Group
does not consider that these cases will have a material impact upon its financial position.
Greek case
In connection with a legal dispute (one case by the Company against Themis and one by Themis against the
Company) relating to the Company's discontinued operations in Greece (Themis case), a provision was
recognised in previous periods (30 September 2014: €38.950 thousand) following a court judgement of the
Athens Court of Appeal (dismissing the Company's case and upholding the Themis case). This provision was
reversed as at 31 December 2014 following the dismissal of the judgement by the Greek Supreme Court in
March 2015. The Supreme Court further ruled that these claims (the Company's claim against Themis for
approximately €25 million which had been transferred to Piraeus Bank SA in March 2013, as well as Themis'
claim against the Company for a similar amount) be reconsidered by the Supreme Court on the merits at the
instigation of the affected party. Both cases were heard in December 2016 and the court reserved its
judgement. The Company does not consider that this case will have a material impact upon the financial
position of the Company.
Swiss Francs loans litigation in Cyprus and UK
A number of actions have been instituted against the Company by borrowers who obtained loans in foreign
currencies (mainly Swiss Francs). The central allegation in these cases is that the Company misled these
borrowers and/or misrepresented matters, in violation of applicable law. The Company intends to contest such
proceedings. The Company does not expect that these actions will have a material impact upon its financial
position.
261
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
36.
Contingent liabilities and commitments (continued)
36.1
Pending litigation, claims and regulatory matters (continued)
36.2.1 Pending litigation and claims (continued)
UK property lending claims
The Company is the defendant in certain proceedings alleging that the Company is legally responsible for
allegedly, inter alia, advancing and misselling loans for the purchase by UK nationals of property in Cyprus.
The proceedings in the United Kingdom are currently stayed in order for the parties to have time to negotiate
possible settlements.
General criminal investigations and proceedings
The Attorney General and the Cypriot Police (the Police) are conducting various investigations and inquiries
following and relating to the financial crisis which culminated in March 2013. The Company is cooperating fully
with the Attorney General and the Police and is providing all information requested of it. Based on the currently
available information, the Company is of the view that any further investigations or claims resulting from these
investigations will not have a material impact on its financial position.
The Attorney General has filed a criminal case against the Company and five former members of the Board of
Directors for alleged breach of Article 302 (conspiracy to defraud) of Cyprus' criminal code and Article 19 of the
Manipulation of Insider Information and Market Manipulation (Market Abuse) Law. The alleged offence refers to
the non-publication in a timely manner of the increased capital shortfall of the Company in 2012. The Company
denies all allegations. The case is pending in court. The maximum penalty on the Company, if found guilty, will
be the imposition of a fine that is not expected to have a material impact on the financial position of the
Company.
The Attorney General has filed a separate criminal case against the Company and six former members of the
Board of Directors for alleged breach of Article 19 of the Manipulation of Insider Information and Market
Manipulation (Market Abuse) Law, with respect to the Greek Government Bonds. The alleged offence refers to
the non-disclosure of the purchase of the Greek Government Bonds during a specified period. The Company
denies all allegations. The case is pending in court. The maximum penalty on the Company, if found guilty, will
be the imposition of a fine that is not expected to have a material impact on the financial position of the
Company.
In January 2017 the Attorney General has filed a criminal case against a number of current and former officers
of the Company relating to the reclassification of Greek Government Bonds in April 2010. No charges were
instituted against the Company in this case.
36.2.2 Provisions for regulatory matters
The Hellenic Capital Market Commission (HCMC) Investigation
The HCMC is currently in the process of investigating matters concerning the Company's investment in Greek
Government Bonds from 2009 to 2011, including, inter-alia, related non-disclosure of material information in
the Company's CCS and CECS and rights issue prospectus (tracking the investigation carried out by CySEC in
2013), Greek government bonds' reclassification, ELA disclosures and allegations by some Greek Government
Bond investors regarding the Company's non-compliance with Markets in Financial Instruments Directive
(MiFID) in respect of investors' direct investments in Greek Government Bonds.
A specific estimate of the outcome of the investigations or of the amount of possible fines cannot be given at
this stage, though it is not expected that any resulting liability or damages will have a material impact on the
financial position of the Company.
The Cyprus Securities and Exchange Commission (CySEC) Investigations
CySEC is currently in the process of investigating matters concerning possible price manipulation attributable to
the Company for the period from 1 November 2009 to 30 June 2010 post the investment in Banca
Transylvania.
CySEC has also completed the investigation on the adequacy of provisions for the impairment of loans and
advances in year 2011 and the investigation is currently pending with the CySEC Board.
262
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
36.
Contingent liabilities and commitments (continued)
36.2
Pending litigation, claims and regulatory matters (continued)
36.2.2 Provisions for regulatory matters (continued)
The Cyprus Securities and Exchange Commission (CySEC) Investigations (continued)
As the above investigations are in progress or decisions have been reserved, it is not practical at this stage for
the Company to estimate reliably the possible consequences thereof, though it is not expected that any
resulting liability or damages will have a material impact on the financial position of the Company.
Additionally, in late 2014 CySEC completed an investigation into the value of goodwill in CB Uniastrum Bank
LLC disclosed in the interim financial statements of the Group in 2012. In October 2016, CySEC issued a
decision, concluding that the Company was in breach of certain laws regarding disclosure in accordance, inter
alia, with the Market Manipulation (Market Abuse) Law of 2005 and has imposed an administrative fine upon
the Company of €25 thousand. CySEC also imposed higher fines upon certain former members of the Board of
Directors and former management of the Company. The Company filed a recourse before the Administrative
Court against the decisions of CySEC and the fine imposed upon the Company. In March 2017, CySEC filed a
legal action against the Company, claiming the amount of €25 thousand imposed as a fine.
In 2015, CySEC carried out an investigation into the reclassification of Greek Government Bonds in April 2010,
which was also completed in 2016 with no findings against the Company.
The investigation regarding the adequacy of provisions for impairment of loans and advances in year 2013 in
light of the results of the Asset Quality Review was also completed in 2016 with no finding against the
Company.
Commission for the Protection of Competition Investigation
In April 2014, following an investigation which began in 2010, the Cypriot Commission for the Protection of
Competition (the CPC) issued a statement of objections, alleging violations of Cypriot and EU competition law
relating to the activities and/or omissions in respect of card payment transactions by, among others, the
Company and JCC Payment Systems Ltd (JCC), a card-processing business currently 75% owned by the
Company.
There was also an allegation concerning the Company's arrangements with American Express, namely that
such exclusive arrangements violated Cypriot and EU competition law. On both matters, the CPC has concluded
that the Company (in common with other banks and JCC) has breached the relevant provisions of the
applicable law for the protection of competition. For the time being, the proceedings before the CPC had been
stalled due to an Administrative Court decision holding that the composition of the CPC was contrary to law,
which was however overturned in March 2017 by the Supreme Court on appeal by the Attorney General. This
decision is subject to an appeal instituted before the Supreme Court by the Attorney General. The Company
intends to file a recourse before the Administrative Court for the annulment of the CPC's decision and fine (if
and when a fine is imposed in reliance thereof). At this stage it is not possible to predict the amount of the fine
that may be imposed upon the Company, though it is not expected that any resulting liability or damages will
have a material impact on the financial position of the Company.
36.3
Other contingent liabilities
The Company, as part of its disposal process of certain of its operations, has provided various representations,
warranties and indemnities to the buyers. These relate to, among other things, the ownership of the loans, the
validity of the liens, tax exposures and other matters agreed with the buyers. As a result, the Company may be
obliged to compensate the buyers in the event of a valid claim by the buyers with respect to the above
representations, warranties and indemnities.
A provision has been made, based on management’s best estimate of probable outflows, where it was assessed
that such an outflow is probable.
263
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
37.
Net cash flow from operating activities
Profit/(loss) before tax
Adjustments for:
Provisions for impairment of loans and advances to customers and
other customer credit losses and gain on derecognition and changes
in expected cash flows
Depreciation of property and equipment
Amortisation of intangible assets
Impairment of property and equipment
Impairment of other financial instruments
Amortisation of discounts/premiums, catch-up adjustment and
interest on debt securities
Loss on sale and write-offs of property and equipment and intangible
assets
(Gains)/losses on disposal of investment properties and investment
properties held for sale
Losses from revaluation of investment properties and investment
properties held for sale
Loss on dissolution/disposal of subsidiaries
Dividend income
Impairment of investments in subsidiaries and associates
Impairment of balances with Group companies
Net gains on disposal of available-for-sale investments in equity
securities
Net gains on disposal of available-for-sale investments and
investments classified as loans and receivables in debt securities
Loss from revaluation of debt securities designated as fair value
hedges
Gains on disposal of stock of property
Gains on disposal of joint ventures
Impairment of stock of property
Interest on funding from central banks
Change in:
Loans and advances to banks
Deposits by banks
Obligatory balances with central banks
Customer deposits
Debit balances with Group companies
Credit balances with Group companies
Loans and advances to customers
Other assets
Accrued income and prepaid expenses
Other liabilities
Accrued expenses and deferred income
Derivative financial instruments
Investments at fair value through profit or loss
Repurchase agreements
Proceeds on disposal of stock of property
Tax received/(paid)
Net cash flow from operating activities
264
2016
€000
168.157
2015
€000
(433.382)
360.311
924.538
7.550
6.110
-
12.609
8.237
5.756
288
42.002
(22.596)
(71.934)
54
(4.050)
63
10.719
(108.073)
24.798
33.356
(37.013)
41
505
35.045
25.612
(34.113)
30.455
27.039
(1.060)
(8.419)
(49.502)
16.466
(399)
-
11.745
29.656
501.044
49.909
189.877
(19.655)
2.350.960
64.054
(65.841)
236.696
12.091
59
32.968
(1.331)
(12.380)
7.925
(110.784)
28.306
3.263.898
4.951
3.268.849
11.600
-
(13.526)
9.709
78.187
595.497
60.083
77.069
361.510
1.364.973
114.839
17.803
220.574
7.281
318
(47.036)
14.300
31.210
(559)
(211.531)
-
2.606.331
(1.071)
2.605.260
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
37.
Net cash flow from operating activities (continued)
Non-cash transactions
2016
Acquisition of S.Z. Eliades Leisure Ltd
During the year ended 31 December 2016 the Company acquired a 70% interest in the share capital of S.Z.
Eliades Leisure Ltd in exchange for the settlement of the majority of the borrowing due from S.Z. Eliades
Leisure Ltd to the Company, as part of the restructuring of its debt. The acquisition did not include any cash
consideration. Further information is disclosed in Note 47.1.1.
Sale of shares held in Visa Europe Limited
During the year ended 31 December 2016 the Company sold its shares held in Visa Europe Limited following
the purchase of Visa Europe Limited by Visa Inc. The transaction in addition to the cash paid, involved the
granting of preferred stock in Visa Inc. with a carrying value of approximately €5 million and a deferred cash
component of a carrying value of approximately €2 million.
Repossession of collaterals
During the year ended 31 December 2016, the Company acquired stock of property by taking possession of
collaterals held as security for loans and advances to customers of €258.555 thousand (2015: €1.880
thousand) (Note 26).
Closure of the operations of Bank of Cyprus (Channel Islands) Ltd
As part of the Company’s strategy of focusing on its core businesses and markets, the Company decided the
closure of the operations of Bank of Cyprus (Channel Islands) Ltd and the relocation of its business to other
Group locations, mainly Cyprus and the UK.
2015
Disposal of the majority of the Russian subsidiaries
On 25 September 2015, the Company completed the disposal of the majority of its Russian operations,
including the related subsidiaries. As part of the sales agreement, the parties agreed an asset swap
arrangement which involved the exchange of certain assets between them that resulted in €41.849 thousand
receivable for the Company, which was fully settled during 2016.
Disposal of Aphrodite group
During 2015, the Company disposed of a 65% shareholding in the Aphrodite group. The transaction involved
the restructuring of the debt owed by this group to the Company.
Net cash flow from operating activities – interest and dividends
Interest paid
Interest received
Dividends received
2016
€000
2015
€000
(195.046)
(268.106)
929.681
1.134.300
108.073
842.708
34.113
900.307
265
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
38.
Cash and cash equivalents
Cash and cash equivalents comprise:
2016
€000
2015
€000
Cash and non-obligatory balances with central banks
1.125.351
989.007
Treasury bills repayable within three months
-
21.451
Loans and advances to banks with original maturity less than
three months
769.304
833.035
1.894.655
1.843.493
Analysis of cash and balances with central banks and loans and advances to banks
Cash and non-obligatory balances with central banks
Obligatory balances with central banks
2016
€000
1.125.351
142.002
2015
€000
989.007
122.347
Total cash and balances with central banks (Note 17)
1.267.353
1.111.354
Loans and advances to banks with original maturity less than
three months
Other restricted loans and advances to banks
Other loans and advances to banks
769.304
833.035
136.398
79.174
153.608
125.694
Total loans and advances to banks (Note 17)
984.876
1.112.337
Other restricted loans and advances to banks include collaterals under derivative transactions of €55.017
thousand (2015: €82.123 thousand) which is not immediately available for use by the Company, but is
released once the transactions are terminated.
39.
Operating leases – The Company as lessee
The total future minimum lease payments under non-cancellable operating leases at 31 December 2016 and
2015 are presented below:
Within one year
Between one and five years
After five years
2016
€000
2015
€000
2.142
4.637
282
7.061
2.637
5.876
742
9.255
The above mainly relate to property leases for the Company’s branches and offices.
266
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
40.
Analysis of assets and liabilities by expected maturity
Less than
one year
2016
Over one
year
Assets
€000
€000
2015
Total
€000
Less than one
year
Over one
year
€000
€000
Total
€000
Cash and balances
with central banks
Loans and advances
to banks
Derivative financial
assets
1.125.906
141.447
1.267.353
989.598
121.756
1.111.354
850.199
134.677
984.876
1.010.375
101.962
1.112.337
20.374
460
20.834
13.938
84
14.022
Investments
60.264
572.771
633.035
317.542
616.121
933.663
Loans and advances
to customers
Balances with Group
companies
Prepayments,
accrued income and
other assets
5.201.405
9.151.155
14.352.560
4.821.788
11.184.090
16.005.878
159.412
1.205.570
1.364.982
192.677
542.902
735.579
34.589
118.746
153.335
11.049
156.437
167.486
Stock of property
133.000
361.998
494.998
62.683
213.412
276.095
Property, equipment
and intangible assets
Investment
properties
Investments in
associates and joint
ventures
Investments in Group
companies
-
-
-
-
217.569
217.569
335
212.665
213.000
11.625
11.625
97.293
97.293
198.708
198.708
-
-
-
11.688
11.688
97.293
97.293
207.781
207.781
Deferred tax assets
2.885
447.465
450.350
8.828
447.651
456.479
Non-current assets
classified as held for
sale
Liabilities
346
-
346
9.767
-
9.767
7.588.380
12.659.484
20.247.864
7.438.580
13.913.842
21.352.422
Deposits by banks
347.729
80.008
427.737
204.697
33.163
237.860
Funding from central
banks
Repurchase
agreements
Derivative financial
liabilities
250.014
600.000
850.014
2.744.764
1.708.086
4.452.850
-
257.367
257.367
111.605
256.546
368.151
9.649
39.191
48.840
16.041
38.367
54.408
Customer deposits
4.206.159
10.838.931
15.045.090
3.705.967
8.988.163
12.694.130
Balances with Group
companies
Accruals, deferred
income and other
liabilities
Debt securities in
issue
Deferred tax
liabilities
133.483
369.162
502.645
199.170
369.316
568.486
211.680
44.980
256.660
184.710
48.374
233.084
-
-
-
-
712
-
712
20.533
20.533
-
19.868
19.868
5.158.714
12.250.172
17.408.886
7.167.666
11.461.883
18.629.549
267
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
40.
Analysis of assets and liabilities by expected maturity (continued)
The main assumptions used in determining the expected maturity of assets and liabilities are set out below.
The ELA funding which forms part of the funding from central banks has been included in the ‘less than one
year’ time band as at 31 December 2016, since it was expected to be repaid within one year. Funding under
ELA has a contractual maturity of less than one year.
The investments are classified in the relevant time band based on expectations as to their realisation. In most
cases this is the maturity date, unless there is an indication that the maturity will be prolonged or there is an
intention to sell, roll or replace the security with a similar one. The latter would be the case where there is
secured borrowing, requiring the pledging of bonds and these bonds mature before the maturity of the secured
borrowing. The maturity of bonds is then extended to cover the period of the secured borrowing.
Performing loans and advances to customers in Cyprus are classified based on the contractual repayment
schedule. Overdraft accounts are classified in the ‘over one year’ time band. The impaired loans as defined in
Note 41, net of specific and collective provisions, and the loans which are past due for more than 90 days, are
classified in the ‘over one year’ time band except from expected receipts which are included within time bands,
according to historic amounts of receipts in the last months.
Stock of property is classified in the relevant time band based on expectations as to its realisation.
A percentage of customer deposits in Cyprus maturing within one year is transferred in the ‘over one year’ time
band, based on the observed behavioural analysis. In Romania deposits are classified on the basis of
contractual maturities.
Trading investments are classified in the less than one year time band.
The expected maturity of all prepayments, accrued income and other assets and accruals, deferred income and
other liabilities is the same as their contractual maturity. If they don’t have a contractual maturity, the
expected maturity is based on the timing the asset is expected to be realised and the liability is expected to be
settled.
41.
Risk management – Credit risk
In the ordinary course of its business the Company is exposed to credit risk which is monitored through various
control mechanisms, in order to prevent undue risk concentrations and to price credit facilities and products on
a risk-adjusted basis.
Credit risk is the risk that arises from the possible failure of one or more customers to discharge their
obligations towards the Company.
The Credit Risk department sets the Company’s credit disbursement policies and monitors compliance with
credit risk policy applicable to each business line and monitors the quality of the Company’s loans and
advances portfolio through the timely assessment of problematic customers. The credit exposures from related
accounts are aggregated and monitored on a consolidated basis.
Credit Risk department, safeguards the effective management of credit risk at all stages of the credit cycle,
monitors the quality of decisions and processes and ensures that credit sanctioning function is being properly
managed.
The credit policies are combined with the methods used for the assessment of the customers’ creditworthiness
(credit rating and credit scoring systems).
The loan portfolio is analysed on the basis of assessments about the customers’ creditworthiness, their
economic sector of activity and the country in which they operate.
The credit risk exposure of the Company is diversified both geographically and across the various sectors of the
economy. The Credit Risk department determines the prohibitive/dangerous sectors of the economy and sets
out stricter policy rules for these sectors, according to their degree of riskiness.
268
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
The Company’s significant judgements, estimates and assumptions regarding the determination of the level of
provisions for impairment are described in Note 5.1.
The Market Risk department assesses the credit risk relating to investments in liquid assets (mainly loans and
advances to banks and debt securities) and submits its recommendations for limits to be set for banks and
countries to the ALCO for approval.
Maximum exposure to credit risk and collateral and other credit enhancements
The Company’s maximum exposure to credit risk is analysed by geographic area as follows:
On-balance sheet
Cyprus
Greece
Russia
United Kingdom
Romania
Off-balance sheet
Cyprus
Greece
Russia
Romania
Total on and off-balance sheet
Cyprus
Greece
Russia
United Kingdom
Romania
2016
€000
2015
€000
18.265.382
19.423.767
48.399
10.985
22.027
48.126
55.257
16.545
226.751
319.477
18.573.544
19.863.172
2.738.382
2.736.014
112.596
-
397
131.172
20.000
307
2.851.375
2.887.493
21.003.764
22.159.781
160.995
179.298
10.985
22.027
75.257
16.545
227.148
319.784
21.424.919
22.750.665
269
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Maximum exposure to credit risk and collateral and other credit enhancements (continued)
The Company offers guarantee facilities to its customers under which the Company may be required to make
payments on their behalf and enters into commitments to extend credit lines to secure their liquidity needs.
Letters of credit and guarantee (including standby letters of credit) commit the Company to make payments on
behalf of customers in the event of a specific act, generally related to the import or export of goods. Such
commitments expose the Company to risks similar to those of loans and advances and are therefore monitored
by the same policies and control processes.
Loans and advances to customers
The Credit Risk department determines the amount and type of collateral and other credit enhancements
required for the granting of new loans to customers.
The main types of collateral obtained by the Company are mortgages on real estate, cash collateral/blocked
deposits, bank guarantees, government guarantees, pledges of equity securities and debt instruments of public
companies, fixed and floating charges over corporate assets, assignment of life insurance policies, assignment
of rights on certain contracts and personal and corporate guarantees.
The Company’s management regularly monitors the changes in the market value of the collateral and, where
necessary, requests the pledging of additional collateral in accordance with the relevant agreement.
Other financial instruments
Collateral held as security for financial assets other than loans and advances is determined by the nature of the
financial instrument. Debt securities and other eligible bills are generally unsecured with the exception of
asset-backed securities and similar instruments, which are secured by pools of financial assets. In addition,
some debt securities are government-guaranteed.
The Company has chosen the ISDA Master Agreement for documenting its derivatives activity. It provides the
contractual framework within which dealing activity across a full range of over-the-counter (OTC) products is
conducted and contractually binds both parties to apply close-out netting across all outstanding transactions
covered by an agreement, if either party defaults. In most cases the parties execute a Credit Support Annex
(CSA) in conjunction with the ISDA Master Agreement. Under a CSA, the collateral is passed between the
parties in order to mitigate the market contingent counterparty risk inherent in their open positions.
Settlement risk arises in any situation where a payment in cash or securities is made in the expectation of a
corresponding receipt in securities or cash. The Company sets daily settlement limits for each counterparty.
Settlement risk is mitigated when transactions are effected via established payment systems or on a delivery
upon payment basis.
The table below presents the maximum exposure to credit risk, the tangible and measurable collateral and
credit enhancements held and the net exposure to credit risk, that is the exposure after taking into account the
impairment loss and tangible and measurable collateral and credit enhancements held. Personal guarantees
are an additional form of collateral, but are not included in the information below since it is impracticable to
estimate their fair value.
The fair value of the collateral presented in the tables below is capped to the carrying value of the loans and
advances to customers.
270
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Maximum exposure to credit risk and collateral and other credit enhancements (continued)
2016
Maximum
exposure
to credit
risk
Fair value of collateral and credit enhancements held by the Company
Cash
Securities
Letters of
credit /
guarantee
Property
Other
Surplus
collateral
Net collateral
Net
exposure to
credit risk
€000
€000
€000
€000
€000
€000
€000
€000
€000
Balances with central banks (Note 17)
1.135.173
Loans and advances to banks (Note 17)
984.876
Debt securities at fair value through profit or
loss (Note 18)
Debt securities classified as available-for-sale
and loans and receivables (Note 18)
10.426
608.625
Derivative financial instruments (Note 19)
20.834
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1.135.173
984.876
10.426
608.625
20.834
Loans and advances to customers (Note 21)
14.352.560
337.198
335.599
305.202
19.259.024
501.500
(8.265.377)
12.473.146
1.879.414
Debtors (Note 27)
315
Balances with Group companies (Note 22)
1.364.982
Other assets
95.753
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
315
1.364.982
95.753
On-balance sheet total
18.573.544
337.198
335.599
305.202 19.259.024
501.500
(8.265.377)
12.473.146
6.100.398
Contingent liabilities
Acceptances and endorsements
6.413
353
-
-
4.263
13
-
4.629
1.784
Guarantees
Commitments
797.071
69.712
1.326
65.185
164.480
6.222
(967)
305.958
491.113
Documentary credits
27.636
10.837
15
102
8.112
297
Undrawn formal stand-by facilities, credit
lines and other commitments to lend
2.020.255
31.347
1.050
2.221
294.839
16.158
-
-
19.363
8.273
345.615
1.674.640
Off-balance sheet total
2.851.375
112.249
2.391
67.508
471.694
22.690
(967)
675.565
2.175.810
Total credit risk exposure
21.424.919
449.447
337.990
372.710 19.730.718
524.190
(8.266.344) 13.148.711
8.276.208
271
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Maximum exposure to credit risk and collateral and other credit enhancements (continued)
2015
Maximum
exposure
to credit
risk
Fair value of collateral and credit enhancements held by the Company
Cash
Securities
Letters of
credit /
guarantee
Property
Other
Surplus
collateral
Net
collateral
Net
exposure to
credit risk
€000
€000
€000
€000
€000
€000
€000
€000
€000
Balances with central banks (Note 17)
957.612
Loans and advances to banks (Note 17)
1.112.337
Debt securities at fair value through profit or
loss (Note 18)
Debt securities classified as available-for-sale
and loans and receivables (Note 18)
17.430
874.337
Derivative financial instruments (Note 19)
14.022
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
957.612
1.112.337
17.430
874.337
14.022
Loans and advances to customers (Note 21)
16.005.878
478.532
253.305
377.011
20.944.487
347.591
(8.058.447)
14.342.479
1.663.399
Debtors (Note 27)
Balances with Group companies (Note 22)
Other assets
259
735.579
145.718
-
-
-
-
-
4.600
-
-
-
-
-
19.043
-
-
-
-
-
-
-
-
259
735.579
23.643
122.075
On-balance sheet total
19.863.172
478.532
257.905
377.011 20.963.530
347.591 (8.058.447) 14.366.122
5.497.050
Contingent liabilities
Acceptances and endorsements
7.041
666
-
-
4.352
32
Guarantees
Commitments
792.883
52.446
687
73.436
186.975
10.442
Documentary credits
18.441
1.123
9
71
8.245
495
Undrawn formal stand-by facilities, credit
lines and other commitments to lend
2.069.128
30.339
1.302
1.744
288.908
14.433
Off-balance sheet total
2.887.493
84.574
1.998
75.251
488.480
25.402
-
-
-
-
-
5.050
1.991
323.986
468.897
9.943
8.498
336.726
1.732.402
675.705
2.211.788
Total credit risk exposure
22.750.665
563.106
259.903
452.262 21.452.010
372.993 (8.058.447) 15.041.827
7.708.838
272
BANK OF CYPRUS PUBLIC COMPANY LTD Annual Financial Report 2016
Notes to the Financial Statements
41. Risk management – Credit risk (continued)
Credit risk concentration of loans and advances to customers
There are restrictions on loan concentrations which are imposed by the Banking Law in Cyprus and the
relevant CBC Directives and CRR. According to these restrictions, banks are prohibited from lending more
than 25% of the capital base to a single customer group. The Group’s risk appetite statement imposes stricter
concentration limits and the Company is taking actions to run down those exposures which are in excess of
these internal limits over time.
In addition to the above, the Company’s overseas branches must comply with guidelines for large exposures
as set by the regulatory authorities of the countries in which they operate.
Fair value adjustment on initial recognition
The fair value adjustment on initial recognition relates to the loans and advances to customers acquired as
part of the acquisition of certain operations of Laiki Bank in 2013 and originated credit impaired loans. In
accordance with the provisions of IFRS 3, this adjustment has decreased the gross balance of loans and
advances to customers. However, for IFRS 7 disclosure purposes as well as for credit risk monitoring, the
aforementioned adjustment is not presented within the gross balances of loans and advances.
273
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Credit risk concentration of loans and advances to customers (continued)
Geographical and industry concentrations of the Company loans and advances to customers are presented below:
2016
Cyprus
Greece
United
Kingdom
Romania
Russia
Total
Fair value
adjustment
on initial
recognition
By economic activity
€000
€000
€000
€000
€000
€000
€000
Gross loans
after fair
value
adjustment
on initial
recognition
€000
Trade
Manufacturing
Hotels and catering
Construction
Real estate
Private individuals
Professional and other services
Other sectors
By customer sector
Corporate
SMEs
Retail
- housing
- consumer, credit cards and other
International banking services
Wealth management
2.044.324
658.811
1.302.543
2.874.260
2.022.559
6.980.383
1.322.550
1.054.272
-
-
-
-
19.599
-
-
337
28
93
221
-
8.239
15.508
3.980
16
11.141
7.722
3.263
67.756
200.642
3.000
11.810
32.927
-
-
-
-
2.055.493
(87.576)
1.967.917
666.626
(25.734)
640.892
1.306.027
(62.665)
1.243.362
2.942.016
(210.436)
2.731.580
6.934
2.257.973
(114.140)
2.143.833
-
6.998.891
(227.057)
6.771.834
13.701
1.352.041
(72.960)
1.279.081
-
1.087.552
(120.344)
967.208
18.259.702
19.936
28.085
338.261
20.635 18.666.619
(920.912) 17.745.707
7.507.790
4.100.298
4.202.287
2.064.802
321.571
62.954
19.936
-
-
-
-
-
22.969
2.684
-
2.432
-
-
334.440
13.701
7.898.836
(473.799)
7.425.037
3.635
-
4.106.617
(202.240)
3.904.377
100
86
-
-
-
4.202.387
(100.509)
4.101.878
6.934
2.074.254
(135.350)
1.938.904
-
-
321.571
(3.619)
317.952
62.954
(5.395)
57.559
18.259.702
19.936
28.085
338.261
20.635 18.666.619
(920.912) 17.745.707
274
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Credit risk concentration of loans and advances to customers (continued)
2016
Cyprus
Greece
United
Kingdom
Romania
Russia
Total
Fair value
adjustment
on initial
recognition
By business line
€000
€000
€000
€000
€000
€000
€000
Gross loans
after fair
value
adjustment
on initial
recognition
€000
Corporate
SMEs
Retail
- housing
- consumer, credit cards and other
Restructuring
- major corporate
- corporate
- SMEs
Recoveries
- corporate
- SMEs
- retail housing
- retail other
International banking services
Wealth management
2.547.970
1.377.837
3.531.222
1.317.434
2.080.586
1.014.853
1.219.572
1.864.381
1.502.889
671.065
747.368
321.571
62.954
19.936
-
-
-
-
-
-
-
-
-
-
-
-
18.359
2.684
237.203
3.436
-
883
-
-
-
100
86
33.947
-
-
-
-
-
-
-
-
-
2.823.468
(63.523)
2.759.945
1.383.957
(29.071)
1.354.886
3.531.322
(40.640)
3.490.682
1.318.403
(26.435)
1.291.968
2.114.533
(156.190)
1.958.343
1.014.853
(22.795)
992.058
1.219.572
(50.393)
1.169.179
4.610
63.290
13.701
1.945.982
(231.291)
1.714.691
-
-
1.549
-
-
199
-
-
-
-
-
-
1.503.088
(122.776)
1.380.312
671.065
(59.869)
611.196
6.934
755.851
(108.915)
646.936
-
-
321.571
(3.619)
317.952
62.954
(5.395)
57.559
18.259.702
19.936
28.085
338.261
20.635 18.666.619
(920.912) 17.745.707
Restructuring major corporate business line includes customers with exposures over €100.000 thousand, whereas restructuring corporate business line includes
customers with exposures between €6.000 thousand and €100.000 thousand.
275
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Credit risk concentration of loans and advances to customers (continued)
2015
Cyprus
Greece
United
Kingdom
Romania
Russia
Total
Fair value
adjustment
on initial
recognition
By economic activity
€000
€000
€000
€000
€000
€000
€000
Gross loans
after fair
value
adjustment
on initial
recognition
€000
Trade
Manufacturing
Hotels and catering
Construction
Real estate
Private individuals
Professional and other services
Other sectors
By customer sector
Corporate
SMEs
Retail
- housing
- consumer, credit cards and other
International banking services
Wealth management
2.267.092
801.536
1.463.129
3.976.156
2.130.028
7.282.322
1.595.010
1.145.344
20.660.617
9.222.446
4.408.096
4.285.058
2.152.950
528.795
63.272
-
-
-
-
43.443
-
-
24.866
68.309
68.309
-
-
-
-
-
47
-
2.268
774
39.547
7.429
830
259
12.350
7.590
6.209
45.510
249.630
5.585
37.880
28.584
-
-
-
-
2.279.489
(121.192)
2.158.297
809.126
(31.596)
777.530
1.471.606
(77.444)
1.394.162
4.022.440
(335.803)
3.686.637
6.648
2.469.296
(137.185)
2.332.111
-
7.295.336
(268.496)
7.026.840
13.693
1.647.413
(101.913)
1.545.500
-
1.199.053
(133.781)
1.065.272
51.154
393.338
20.341 21.193.759 (1.207.410) 19.986.349
15.173
33.134
-
2.847
-
-
386.841
13.693
9.706.462
(666.631)
9.039.831
3.857
-
4.445.087
(263.630)
4.181.457
1.306
1.334
-
-
-
4.286.364
(108.267)
4.178.097
6.648
2.163.779
(154.174)
2.009.605
-
-
528.795
(8.056)
520.739
63.272
(6.652)
56.620
20.660.617
68.309
51.154
393.338
20.341 21.193.759 (1.207.410) 19.986.349
276
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Credit risk concentration of loans and advances to customers (continued)
2015
Cyprus
Greece
United
Kingdom
Romania
Russia
Total
Fair value
adjustment
on initial
recognition
By business line
€000
€000
€000
€000
€000
€000
€000
Gross loans
after fair
value
adjustment
on initial
recognition
€000
Corporate
SMEs
Retail
- housing
- consumer, credit cards and other
Restructuring
- major corporate
- corporate
- SMEs
Recoveries
- corporate
- SMEs
- retail housing
- retail other
International banking services
Wealth management
2.188.794
1.502.261
3.657.083
1.409.855
2.877.985
1.814.518
1.376.635
2.341.149
1.529.200
627.975
743.095
528.795
63.272
68.309
-
-
-
-
-
-
-
-
-
-
-
-
15.173
33.134
305.848
3.857
1.306
1.334
35.736
-
-
-
2.847
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2.578.124
(83.695)
2.494.429
1.539.252
(46.973)
1.492.279
3.658.389
(45.585)
3.612.804
1.414.036
(36.834)
1.377.202
2.913.721
(175.920)
2.737.801
1.814.518
(75.945)
1.738.573
1.376.635
(67.758)
1.308.877
45.257
13.693
2.400.099
(331.071)
2.069.028
-
-
-
-
-
-
-
1.529.200
(148.899)
1.380.301
627.975
(62.682)
565.293
6.648
749.743
(117.340)
632.403
-
-
528.795
(8.056)
520.739
63.272
(6.652)
56.620
The loans and advances to customers in Cyprus include lending exposures to Greek entities granted by the Company in Cyprus in its normal course of business with a
carrying value of €82.154 thousand (2015: €81.078 thousand) and lending exposures in Cyprus with collaterals in Greece with a carrying value of €106.968 thousand
(2015: €69.983 thousand).
20.660.617
68.309
51.154
393.338
20.341 21.193.759 (1.207.410) 19.986.349
277
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Currency concentration of loans and advances to customers
2016
Euro
US Dollar
British Pound
Russian Rouble
Romanian Lei
Swiss Franc
Other currencies
2015
Euro
US Dollar
British Pound
Russian Rouble
Romanian Lei
Swiss Franc
Other currencies
Cyprus
Greece
United
Kingdom
Romania
Russia
Total
Fair value
adjustment
on initial
recognition
€000
€000
€000
€000
€000
€000
€000
Gross loans
after fair
value
adjustment
on initial
recognition
€000
17.556.179
19.936
149.235
38.907
103
-
471.167
44.111
-
-
-
-
-
-
200
-
27.885
-
-
-
-
336.832
13.701 17.926.848
(876.186) 17.050.662
-
88
-
1.341
-
-
6.934
156.169
(10.281)
145.888
-
-
-
-
-
66.880
103
1.341
(538)
66.342
(1)
-
102
1.341
471.167
(31.170)
439.997
44.111
(2.736)
41.375
18.259.702
19.936
28.085
338.261
20.635 18.666.619
(920.912) 17.745.707
19.261.824
68.309
2.260
392.100
13.693 19.738.186
(1.128.137) 18.610.049
251.075
50.831
108
1
1.029.847
66.931
-
-
-
-
-
-
-
48.894
-
-
-
-
22
93
-
1.123
-
-
6.648
257.745
(11.858)
245.887
-
-
-
-
-
99.818
(11.900)
87.918
108
1.124
(1)
-
107
1.124
1.029.847
(52.743)
977.104
66.931
(2.771)
64.160
20.660.617
68.309
51.154
393.338
20.341 21.193.759
(1.207.410) 19.986.349
278
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Credit quality of loans and advances to customers
The following table presents the credit quality of the Company’s loans and advances to customers:
2016
Fair value
adjustment
on initial
recognition
Gross loans
before fair
value
adjustment
on initial
recognition
Gross loans
after fair
value
adjustment
on initial
recognition
Gross loans
before fair
value
adjustment
on initial
recognition
2015
Fair value
adjustment
on initial
recognition
Gross loans
after fair
value
adjustment
on initial
recognition
€000
€000
€000
€000
€000
€000
9.749.523
(166.185)
9.583.338
9.356.952
(173.260)
9.183.692
2.214.988
(38.743)
2.176.245
2.993.746
(60.803)
2.932.943
Neither past
due nor
impaired
Past due but
not impaired
Impaired
6.702.108
(715.984)
5.986.124
8.843.061
(973.347)
7.869.714
18.666.619
(920.912) 17.745.707
21.193.759
(1.207.410)
19.986.349
Past due loans are those with delayed payments or in excess of authorised credit limits. Impaired loans are
those which are not considered fully collectable and for which a provision for impairment has been recognised on
an individual basis or for which incurred losses exist at their initial recognition or customers in Debt Recovery.
During the year ended 31 December 2016 the total non-contractual write-offs recorded by the Company
amounted to €517.694 thousand (2015: €172.670 thousand). The remaining gross loan balance of these
customers as at 31 December 2016 was €305.591 thousand (2015: €280.575 thousand) of which €19.651
thousand (2015: €56.548 thousand) were past due for more than 90 days but not impaired and €130.964
thousand (2015: €198.296 thousand) were impaired.
Loans and advances to customers that are neither past due nor impaired
The credit quality of loans and advances to customers that were neither past due nor impaired is monitored by
the Company using internal systems. The table below presents the credit risk quality of loans and advances to
customers that were neither past due nor impaired.
2016
Cyprus
United Kingdom
Romania
2015
Cyprus
United Kingdom
Romania
Grade 1
Grade 2
Grade 3
€000
€000
€000
Total
€000
6.127.367
1.751.332
1.802.957
9.681.656
7.224
56.857
3.357
343
-
86
10.581
57.286
6.191.448
1.755.032
1.803.043
9.749.523
5.572.053
1.441.298
2.244.258
9.257.609
-
45.962
9.267
34.973
-
9.141
9.267
90.076
5.618.015
1.485.538
2.253.399
9.356.952
Loans and advances to customers that were neither past due nor in excess of their limit during the last twelve
months, are classified as Grade 1.
279
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Credit quality of loans and advances to customers (continued)
Loans and advances to customers that are neither past due nor impaired (continued)
Loans and advances to customers that were past due or in excess of their limit for up to 30 consecutive days
during the first half of the year or for up to 15 consecutive days during the second half of the year, are
classified as Grade 2.
Loans and advances to customers that were past due or in excess of their limit for more than 30 consecutive
days during the first half of the year or for more than 15 consecutive days during the second half of the year,
are classified as Grade 3.
Loans and advances to customers that are past due but not impaired
Past due analysis:
- up to 30 days
- 31 to 90 days
- 91 to 180 days
- 181 to 365 days
- over one year
2016
€000
2015
€000
442.742
374.675
125.468
140.078
431.813
347.009
142.245
258.038
1.132.025
1.814.641
2.214.988
2.993.746
The fair value of the collateral that the Company holds (to the extent that it mitigates credit risk) in respect of
loans and advances to customers that are past due but not impaired as at 31 December 2016 is €1.706.196
thousand (2015: €2.391.828 thousand). The fair value of the collateral is capped to the gross carrying value of
the loans and advances to customers.
Impaired loans and advances to customers
Cyprus
Greece
Russia
United Kingdom
Romania
2016
2015
Gross loans
and advances
Fair value of
collateral
Gross loans
and advances
Fair value of
collateral
€000
€000
€000
€000
6.374.803
3.953.087
8.414.868
5.596.169
19.936
20.635
6.118
17.962
13.692
490
68.309
20.341
37.196
17.945
13.684
2.845
280.616
51.999
302.347
165.994
6.702.108
4.037.230
8.843.061
5.796.637
280
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Credit quality of loans and advances to customers (continued)
Impaired loans and advances to customers (continued)
The fair value of the collateral presented above has been computed based on the extent that the collateral
mitigates credit risk and has been capped to the gross carrying value of the loans and advances to customers.
Impaired:
- no arrears
- up to 30 days
- 31 to 90 days
- 91 to 180 days
- 181 to 365 days
- over one year
2016
€000
2015
€000
471.855
875.488
61.484
28.921
44.060
51.438
78.176
24.334
63.369
303.674
6.044.350
7.498.020
6.702.108
8.843.061
Provision for impairment of loans and advances to customers
The movement in provisions for impairment of loans and advances is as follows:
2016
1 January
Acquisition of subsidiary
Foreign exchange and other
adjustments
Applied in writing off impaired
loans and advances
Interest accrued on impaired
loans and advances
Collection of loans and
advances previously written off
Cyprus
€000
Greece
Other countries
€000
€000
Total
€000
3.731.750
33.617
215.104
3.980.471
(8.577)
113.110
-
-
(8.577)
2.269
(685)
114.694
(923.723)
(27.163)
(33.693)
(984.579)
(138.603)
(627)
(1.282)
(140.512)
1.872
-
-
1.872
Charge for the year (Note 14)
394.333
(1.181)
36.626
429.778
31 December
Individual impairment
Collective impairment
3.170.162
2.779.380
390.782
6.915
6.915
-
216.070
3.393.147
215.585
3.001.880
485
391.267
281
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Provision for impairment of loans and advances to customers (continued)
2015
1 January
Foreign exchange and other
adjustments
Transfer between geographical
areas
Applied in writing off impaired
loans and advances
Interest accrued on impaired
loans and advances
Collection of loans and
advances previously written off
Cyprus
€000
Greece
Other countries
€000
€000
Total
€000
2.865.782
9.086
231.976
3.106.844
80.373
-
338
80.711
(62.010)
6.329
55.681
-
(151.619)
(16.700)
(111.746)
(280.065)
(197.009)
(2.134)
(1.577)
(200.720)
2.671
-
-
2.671
Charge for the year (Note 14)
1.193.562
37.036
40.432
1.271.030
31 December
3.731.750
33.617
215.104
3.980.471
Individual impairment
3.255.398
29.242
213.085
3.497.725
Collective impairment
476.352
4.375
2.019
482.746
The above table does not include the provisions for impairment on financial guarantees and commitments which
are part of ‘Accruals, deferred income and other liabilities’ (Note 31).
Assumptions have been made about the future changes in property values, as well as the timing for the
realisation of the collateral and for taxes and expenses on the repossession and subsequent sale of the
collateral. Indexation has been used to estimate updated market values of properties, while assumptions were
made on the basis of a macroeconomic scenario for future changes in property values. The timing of recovery
from real estate collaterals has been estimated to be on average 3 years, with the exception of specific cases for
which, based on specific facts and circumstances, a different period has been used and for customers in Debt
Recovery where an average 6 year period has been used. In accordance with the Loan Impairment and
Provisioning Procedures Directives of 2014 and 2015 of the CBC, the cumulative average future change in
property values during the year has been capped to zero. The average liquidity haircut and selling expenses
used in the provisions calculation is 10% of the current market value of the property for those collaterals for
which the increase in their value is capped to zero and 10% of the projected market value of the property for
those collaterals for which their value is expected to drop.
The above assumptions are also influenced by the ongoing regulatory dialogue the Company maintains with its
lead regulator, the ECB, and other regulatory guidance and interpretations issued by various regulatory and
industry bodies such as the ECB and EBA, which provide guidance and expectations as to relevant definitions
and the treatment/classification of certain parameters/assumptions used in the estimation of provisions.
Any changes in these assumptions or difference between assumptions made and actual results could result in
significant changes in the amount of required provisions for impairment of loans and advances.
282
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Provision for impairment of loans and advances to customers(continued)
Sensitivity analysis
The Company has performed sensitivity analysis on certain of the loan impairment assumptions relating to the
loan portfolio in Cyprus with reference date 31 December 2016. The impact on the provisions for impairment of
loans and advances is presented below:
Change in provisions assumptions:
Increase/(decrease)
on provisions for
impairment of loans
and advances
€000
the recoverable amount
the recoverable amount
Increase the timing of recovery from collaterals by 1 year (to an average
of 4 years) for the customers that were assessed on a collective basis,
excluding any customers in Debt Recovery
Decrease the timing of recovery from collaterals by 1 year (to an average
of 2 years) for the customers that were assessed on a collective basis,
excluding any customers in Debt Recovery
Decrease
from collaterals of customers
individually assessed and which have an identified impairment loss and all
customers in Debt Recovery by 5% compared to the expected recoverable
amount applied in the provisions calculations
Decrease
from collaterals of customers
individually assessed and which have an identified impairment loss and all
customers in Debt Recovery by 10% compared to the expected
recoverable amount applied in the provisions calculations
Increase the recoverable amount from collaterals of customers individually
assessed and which have an identified impairment loss and all customers
in Debt Recovery by 5% compared to the expected recoverable amount
applied in the provisions calculations
Increase the recoverable amount from collaterals of customers individually
assessed and which have an identified impairment loss and all customers
in Debt Recovery by 10% compared to the expected recoverable amount
applied in the provisions calculations
Extend the timing of recovery from collaterals by 1 year and decrease the
liquidation haircut by 20% on customers that have been individually
assessed for impairment with an identified impairment loss and on
customers collectively assessed for impairment
Decrease the timing of recovery from collaterals by 1 year and increase
the liquidation haircut by 20% on customers that have been individually
assessed for impairment with an identified impairment loss and on
customers collectively assessed for impairment
27.891
(26.814)
118.055
216.359
(73.940)
(168.357)
90.028
(45.844)
283
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Collateral and other credit enhancements obtained
The carrying value of assets obtained during 2016 and 2015 by taking possession of collateral held as security,
was as follows:
Residential property
Commercial and other property
2016
€000
85.171
921.185
1.006.356
2015
€000
1.946
110.771
112.717
The total carrying value of the assets obtained over the years by taking possession of collateral held as security
for customer loans and advances and held by the Company as at 31 December 2016 amounted to €1.268.811
thousand including an amount of €3.072 thousand relating to commercial and other property which were
classified as held for sale (2015: €421.110 thousand, including an amount of €6.552 thousand relating to
commercial and other property held for sale).
The disposals of repossessed assets during 2016 amounted to €128.887 thousand (2015: €28.883 thousand).
Forbearance
Forbearance measures occur in situations in which the borrower is considered to be unable to meet the terms
and conditions of the contract due to financial difficulties. Taking into consideration these difficulties, the
Company decides to modify the terms and conditions of the contract to provide the borrower the ability to
service the debt or refinance the contract, either partially or fully.
The practice of extending forbearance measures constitutes a grant of a concession whether temporarily or
permanently to that borrower. A concession may involve restructuring the contractual terms of a debt or
payment in some form other than cash, such as an arrangement whereby the borrower transfers collateral
pledged to the Company. As such, it constitutes an objective indicator that requires assessing whether
impairment is needed.
Modifications of loans and advances that do not affect payment arrangements, such as restructuring of collateral
or security arrangements are not regarded as sufficient to indicate impairment as by themselves they do not
necessarily indicate credit distress affecting payment ability.
Rescheduled loans and advances are those facilities for which the Company has modified the repayment
programme (provision of a grace period, suspension of the obligation to repay one or more instalments,
reduction in the instalment amount and/or elimination of overdue instalments relating to capital or interest) and
current accounts/overdrafts for which the credit limit has been increased with the sole purpose of covering an
excess.
For an account to qualify for rescheduling it must meet certain criteria including that the client’s business must
be considered to be viable. The extent to which the Company reschedules accounts that are eligible under its
existing policies may vary depending on its view of the prevailing economic conditions and other factors which
may change from year to year. In addition, exceptions to policies and practices may be made in specific
situations in response to legal or regulatory agreements or orders.
Forbearance activities may include measures that restructure the borrower's business (operational restructuring)
and/or measures that restructure the borrower’s financing (financial restructuring).
Restructuring options may be of a short or long-term nature or combination thereof. The Company has
developed and deployed sustainable restructuring solutions, which are suitable for the borrower and acceptable
for the Company.
284
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Forbearance (continued)
Short-term restructuring solutions are defined as restructured repayment solutions of duration of less than two
years. In the case of loans for the construction of commercial property and project finance, a short-term
solution may not exceed one year.
Short-term restructuring solutions can include the following:
Interest only: during a defined short-term period, only interest is paid on credit facilities and no principal
repayment is made.
Reduced payments: decrease of the amount of repayment instalments over a defined short-term period in
order to accommodate the borrower’s new cash flow position.
Arrears and/or interest capitalisation: the capitalisation of arrears and/or of accrued interest arrears to the
principal; that is forbearance of the arrears and addition of any unpaid interest to the outstanding principal
balance for repayment under a rescheduled program.
Grace period: an agreement allowing the borrower a defined delay in fulfilling the repayment obligations
usually with regard to the principal.
Interest rate reduction: permanent or temporary reduction of interest rate (fixed or variable) into a fair
and sustainable rate.
Long-term restructuring solutions can include the following:
Extension of maturity: extension of the maturity of the loan which allows a reduction in instalment
amounts by spreading the repayments over a longer period.
Additional security: when additional liens on unencumbered assets are obtained as additional security
from the borrower in order to compensate for the higher risk exposure and as part of the restructuring
process.
Forbearance of penalties in loan agreements: waiver, temporary or permanent, of violations of covenants
in the loan agreements.
Rescheduling of payments: the existing contractual repayment schedule is adjusted to a new sustainable
repayment program based on a realistic, current and forecasted, assessment of the cash flow generation
of the borrower.
Strengthening of the existing collateral: a restructuring solution may entail the pledge of additional
security for instance, in order to compensate for the reduction in interest rates or to balance the
advantages the borrower receives from the restructuring.
New loan facilities: new loan facilities may be granted during a restructuring agreement, which may entail
the pledge of additional security and in the case of inter-creditor arrangements the introduction of
covenants in order to compensate for the additional risk incurred by the Company in providing a new
financing to a distressed borrower.
Debt consolidation: the combination of multiple exposures into a single loan or limited number of loans.
Debt/equity swaps: partial set-off of the debt and obtaining of an equivalent amount of equity by the
Company, with the remaining debt right-sized to the cash flows of the borrower to allow repayment to the
Company from repayment on the re-sized debt and from the eventual sale of the equity stake in the
business. This solution is used only in exceptional cases and only where all other efforts for restructuring
are exhausted and after ensuring compliance with the banking law.
Debt/asset swaps: agreement between the Company and the borrower to voluntarily dispose of the
secured asset to partially or fully repay the debt. The asset may be acquired by the Company and any
residual debt may be restructured within an appropriate repayment schedule in line with the borrower’s
reassessed repayment ability.
Debt write-off: cancellation of part or the whole of the amount of debt outstanding by the borrower. The
Company applies the debt forgiveness solution only as a last resort and in remote cases having taken into
consideration the ability of the borrower to repay the remaining debt in the agreed timeframe and the
moral hazard.
Split and freeze: the customer’s debt is split into sustainable and unsustainable parts. The sustainable part
is restructured and continues to operate. The unsustainable part is ‘frozen’ for the restructured duration of
the sustainable part. At the maturity of the restructuring, the frozen part is either forgiven pro-rata (based
on the actual repayment of the sustainable part) or restructured.
285
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Rescheduled loans and advances to customers
The below tables present the Company’s rescheduled loans and advances to customers by industry sector,
geography and credit quality classification, as well as impairment provisions and tangible collateral held for
rescheduled loans.
2016
Cyprus
Greece
€000
€000
United
Kingdom
€000
Romania
€000
Total
€000
1 January
8.391.624
24.865
814
118.121
8.535.424
900.616
-
35
340
900.991
(1.504.769)
(97)
(234)
(41.819) (1.546.919)
(715.713)
(24.871)
(255)
(144)
(740.983)
New loans and advances
rescheduled in the year
Assets no longer classified as
rescheduled (including
repayments)
Applied in writing off
rescheduled loans and
advances
Interest accrued on
rescheduled loans and
advances
Foreign exchange adjustments
3.852
31 December
7.401.870
326.260
440
-
337
13
2.392
329.105
(96)
277
(9)
3.747
78.881
7.481.365
2015
1 January
New loans and advances
rescheduled in the year
Assets no longer classified as
rescheduled (including
repayments)
Applied in writing off
rescheduled loans and
advances
Interest accrued on
rescheduled loans and
advances
7.024.847
75.778
4.451
183.372
7.288.448
2.189.524
-
-
-
2.189.524
(1.125.219)
(35.927)
(3.647)
(32.178) (1.196.971)
(80.896)
(16.700)
337.231
1.714
-
-
(33.888)
(131.484)
1.610
340.555
Foreign exchange adjustments
46.137
-
10
(795)
45.352
31 December
8.391.624
24.865
814
118.121
8.535.424
The classification as rescheduled loans is discontinued when all EBA criteria for the discontinuation of the
classification as forborne exposure are met. These are set out in the EBA Final draft Implementing Technical
Standards (ITS) on supervisory reporting and non-performing exposures.
286
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Rescheduled loans and advances to customers (continued)
Credit quality
2016
Cyprus
Greece
€000
€000
United
Kingdom
€000
Romania
€000
Total
€000
Neither past due nor impaired
4.021.923
Past due but not impaired
Impaired
2015
1.212.177
2.167.770
7.401.870
Neither past due nor impaired
3.636.868
Past due but not impaired
1.591.934
-
-
337
337
-
-
Impaired
3.162.822
24.865
153
6
118
277
106
202
506
85
4.022.161
225
1.212.408
78.571
2.246.796
78.881
7.481.365
60.182
3.697.156
297
1.592.433
57.642
3.245.835
8.391.624
24.865
814
118.121
8.535.424
Fair value of collateral
2016
Neither past due nor impaired
Past due but not impaired
Impaired
2015
Neither past due nor impaired
Past due but not impaired
Impaired
Cyprus
€000
3.772.578
1.021.347
1.828.036
United
Kingdom
€000
Romania
€000
Total
€000
92
-
-
80
3.772.750
182
1.021.529
22.060
1.850.096
6.621.961
92
22.322
6.644.375
3.360.868
1.407.575
2.709.602
7.478.045
-
155
-
155
59.931
3.420.799
178
1.407.908
38.924
2.748.526
99.033
7.577.233
The fair value of collateral presented above has been computed based on the extent that the collateral mitigates
credit risk.
287
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Rescheduled loans and advances to customers (continued)
Credit risk concentration
Cyprus
Greece
€000
€000
United
Kingdom
€000
Romania
€000
Total
€000
2016
By economic activity
Trade
Manufacturing
Hotels and catering
Construction
Real estate
Private individuals
Professional and other services
Other sectors
By customer sector
Corporate
SMEs
Retail
- housing
668.305
214.248
619.259
1.539.773
1.047.280
2.515.157
446.946
350.902
7.401.870
3.418.231
1.675.528
1.661.487
- consumer, credit cards and other
567.426
International banking services
Wealth management
74.704
4.494
-
-
-
-
-
-
-
337
337
337
-
-
-
-
-
-
-
8
-
-
257
12
-
1.624
669.929
1.263
215.511
3.249
622.516
25.175
1.564.948
47.192
1.094.472
60
2.515.474
-
446.958
318
351.557
277
78.881
7.481.365
3
178
-
96
-
-
77.556
3.496.127
1.265
1.676.971
-
1.661.487
60
567.582
-
-
74.704
4.494
7.401.870
337
277
78.881
7.481.365
288
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Rescheduled loans and advances to customers (continued)
Credit risk concentration (continued)
Cyprus
Greece
€000
€000
United
Kingdom
€000
Romania
€000
Total
€000
2016
By business line
Corporate
SMEs
Retail
- housing
711.872
464.163
1.494.123
- consumer, credit cards and other
449.107
Restructuring
- major corporate
- corporate
- SMEs
Recoveries
- corporate
- SMEs
- retail housing
- retail other
International banking services
Wealth management
1.371.448
790.600
815.597 -
544.311
395.768
167.364
118.319
74.704
4.494
337
-
-
-
-
-
-
-
-
-
-
-
-
3
178
-
96
-
-
-
-
-
-
-
-
77.391
789.603
1.265
465.606
-
1.494.123
60
449.263
165
1.371.613
-
790.600
-
815.597
-
-
-
-
-
-
544.311
395.768
167.364
118.319
74.704
4.494
7.401.870
337
277
78.881
7.481.365
289
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Rescheduled loans and advances to customers (continued)
Credit risk concentration (continued)
Cyprus
Greece
€000
€000
United
Kingdom
€000
Romania
€000
Total
€000
Professional and other services
584.836
Other sectors
322.161
24.865
8.391.624
24.865
814
118.121
8.535.424
2015
By economic activity
Trade
Manufacturing
Hotels and catering
Construction
Real estate
Private individuals
By customer sector
Corporate
SMEs
Retail
- housing
- consumer, credit cards and other
568.986
International banking services
Wealth management
42.481
5.729
707.105
282.449
743.585
2.155.778
1.069.156
2.526.554
4.368.307
24.865
1.720.453
1.685.668
-
-
-
-
-
-
-
-
-
-
-
-
-
-
30
-
295
451
38
-
2.936
710.041
1.258
283.707
6.196
749.811
1.399
2.157.177
82.739
1.152.190
153
2.527.158
22.697
607.571
743
347.769
27
620
-
167
-
-
116.385
4.509.584
1.583
1.722.656
-
1.685.668
153
569.306
-
-
42.481
5.729
8.391.624
24.865
814
118.121
8.535.424
290
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Rescheduled loans and advances to customers (continued)
Credit risk concentration (continued)
Cyprus
Greece
€000
€000
United
Kingdom
€000
Romania
€000
Total
€000
2015
By business line
Corporate
SMEs
Retail
- housing
647.785
24.865
550.664
1.562.149
- consumer, credit cards and other
468.368
Restructuring
- major corporate
- corporate
- SMEs
Recoveries
- corporate
- SMEs
- retail housing
- retail other
International banking services
Wealth management
1.768.782
1.272.086
798.010
679.654
371.779
123.519
100.618
42.481
5.729
-
-
-
-
-
-
-
-
-
-
-
-
27
620
-
167
-
-
-
-
-
-
-
-
-
115.639
788.316
1.583
552.867
-
1.562.149
153
468.688
626
1.769.408
-
-
1.272.086
798.010
120
679.774
-
-
-
-
-
371.779
123.519
100.618
42.481
5.729
8.391.624
24.865
814
118.121
8.535.424
291
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Rescheduled loans and advances to customers (continued)
Provisions for impairment
Cyprus
Greece
United
Kingdom
Romania
Total
€000
€000
€000
€000
€000
2016
Individual impairment
Collective impairment
2015
899.178
200.069
1.099.247
337
-
337
Individual impairment
1.144.476
22.966
Collective impairment
207.106
-
1.351.582
22.966
118
1
119
504
1
505
59.791
959.424
2
200.072
59.793
1.159.496
35.402
1.203.348
1.813
208.920
37.215
1.412.268
Credit quality of Company assets exposed to credit risk other than loans and advances to customers
- analysis by rating agency designation
Balances with central banks and loans and advances to banks
Balances with central banks and loans and advances to banks are analysed by Moody’s rating as follows:
Aaa – Aa3
A1 – A3
Baa1 – Baa3
Ba1 – Ba3
B1 – B3
Caa - C
Unrated
Other receivables from banks
2016
€000
492.870
220.509
36.844
37.067
1.133.287
10.695
147.692
41.085
2015
€000
169.626
533.973
146.428
36.954
957.021
685
196.560
28.702
2.120.049
2.069.949
Band B1-B3 above includes an amount of €141.447 thousand which mainly relates to obligatory deposits for
liquidity purposes with the CBC. As at 31 December 2016, bank balances with carrying value of €78.725
thousand are impaired (2015: €134.291 thousand) with cumulative impairment loss of €55.655 thousand
(2015: €28.605 thousand).
292
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
41.
Risk management – Credit risk (continued)
Credit quality of Company assets exposed to credit risk other than loans and advances to customers
- analysis by rating agency designation (continued)
Debt securities
Investments in debt securities are analysed by Moody’s rating, their issuer and classification, as follows:
Aaa – Aa3
Baa1 – Baa3
B1 – B3
Issued by:
- Cyprus government
- other governments
- banks and other corporations
Classified as:
- investments at fair value through profit or loss
- available-for-sale investments
- investments classified as loans and receivables
2016
€000
2015
€000
349.565
12.507
256.979
619.051
256.979
329.211
32.861
619.051
10.426
540.551
68.074
619.051
378.339
54.626
458.802
891.767
458.802
421.037
11.928
891.767
17.430
437.402
436.935
891.767
42.
Risk management – Market risk
Market risk is the risk of loss from adverse changes in market prices–namely from changes in interest rates,
exchange rates and security prices. The Market Risk department is responsible for monitoring the risk resulting
from such changes with the objective to minimise the impact on earnings and capital. The department also
monitors liquidity risk and credit risk with counterparties and countries. It is also responsible for monitoring
compliance with the various market risk policies and procedures.
Interest rate risk
Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate
because of changes in market interest rates. It arises mainly as a result of timing differences on the repricing
of assets, liabilities and off-balance sheet items.
Interest rate risk is measured using interest rate sensitivity gap analysis where the difference between assets
and liabilities repricing in each time band is calculated separately for each currency. A rate change is applied
on each item of the balance sheet for the number of days between its repricing date and the one year horizon
in order to calculate the impact on net interest income.
293
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
42.
Risk management – Market risk (continued)
Interest rate risk (continued)
Interest rate risk is managed through maximum loss limits from interest rate mismatches which are set for
each banking unit of the Company. There are different limits for the Euro and for foreign currencies. The
maximum loss limits apply for each of the next three years. These limits are set as a percentage of Company
capital and as a percentage of net interest income (when positive) and are allocated to the various banking
units of the Company based on their contribution to net interest income. Small limits for open interest rate
positions for periods of more than three years are also in place.
Sensitivity analysis
The table below sets out the impact on the Company’s net interest income, over a one-year period, from
reasonably possible changes in the interest rates of the main currencies:
Change in interest rates
€000
€000
Euro
US Dollar
British
Pound
€000
Other
currencies
€000
Total
€000
2016
+2% for Russian Rouble
+1% for US Dollar
+0,5% for all other currencies
-4% for Russian Rouble
-0,5% for all other currencies
2015
+5% for Russian Rouble
+0,75% for US Dollar
+0,5% for all other currencies
-5% for Russian Rouble
-0,25% for Japanese Yen
-0,5% for Euro Euribor ECB
-1% for Euro Bank Basic Rate
-0,5% for all other currencies
16.884
16.443
514
1.018
34.859
(21.323)
(8.345)
(760)
(2.578)
(33.006)
13.820
10.568
132
1.720
26.240
(23.895)
(7.489)
(241)
(1.767)
(33.392)
In addition to the above fluctuations in net interest income, interest rate changes can result in fluctuations in
the fair value of investments at fair value through profit or loss (including investments held for trading) and in
the fair value of derivative financial instruments.
The equity of the Company is also affected by changes in market interest rates. The impact on the Company’s
equity arises from changes in the fair value of fixed rate debt securities classified as available-for-sale (unless
impaired).
The sensitivity analysis is based on the assumption of a parallel shift of the yield curve. The table below sets
out the impact on the Company’s profit/loss before tax and equity as a result of reasonably possible changes in
the interest rates of the major currencies.
294
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
42.
Risk management – Market risk (continued)
Interest rate risk (continued)
Sensitivity analysis (continued)
Change in interest rates
2016
+2% for Russian Rouble
+1% for US Dollar
+0,5% for all other currencies
-4% for Russian Rouble
-0,5% for all other currencies
2015
+5% for Russian Rouble
+0,75% for US Dollar
+0,5% for all other currencies
-5% for Russian Rouble
-0,25% for Japanese Yen
-0,5% for all other currencies
Impact on
profit/loss
before tax
Impact on
equity
€000
€000
1.828
(1.743)
(1.828)
1.713
1.192
(80)
(1.192)
80
Currency risk
Currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because
of changes in foreign exchange rates.
In order to manage currency risk, the ALCO has approved open position limits for the total foreign exchange
position limits. The foreign exchange position limits are lower than those prescribed by the CBC. These limits
are managed by Treasury and monitored daily by market risk officers in all the banking units of the Company,
who report the overnight foreign currency position of each unit to Market Risk daily.
The Company does not maintain a currency trading book.
The table below sets out the Company’s currency risk resulting from the financial instruments that it holds. The
analysis assumes reasonably possible changes in the exchange rates of major currencies against the Euro
based mainly on historical price fluctuations. The impact on profit/loss after tax includes the change in net
interest income that arises from the change of currency rate.
The impact on equity arises from the hedging instruments that are used to hedge part of the net assets of the
Company’s branch whose functional currency is not the euro. The net assets of foreign operations are also
revalued and affect equity, but their impact is not taken into account in the above sensitivity analysis as the
above relates only to financial instruments which have a direct impact either on profit/loss after tax or on
equity.
295
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
42.
Risk management – Market risk (continued)
Currency risk (continued)
Change in
foreign
exchange rate
Impact on profit
after tax
Impact on
equity
%
€000
€000
2016
US Dollar
Russian Rouble
Romanian Lei
Swiss Franc
British Pound
Japanese Yen
Other currencies
2016
US Dollar
Russian Rouble
Romanian Lei
Swiss Franc
British Pound
Japanese Yen
Other currencies
2015
US Dollar
Russian Rouble
Romanian Lei
Swiss Franc
British Pound
Japanese Yen
Other currencies
-
-
4.459
-
-
-
-
-
-
+10
+25
+10
+20
+20
+10
+10
1.936
21.474
(213)
6.629
(8.152)
307
174
Change in
foreign
exchange rate
Impact on profit
after tax
Impact on
equity
%
€000
€000
-10
-25
-10
-20
-20
-10
-10
(1.584)
(12.884)
174
(3.648)
(4.420)
6.669
(251)
(143)
-
-
-
-
Change in
foreign
exchange rate
Impact on loss
after tax
Impact on
equity
%
€000
€000
+10
+40
+10
+20
+10
+10
+10
1.753
84.392
1
9.341
(17.788)
492
106
-
-
3.634
-
-
-
-
296
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
42.
Risk management – Market risk (continued)
Currency risk (continued)
2015
US Dollar
Russian Rouble
Romanian Lei
Swiss Franc
British Pound
Japanese Yen
Other currencies
Price risk
Change in
foreign
exchange rate
Impact on loss
after tax
Impact on
equity
%
€000
€000
-10
-40
-10
-20
-10
-10
-10
(1.434)
(36.168)
-
-
(1)
(2.974)
(6.228)
14.554
(403)
(87)
-
-
-
-
Equity securities price risk
The risk of loss from changes in the price of equity securities arises when there is an unfavourable change in
the prices of equity securities held by the Company as investments.
Investments in equities are outside the Group’s risk appetite. The Company monitors the current portfolio
mostly acquired by the Company as part of the acquisition of certain operations of Laiki Bank, with the
objective to gradually liquidate all positions for which there is a market. Equity securities may also be acquired
in the context of delinquent loan workouts and are disposed of by the Company as soon as practicable.
Changes in the prices of equity securities that are classified as investments at fair value through profit or loss,
affect the results of the Company, whereas changes in the value of equity securities classified as available-for-
sale affect the equity of the Company (if not impaired).
The table below shows the impact on the profit/loss before tax and on equity of the Company from a change in
the price of the equity securities held, as a result of reasonably possible changes in the relevant stock exchange
indices.
2016
Cyprus Stock Exchange
Athens Exchange
Other Stock Exchanges and non listed
Cyprus Stock Exchange
Athens Exchange
Other Stock Exchanges and non listed
Change in
index
Impact on
profit/loss
before tax
Impact on
equity
%
€000
€000
+25
+35
+20
-25
-35
-20
342
-
2
(585)
(22)
(58)
1.039
32
1.536
(796)
(10)
(1.480)
297
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
42.
Risk management – Market risk (continued)
Price risk (continued)
Equity securities price risk (continued)
2015
Cyprus Stock Exchange
Athens Exchange
Other Stock Exchanges and non listed
Cyprus Stock Exchange
Athens Exchange
Other Stock Exchanges and non listed
Change in
index
Impact on
profit/loss
before tax
Impact on
equity
%
€000
€000
+30
+50
+20
-30
-50
-20
689
-
-
(791)
(4)
(47)
1.459
13
1.365
(1.358)
(9)
(1.318)
Debt securities price risk
Debt securities price risk is the risk of loss as a result of adverse changes in the prices of debt securities held by
the Company. Debt security prices change as the credit risk of the issuer changes and/or as the interest rate
changes for fixed rate securities. The Company invests a significant part of its liquid assets in debt securities
issued mostly by governments. The average Moody’s rating of the debt securities portfolio of the Company as
at 31 December 2016 was B1 (2015: Baa2).
Changes in the prices of debt securities classified as investments at fair value through profit or loss, affect the
profit or loss of the Company, whereas changes in the value of debt securities classified as available-for-sale
affect the equity of the Company (if not impaired).
The table below indicates how the profit/loss before tax and equity of the Company will be affected from
reasonably possible changes in the price of the debt securities held, based on observations of changes in credit
risk over the past years.
Change in market prices
2016
+6,5%
-6,5%
2015
+5,5%
-5,5%
Impact on
profit/loss
before tax
Impact on
equity
€000
€000
667
33.614
(667)
(33.614)
944
(944)
23.825
(23.825)
298
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
43.
Risk management – Liquidity risk and funding
Liquidity risk is the risk that the Company is unable to fully or promptly meet current and future payment
obligations as and when they fall due. This risk includes the possibility that the Company may have to raise
funding at high cost or sell assets at a discount to fully and promptly satisfy its obligations.
It reflects the potential mismatch between incoming and outgoing payments, taking into account unexpected
delays in repayment or unexpectedly high payment outflows. Liquidity risk involves both the risk of unexpected
increases in the cost of funding of the portfolio of assets and the risk of being unable to liquidate a position in a
timely manner on reasonable terms.
In order to limit this risk, management aims to achieve diversified funding sources in addition to the Company’s
core deposit base, and has adopted a policy of managing assets with liquidity in mind and monitoring cash
flows and liquidity on a daily basis. The Company has developed internal control processes and contingency
plans for managing liquidity risk. These incorporate an assessment of expected cash flows and the availability
of collateral which could be used to secure additional funding if required.
Management and structure
The Board of Directors sets the Group’s Liquidity Risk Appetite being the level of risk at which the Company
should operate.
The Board of Directors, through its Risk Committee, approves the Liquidity Policy Statement and reviews almost
at every meeting, the liquidity position of the Company. Information on inflows/outflows is also provided.
The ALCO is responsible for setting the policies for the effective management and monitoring of liquidity across
the Company. It also monitors the liquidity position of its major banking units at least monthly. Given the
current liquidity position of the Company, the ALCO considers the monitoring of liquid assets and the cash
inflows/outflows of the Company in Cyprus, to be of utmost importance.
Group Treasury is responsible for liquidity management at Company level and for overseeing the operations of
Bank of Cyprus UK Ltd, to ensure compliance with internal and regulatory liquidity policies and provide direction
as to the actions to be taken regarding liquidity needs. The Group Treasury also manages the treasury
business of Bank of Cyprus Romania, which is in run-down mode. Every unit is responsible for managing its
liquidity and targets to finance its own needs in the medium term. Group Treasury assesses on a continuous
basis, and informs ALCO at regular time intervals, the adequacy of the liquid assets and takes the necessary
actions to enhance the Company’s liquidity position.
Liquidity is also monitored daily by Market Risk, which is an independent department responsible to monitor
compliance at the level of individual units, as well as at Company level, with both internal policies and limits,
and with the limits set by the regulatory authorities in the countries where the Company operates. Market Risk
reports to ALCO the regulatory liquidity position of the various units of the Company, at least monthly. It also
provides the results of various stress tests to ALCO at least quarterly.
Liquidity is monitored and managed on an ongoing basis through:
(i) Risk appetite: established Group Risk Appetite together with the appropriate limits for the management of
all risks including liquidity risk.
(ii) Liquidity policy: sets the responsibilities for managing liquidity risk as well as the framework, limits and
stress test assumptions.
(iii) Liquidity limits: a number of internal and regulatory limits are monitored on a daily, monthly and quarterly
basis. Where applicable a traffic light system (RAG) has been introduced for the ratios, in order to raise
flags when the ratios deteriorate.
(iv) Early warning indicators: monitoring of a range of indicators for early signs of liquidity risk in the market or
specific to the Company. These are designed to immediately identify the emergence of increased liquidity
risk to maximise the time available to execute appropriate mitigating actions.
(v) Liquidity Contingency Plan: maintenance of a Liquidity Contingency Plan (LCP) which is designed to provide
a framework where a liquidity stress could be effectively managed. The LCP provides a communication plan
and includes management actions to respond to liquidity stresses.
(vi) Recovery Plan: the Group has developed a Recovery Plan. The key objectives are to provide the Company
with a range of options to ensure its viability in a stress, to set consistent Early Warning and Recovery
Indicators and to enable the Company to be adequately prepared to respond to stressed conditions.
299
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
43.
Risk management – Liquidity risk and funding (continued)
Monitoring process
Daily
The daily monitoring of cash flows and highly liquid assets is important to safeguard and ensure the
uninterrupted operations of the Company’s activities. Market Risk prepares a report for submission to the CBC
and ECB/Single Supervisory Mechanism (SSM), indicating the opening and closing liquidity position, net
customer movements and other movements analysed by the main currencies. In addition, Group Treasury
monitors daily and intraday the customer inflows and outflows in the main currencies used by the Company.
Since May 2016, Market Risk also prepares daily stress testing for bank-specific, market wide and combined
scenarios. The requirement is to have sufficient liquidity buffer to enable the Company to survive a two-week
stress period, and adequate capacity to raise funding under a three month period, under all scenarios.
The liquidity buffer is made up of: Euro banknotes, CBC balances (excluding the Minimum Reserve
Requirements (MRR)), nostro current accounts, money market placements up to the stress horizon, available
ECB credit line and market value net of haircut of liquid unencumbered/available bonds.
The designing of the stress tests followed best practice guidance and was based on the liquidity risk drivers
which are recognised internationally by both the Prudential Regulation Authority (PRA) and EBA SREP. The
stress tests assumptions are included in the Group Liquidity Policy which is reviewed on an annual basis and
approved by the Board. However, whenever it is considered appropriate to amend the assumptions during the
year, approval is requested by ALCO and the Board Risk Committee. The main items shocked in the different
scenarios are: deposit outflows, wholesale funding, loan repayments, off-balance sheet commitments,
marketable securities and cash collateral for derivatives and repos.
Weekly
Market Risk prepares a weekly report of Euro and foreign currency liquidity mismatch which is submitted to the
CBC.
Monthly
Market Risk prepares reports monitoring compliance with internal and regulatory liquidity ratios, for all banking
units and for the Company and submits them to the ALCO, the Executive Committee and the Board Risk
Committee. It also calculates the expected flows under a stress scenario and compares them with the projected
available liquidity buffer in order to calculate the survival days. The fixed deposit renewal rates and deposits by
tenor are also presented to the ALCO.
Market Risk reports the LCR and Additional Liquidity Monitoring Metrics (ALMM) to the CBC/ECB monthly.
Group Treasury prepares a liquidity report which is submitted to the ALCO on a monthly basis. The report
indicates the liquidity position of the Company, data on monthly customer flows, as well as other important
developments related to liquidity. Moreover, during 2016 Group Treasury prepared a cash flows projection
report, under a base and an adverse scenario, covering a one month and two month periods, which was sent to
ECB/SSM/CBC/Ministry of Finance. Following full ELA repayment in January 2017, Group Treasury has stopped
producing the cash flows projection report.
Quarterly
The results of the stress testing scenarios prepared daily are reported to ALCO and Board Risk Committee
quarterly. Moreover, Market Risk reports the Net Stable Funding Ratio (NSFR), Leverage Ratio to the CBC/ECB
quarterly and various other liquidity reports, included in the short-term exercise of the SSM per their SREP
guidelines.
300
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
43.
Risk management – Liquidity risk and funding (continued)
Monitoring process (continued)
Annually
The Company prepares on an annual basis its report on Internal Liquidity Adequacy Assessment Process
(ILAAP).
As part of the Company’s procedures for monitoring and managing liquidity risk, there is a Group Liquidity
Contingency Plan for handling liquidity difficulties. The plan details the steps to be taken in the event that
liquidity problems arise, which escalate to a special meeting of the extended ALCO. The plan sets out the
members of this Committee and a series of the possible actions that can be taken. This plan, as well as the
Group’s Liquidity Policy, is reviewed by ALCO at least annually, during the ILAAP review. The ALCO submits the
updated policy with its recommendations to the Board through the Board Risk Committee for approval. The
approved policy is notified to the SSM.
Liquidity ratios
The Company liquidity ratio presented in the table below, is calculated for management information purposes,
based on the CBC methodology for the Euro stock liquidity ratio. The ratio is calculated as the amount of liquid
assets to total deposits and other liabilities falling due within twelve months. Liquid assets are defined as cash,
interbank deposits maturing within thirty days and eligible debt and equity securities at haircuts prescribed by
the regulatory authorities. Total deposits comprise all customer deposits irrespective of maturity and other
liabilities include all non-customer deposit/liabilities due to be paid in the next twelve months.
The Company liquidity ratio is prepared monthly by Market Risk and monitored by ALCO. Each banking unit
has its own required limit for this ratio and is monitored accordingly: for the operations in Cyprus, two separate
ratios are calculated; one for Euro and one for foreign currencies and the required limit is 20% for Euro and
70% for foreign currencies. For the other banking units the minimum requirement is at 15%.
It is noted that in the calculation of this ratio, as well as for the CBC regulatory reports, ELA is treated as a long
term liability.
The Company’s liquidity ratio was as follows:
End of reporting year
Average monthly ratio
Highest monthly ratio
Lowest monthly ratio
2016
%
2015
%
15,06
14,67
15,46
12,60
16,53
16,19
19,50
13,30
The Company is currently not in compliance with the regulatory liquidity requirements with respect to its
operations in Cyprus and the Group is currently not in compliance with its regulatory liquidity requirements with
respect to the LCR and therefore is dependent on continuing regulatory forbearance.
As at 31 December 2016 and 2015 the other banking units of the Company were in compliance with their
regulatory liquidity requirements.
301
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
43.
Risk management – Liquidity risk and funding (continued)
Liquidity ratios (continued)
The ratio of loans and advances to customer deposits is presented below:
End of reporting year
Average quarterly ratio
Highest quarterly ratio
Lowest quarterly ratio
Sources of funding
2016
%
2015
%
95,14
111,96
125,74
95,14
125,74
142,14
152,69
125,74
During the year of 2016, the Company’s main sources of liquidity were its deposit base and central bank
funding, either through the Eurosystem monetary policy operations or through ELA.
Reliance on ELA funding was reduced from its peak of €11,4 billion in April 2013 to €200 million as at 31
December 2016 (2015: €3,8 billion) (Note 29). ELA was fully repaid on 5 January 2017.
The liquidity received from central banks is subject to the relevant regulations and requires qualifying assets as
collateral.
The funding provided to the Company through ELA is short term, usually 2-4 weeks. The funding via
Eurosystem monetary policy operations ranges from short term to long term.
In 2014, the Company participated in the TLTRO of the ECB for an amount of €500 million. On 29 June 2016
the Company repaid the amount borrowed through the TLTRO amounting to €500 million and borrowed the
same amount from the MRO. In December 2016, the Company borrowed an amount of €600 million through
the new series of TLTRO (TLTRO II) announced by the ECB in March 2016. Additionally, an amount of €50
million was borrowed through the LTRO. As a result, in December 2016 all the ECB funding that was borrowed
through the MRO, was switched to longer term funding.
In May 2016, the Company raised new funding from the ECB using as collateral a pool of housing loans that
satisfy the criteria of the Additional Credit Claims as set out in accordance with the Implementation of the
Eurosystem Monetary Policy Framework Directives of 2015 and 2016.
Funding to subsidiaries
The funding provided by the Company to its subsidiaries for liquidity purposes is repayable as per the terms of
the respective agreements. For lending provided for capital purposes (subordinated loan stocks) the prior
approval of the regulator is usually required on any repayment before the maturity date and for Bank of Cyprus
UK Ltd approval is also required for the final repayment. The Company’s subsidiary Bank of Cyprus UK Ltd
cannot place funds with the Group in excess of maximum limits set by the local regulator.
Any new funding to subsidiaries requires approval from the ECB and the CBC.
The subsidiaries may proceed with dividend distributions in the form of cash to the Company, provided that
they are not in breach of their regulatory capital and liquidity requirements. Certain subsidiaries have a
recommendation from their regulator to avoid any dividend distribution at this point in time.
302
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
43.
Risk management – Liquidity risk and funding (continued)
Collateral requirements
The carrying values of the Company’s encumbered assets as at 31 December 2016 and 2015 are
summarised below:
Cash and other liquid assets
Investments
Loans and advances
Property
2016
€000
2015
€000
139.975
358.252
154.896
891.701
2.609.248
12.882.139
93.574
93.500
3.201.049
14.022.236
Cash is mainly used to cover collateral required for (i) derivatives and repurchase transactions and (ii) trade
finance transactions and guarantees issued. It is also used as part of the supplementary assets for the covered
bond.
Investments are mainly used as collateral for repurchase transactions with commercial banks as well as
supplementary assets for the covered bond.
Loans and advances indicated as encumbered as at 31 December 2016 and 2015 are mainly used as collateral
for funding from the CBC, the covered bond and the ECB.
As at 31 December 2016 loans and advances to customers include loans of a nominal amount of €787 million
(2015: €14.763 million) in Cyprus, which are pledged as collateral for ELA. Additionally, they include mortgage
loans of a nominal amount €1.002 million (2015: €1.004 million) in Cyprus, which are pledged as collateral for
the covered bond issued by the Company in 2011 under the Covered Bond Programme. Furthermore they
include housing loans of a nominal amount €765 million (2015: €nil) in Cyprus pledged as collateral for the
funding from the ECB (Note 29).
In August 2016, the Company cancelled two own-issued bonds guaranteed by the Republic of Cyprus of €500
million each. The bonds bore an annual fixed interest rate at 5%. The bonds were guaranteed by the Republic
of Cyprus and were issued in accordance with the relevant legislation and decrees on the ‘Granting of
Government Guarantees for the Conclusion of Loans and/or the Issue of Bonds by Credit Institutions Law’. No
liability from the issue of these bonds was presented in debt securities in issue in the balance sheet as all the
bonds were held by the Company. The bonds were listed on the CSE and were pledged as collateral for
obtaining funding from central banks. One of the bonds was released in June 2016 from the ELA pool of
collateralised assets. After taking into consideration the significant reduction of ELA funding, the Board of
Directors of the Company at its meeting held on 16 August 2016, decided to proceed with the cancellation of
the two bonds. Given the decision for the cancellation, the CBC released the second bond on 19 August 2016.
The two bonds were cancelled on 25 August 2016, following the approval/consent from the competent
authorities.
The Company maintains a Covered Bond Programme set up under the Cyprus Covered Bonds legislation and
the Covered Bonds Directive of the CBC.
Under the Programme, the Company issued in December 2011 covered bonds of €1.000 million. The covered
bonds issued had a maturity of three years with a potential extension of their repayment by one year, bore
interest at the three month Euribor plus 1,25% on a quarterly basis and were traded on the Luxemburg Bourse.
The terms of the €1.000 million covered bond secured by residential mortgage loans originated in Cyprus were
amended in June 2014 and the maturity date changed to 12 June 2017 with a potential extension of one year
and the interest rate to three month Euribor plus 3,25% on a quarterly basis. All the bonds issued are held by
the Company.
303
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
43.
Risk management – Liquidity risk and funding (continued)
Collateral requirements (continued)
On 29 September 2015, the terms of the Covered Bond Programme and the outstanding €1.000 million covered
bond were amended to a Conditional Pass–Through structure. As part of the restructuring, the outstanding
principal of the retained covered bond was reduced to €650 million with a new maturity date of 12 December
2018. The credit rating of the covered bond was upgraded to an investment grade rating and the covered bond
has become eligible collateral for the Eurosystem credit operations.
As from 2 October 2015, it has been placed as collateral for accessing funding from the ECB.
Recent developments
The credit ratings of the Republic of Cyprus by the main credit rating agencies continue to be below investment
grade. As a result, the ECB is no longer able to include Cyprus Government Bonds in its asset purchase
programme, or as eligible collateral for Eurosystem monetary operations, as was the case when the waiver for
collateral eligibility due to the country being under an economic adjustment programme existed.
In August, October and December 2016 the CBC has released loans and advances with contractual value of
€2 billion, €2,5 billion and €7,3 billion respectively held as collateral for ELA.
Following the full repayment of ELA on 5 January 2017, all ELA collateralised loans have subsequently been
released, but ELA pledged properties remain pledged as of 27 March 2017.
Analysis of financial assets and liabilities based on remaining contractual maturity
The analysis of the Company’s financial assets and liabilities based on the remaining contractual maturity at 31
December is based on undiscounted cash flows, analysed in time bands according to the number of days
remaining from 31 December to the contractual maturity date.
Financial assets
The analysis of financial assets does not include any interest receivable cash flows. Financial assets have a
much longer duration than financial liabilities and non-discounted interest receivable cash flows are higher than
non-discounted interest payable cash flows (based on remaining contractual maturity). As a result, non-
discounted cash inflows from interest receivable would have greatly exceeded non-discounted cash outflows on
interest payable, thus artificially improving liquidity.
Current accounts, overdrafts and amounts in arrears are included within the first maturity time band which
reflects their contractual maturity. All other loans and advances to customers are analysed according to their
contractual repayment schedule.
Loans and advances to banks are analysed in the time bands according to the number of days remaining from
31 December, until their contractual maturity date. Amounts placed as collateral (primarily for derivatives and
loans) are assigned to different time bands based on either their maturity (in the case of loans), or
proportionally according to the maturities of derivatives (where the collateral had no fixed maturity).
Financial assets with no contractual maturity (such as equity securities) are included in the ‘over five years’
time band, unless classified as at fair value through profit or loss, in which case they are included in the ‘up to
one month’ time band.
The investments are classified in the relevant time band according to their contractual maturity.
Financial liabilities
All financial liabilities for the repayment of which notice is required, are included in the relevant time bands as if
notice had been given on 31 December, despite the fact that the Company expects that the majority of its
customers will not demand repayment of such liabilities on the earliest possible date. Fixed deposits are
classified in time bands based on their contractual maturity. Although customers may demand repayment of
time deposits (subject to penalties depending on the type of the deposit account), the Company has the
discretion not to accept such early termination of deposits.
The amounts presented in the table below are not equal to the amounts presented on the balance sheet, since
the table below presents all cash flows (including interest to maturity) on an undiscounted basis.
304
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
43.
Risk management – Liquidity risk and funding (continued)
Analysis of financial assets and liabilities based on remaining contractual maturity (continued)
Derivative financial instruments
Derivative financial instruments were classified according to whether the settlement of cash flows occurs on a
net or gross basis.
For net settled derivatives, after offset of receivable and payable amounts, the fair value of the derivatives is
included in financial assets or in financial liabilities in the time band corresponding to the remaining maturity of
the derivative.
Gross settled derivatives or net settled derivatives that are hedging instruments in cash flow hedges are
presented in a separate table and the corresponding cash flows are classified accordingly in the time bands
which relate to the number of days until their receipt or payment.
Commitments and contingent liabilities
The limits of loans and advances are commitments to provide credit to customers. The limits are granted for
predetermined periods and can be cancelled by the Company after giving relevant notice to the customers.
Usually the customers do not fully utilise the limits granted to them.
2016
Financial assets
Cash and balances with
central banks
Loans and advances to
banks
Investments at fair
value through profit or
loss
Loans and advances to
customers
Fair value of net settled
derivative assets
Non-trading investments
Other assets
Balances with Group
companies
On demand
and up to
one month
€000
Between
one and
three
months
€000
Between
three
months and
one year
€000
Between
one and
five years
Over five
years
Total
€000
€000
€000
1.207.967
26.213
29.157
4.016
-
1.267.353
776.854
10.056
9.725
172.674
15.567
984.876
826
8.740
1.686
-
550
11.802
5.964.788
189.555
510.167
2.868.771
4.819.279 14.352.560
17.829
7.282
5.572
2.701
6.453
6.126
59
158
87
20.834
42.009
18.271
326.663
238.826
621.233
66.099
-
96.068
24.371
60.690
74.351
1.148.224
57.346
1.364.982
Total financial assets
8.005.489
310.534
685.425 4.586.605 5.131.655 18.719.708
Financial liabilities
Deposits by banks
Funding from central
banks
Repurchase agreements
Customer deposits
Fair value of net settled
derivative liabilities
Other liabilities
Balances with Group
companies
Total undiscounted
financial liabilities
313.934
1.955
32.731
-
83.812
432.432
200.014
50.000
-
-
-
-
600.000
-
850.014
285.838
9.188
295.026
8.298.556
2.875.301
2.925.752
1.040.415
4.193 15.144.217
7.955
1.010
53
31.687
7.504
48.209
85.828
11.479
24.809
4.591
2.296
129.003
91.935
25.819
15.729
369.162
-
502.645
8.998.222 2.965.564 2.999.074 2.331.693
106.993 17.401.546
305
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
43.
Risk management – Liquidity risk and funding (continued)
Analysis of financial assets and liabilities based on remaining contractual maturity (continued)
2015
Financial assets
Cash and balances with
central banks
Loans and advances to
banks
Investments at fair
value through profit or
loss
Loans and advances to
customers
Fair value of net settled
derivative assets
On demand
and up to
one month
Between
one and
three
months
Between
three
months and
one year
Between
one and
five years
Over five
years
Total
€000
€000
€000
€000
€000
€000
1.062.261
20.744
27.939
410
- 1.111.354
858.603
6.745
36.774
191.869
18.346 1.112.337
1.378
-
6.719
10.711
919
19.727
6.884.219
172.935
880.654
2.945.186
5.122.884 16.005.878
12.615
733
590
39
45
14.022
Non-trading investments
44.922
51.367
203.219
452.953
161.475
913.936
Other assets
9.819
5.837
6.999
123.322
-
145.977
Balances with Group
companies
58.542
56.813
77.322
493.237
49.665
735.579
Total financial assets
8.932.359
315.174 1.240.216 4.217.727 5.353.334 20.058.810
Financial liabilities
Deposits by banks
177.080
Funding from central
banks
3.953.955
-
-
16.808
8.505
38.395
240.788
-
502.846
- 4.456.801
Repurchase agreements
-
29.826
82.217
288.676
9.679
410.398
Customer deposits
7.166.893
2.034.743
3.239.117
350.412
2.658 12.793.823
Debt securities in issue
-
-
712
-
-
712
Fair value of net settled
derivative liabilities
6.865
3.658
5.266
33.826
4.544
54.159
Other liabilities
60.651
11.692
27.217
4.677
2.338
106.575
Balances with Group
companies
Total undiscounted
financial liabilities
160.843
23.634
14.814
371.916
-
571.207
11.526.287 2.103.553 3.386.151 1.560.858
57.614 18.634.463
306
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
43.
Risk management – Liquidity risk and funding (continued)
Analysis of financial assets and liabilities based on remaining contractual maturity (continued)
On demand
and up to
one month
Between
one and
three
months
Between
three
months and
one year
Between
one and
five years
Over five
years
Total
€000
€000
€000
€000
€000
€000
669.186
164.669
1.531
(652.202)
(161.871)
(1.497)
16.984
2.798
34
1.060.998
188.662
1.498
(1.070.866)
(190.401)
(1.526)
(9.868)
(1.739)
(28)
2.790
2.483
1.140
-
-
-
-
-
-
-
-
-
-
835.386
(815.570)
19.816
-
1.251.158
- (1.262.793)
-
(11.635)
-
6.413
160.531
153.096
242.952
152.890
87.602
797.071
2016
Gross settled
derivatives
Financial assets
Contractual amounts
receivable
Contractual amounts
payable
Financial liabilities
Contractual amounts
receivable
Contractual amounts
payable
Contingent liabilities
and commitments
Contingent liabilities
Acceptances and
endorsements
Guarantees
Commitments
Documentary credits
4.649
6.824
14.190
287
1.686
27.636
Undrawn formal standby
facilities, credit lines and
other commitments to
lend
2.020.255
-
-
-
-
2.020.255
2.188.225
162.403
258.282
153.177
89.288
2.851.375
307
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
43.
Risk management – Liquidity risk and funding (continued)
Analysis of financial assets and liabilities based on remaining contractual maturity (continued)
On demand
and up to
one month
Between
one and
three
months
Between
three
months and
one year
Between
one and
five years
Over five
years
Total
€000
€000
€000
€000
€000
€000
931.730
57.648
1.196
(920.083)
(56.874)
(1.175)
11.647
774
21
408.995
160.095
167.212
(414.868)
(161.442)
(169.407)
(5.873)
(1.347)
(2.195)
2.243
2.750
2.048
-
-
-
-
-
-
-
-
-
-
-
-
-
990.574
(978.132)
12.442
736.302
(745.717)
(9.415)
-
7.041
66.251
140.400
245.352
254.419
86.461
792.883
2015
Gross settled
derivatives
Financial assets
Contractual amounts
receivable
Contractual amounts
payable
Financial liabilities
Contractual amounts
receivable
Contractual amounts
payable
Contingent liabilities
and commitments
Contingent liabilities
Acceptances and
endorsements
Guarantees
Commitments
Documentary credits
2.259
8.028
4.116
2.643
1.395
18.441
Undrawn formal standby
facilities, credit lines and
other commitments to
lend
2.069.128
-
-
-
- 2.069.128
2.139.881
151.178
251.516
257.062
87.856 2.887.493
308
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
44.
Capital management
The primary objective of the Group’s capital management is to ensure compliance with the relevant regulatory
capital requirements and to maintain strong credit ratings and healthy capital adequacy ratios in order to
support its business and maximise shareholder value.
The capital adequacy regulations which govern the Group’s operations are established by the CBC/ECB.
The Company has complied with the minimum capital requirements (Pillar I and Pillar II) during 2016.
The Pillar 3 Disclosures Report (unaudited) of the Group required with respect to the requirements of the
Capital Requirement Regulation (EU) No 575/2013 is published on the Group’s website www.bankofcyprus.com
(Investor Relations).
45.
Related party transactions
Loans and advances to members of the
Board of Directors and connected persons:
- less than 1% of the Company’s net assets
per director
Loans and advances to other key
management personnel and connected
persons
Total loans and advances as at 31
December
Loans and advances as at 31 December:
- members of the Board of Directors and other
key management personnel
- connected persons
Interest income for the year
Deposits as at 31 December:
- members of the Board of Directors and
other key management personnel
- connected persons
Interest expense on deposits for the year
Accruals and other liabilities as at 31
December:
- balances with entity providing key
management personnel services
Staff costs, consultancy and restructuring
expenses
2016
Number of directors
2015
2016
€000
2015
€000
10
10
9
9
314
314
369
369
2.955
3.871
3.269
4.240
2.811
458
3.269
112
2.981
3.559
6.540
69
3.354
886
4.240
138
3.366
3.147
6.513
187
2.635
4.957
10.782
10.693
309
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
45.
Related party transactions (continued)
The above table does not include year-end balances for members of the Board of Directors and their connected
persons who resigned during the year.
Interest income and expense are disclosed for the period during which they were members of the Board of
Directors or served as key management personnel.
In addition to loans and advances, there were contingent liabilities and commitments in respect of members of
the Board of Directors and their connected persons, mainly in the form of documentary credits, guarantees and
commitments to lend, amounting to €61 thousand (2015: €135 thousand). As at 31 December 2016 and 2015,
none of the directors or their connected persons had total loans and advances which exceeded 1% of the net
assets of the Company per director. There were also contingent liabilities and commitments to other key
management personnel and their connected persons amounting to €385 thousand (2015: €856 thousand).
The total unsecured amount of the loans and advances and contingent liabilities and commitments to members
of the Board of Directors, key management personnel and other connected persons (using forced-sale values
for tangible collaterals and assigning no value to other types of collaterals) at 31 December 2016 amounted to
€635 thousand (2015: €1.094 thousand).
At 31 December 2016 the Company has a deposit of €4.370 thousand with Piraeus Bank SA in which Mr Arne
Berggren is a non-executive Director. The Company has also provided certain indemnities to Piraeus Bank SA
as part of the disposal of Kyprou Leasing SA in 2015 (Note 47.3.3).
There were no transactions during the years ended 31 December 2016 and 2015 with connected persons of the
current members of the Board of Directors or with any members who resigned during the two years.
Connected persons include spouses, minor children and companies in which directors/other key management
personnel, hold directly or indirectly, at least 20% of the voting shares in a general meeting, or act as
executive director or exercise control of the entities in any way.
Additional to members of the Board of Directors, related parties include entities providing key management
personnel services to the Company.
All transactions with members of the Board of Directors and their connected persons are made on normal
business terms as for comparable transactions with customers of a similar credit standing. A number of loans
and advances have been extended to other key management personnel and their connected persons on the
same terms as those applicable to the rest of the Company’s employees.
Fees and emoluments of members of the Board of Directors and other key management personnel
Director emoluments
Executives
Salaries and other short term benefits
Employer’s contributions
Retirement benefit plan costs
Non-executives
Fees
Total directors’ emoluments
Other key management personnel emoluments
Salaries and other short term benefits
Termination benefits
Employer’s contributions
Retirement benefit plan costs
Total other key management personnel emoluments
Total
310
2016
€000
2015
€000
1.848
110
168
2.126
861
2.987
2.693
200
140
121
3.154
6.141
1.061
66
128
1.255
818
2.073
3.084
-
139
149
3.372
5.445
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
45.
Related party transactions (continued)
Fees and emoluments of members of the Board of Directors and other key management personnel
(continued)
Fees and benefits are included for the period that they serve as members of the Board of Directors.
The termination benefits relate to compensation paid to a member of the Executive Committee who left the
Group under the voluntary exit plan.
Executive Directors
The salaries and other short term benefits of the Executive Directors are analysed as follows:
John Patrick Hourican (Chief Executive Officer)
Christodoulos Patsalides (Deputy Chief Executive Officer and
Chief Operating Officer)
2016
€000
2015
€000
1.652
196
1.848
910
151
1.061
The retirement benefit plan costs for 2016 amounting to €168 thousand (2015: €128 thousand) relate to:
Mr John Patrick Hourican €150 thousand (2015: €110 thousand) and Dr Christodoulos Patsalides €18 thousand
(2015: €18 thousand).
Non-executive Directors
Josef Ackermann
Wilbur L. Ross Jr.
Vladimir Strzhalkovskiy
Arne Berggren
Maksim Goldman
Michalis Spanos
Ioannis Zographakis
Marios Kalochoritis
Michael Heger
2016
€000
2015
€000
150
120
-
115
120
100
115
90
51
861
150
120
21
107
116
100
115
89
-
818
The fees of the non-executive Directors include fees as members of the Board of Directors of the Company, as
well as of committees of the Board of Directors.
Other key management personnel
The other key management personnel emoluments include the remuneration of the members of the Executive
Committee since the date of their appointment to the Committee and other members of the management team
who report directly to the Chief Executive Officer or to the Deputy Chief Executive Officer and Chief Operating
Officer.
311
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
46.
Group companies
The main subsidiary companies and branches of the Company, their country of incorporation, their activities
and the percentage held by the Company (directly or indirectly) as at 31 December 2016 are:
Company
Country
Activities
Bank of Cyprus Public Company Ltd
Cyprus
Commercial bank
The Cyprus Investment and Securities
Corporation Ltd (CISCO)
Cyprus
Investment banking,
asset management and brokerage
General Insurance of Cyprus Ltd
Cyprus
General insurance
EuroLife Ltd
Kermia Ltd
Cyprus
Life insurance
Cyprus
Property trading and development
Kermia Properties & Investments Ltd
Cyprus
Property trading and development
Cytrustees Investment Public Company
Ltd
Cyprus
Closed-end investment company
Finerose Properties Ltd
Cyprus
Financing services
LCP Holdings and Investments Public Ltd
(formerly Laiki Capital Public Co Ltd)
JCC Payment Systems Ltd
Cyprus
Holding company
Cyprus
Card processing transaction
services
CLR Investment Fund Public Ltd
Cyprus
Investment company
Auction Yard Ltd
Cyprus
Auction company
BOC Secretarial Company Ltd
Cyprus
Secretarial services
S.Z. Eliades Leisure Ltd
Bank of Cyprus Public Company Ltd
(branch of the Company)
Kyprou Zois
(branch of EuroLife Ltd)
Kyprou Asfalistiki (branch of General
Insurance of Cyprus Ltd)
Bank of Cyprus UK Ltd
BOC Financial Services Ltd
Bank of Cyprus Romania (branch of the
Company)
Cyprus
Greece
Land development and operation
of a golf resort
Administration of guarantees and
holding of real estate properties
Greece
Life insurance
Greece
General insurance
United
Kingdom
United
Kingdom
Commercial bank
Financial advisory services
Romania
Commercial bank
Cyprus Leasing S.A. (formerly Cyprus
Leasing Romania IFN SA)
Romania
MC Investment Assets Management LLC
Russia
Collection of the existing portfolio
of receivables, including third
party collections
Problem asset management
company
Kyprou Finance (NL) B.V.
Netherlands Financing services
Fortuna Astrum Ltd
Serbia
Problem asset management
company
Percentage
holding
(%)
n/a
100
100
100
100
100
54
100
67
75
20
100
100
70
n/a
n/a
n/a
100
100
n/a
100
100
100
100
312
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
46.
Group companies (continued)
In addition to the above companies, at 31 December 2016 the Company had 100% shareholding in the
companies listed below whose activity is the ownership and management of immovable property:
Cyprus: Timeland Properties Ltd, Cobhan Properties Ltd, Bramwell Properties Ltd, Birkdale Properties Ltd,
Newington Properties Ltd, Innerwick Properties Ltd, Ramendi Properties Ltd, Ligisimo Properties Ltd, Moonland
Properties Ltd, Polkima Properties Ltd, Nalmosa Properties Ltd, Smooland Properties Ltd, Emovera Properties
Ltd, Estaga Properties Ltd, Skellom Properties Ltd, Blodar Properties Ltd, Spaceglowing Properties Ltd,
Threefield Properties Ltd, Lepidoland Properties Ltd, Ecunaland Properties Ltd, Tebane Properties Ltd, Cranmer
Properties Ltd, Vieman Ltd, Les Coraux Estates Ltd, Natakon Company Ltd, Oceania Ltd, Dominion Industries
Ltd, Ledra Estate Ltd, Eurolife Properties Ltd, Laiki Lefkothea Center Ltd, Labancor Ltd, Steparco Ltd, Joberco
Ltd, Zecomex Ltd, Domita Estates Ltd, Memdes Estates Ltd, Pamaco Platres Complex Ltd, Vameron Properties
Ltd, Thryan Properties Ltd, Otoba Properties Ltd, Edoric Properties Ltd, Canosa Properties Ltd, Silen Properties
Ltd, Kernland Properties Ltd, Unduma Properties Ltd, Danoma Properties Ltd, Kimrar Properties Ltd, Jobelis
Properties Ltd, Metin Properties Ltd, Pekiro Properties Ltd, Melsolia Properties Ltd, Nimoland Properties Ltd,
Lozzaria Properties Ltd, Koralmon Properties Ltd, Petrassimo Properties Ltd, Kedonian Properties Ltd, Lasteno
Properties Ltd, Armozio Properties Ltd, Spacous Properties Ltd, Calinora Properties Ltd, Marcozaco Properties
Ltd, Soluto Properties Ltd, Solomaco Properties Ltd, Linaland Properties Ltd, Andaz Properties Ltd, Unital
Properties Ltd, Neraland Properties Ltd, Canemia Properties Ltd, Wingstreet Properties Ltd, Nolory Properties
Ltd, Lynoco Properties Ltd, Renalandia Properties Ltd, Fitrus Properties Ltd, Lisbo Properties Ltd, Mantinec
Properties Ltd, Syniga Properties Ltd, Colar Properties Ltd, Irisa Properties Ltd, Valiro Properties Ltd, Avolo
Properties Ltd, Bracando Properties Ltd, Provezaco Properties Ltd, Hillbay Properties Ltd, Jungax Properties Ltd,
Ofraco Properties Ltd, Forenaco Properties Ltd, Vidalaco Properties Ltd, Jemina Properties Ltd, Hovita Properties
Ltd, Flitous Properties Ltd, Badrul Properties Ltd, Belaland Properties Ltd, Belzeco Properties Ltd, Bothwick
Properties Ltd, Fireford Properties Ltd, Citlali Properties Ltd, Endar Properties Ltd, Astromeria Properties Ltd,
Orzo Properties Ltd, Basiga Properties Ltd, Regetona Properties Ltd, Arcandello Properties Ltd, Sylvesta
Properties Ltd, Camela Properties Ltd, Nerofarm Properties Ltd, Subworld Properties Ltd, Jongeling Properties
Ltd, Introserve Properties Ltd, Alomco Properties Ltd, Cereas Properties Ltd, Fareland Properties Ltd, Landeed
Properties Ltd, Sindelaco Properties Ltd, Barosca Properties Ltd, Fogland Properties Ltd, Tebasco Properties Ltd,
Dolapo Properties Ltd, Homirova Properties Ltd, Nabela Properties Ltd, Valecross Properties Ltd, Altco Properties
Ltd, Forsban Properties Ltd, Marisaco Properties Ltd, Olivero Properties Ltd, Cavadino Properties Ltd, Jaselo
Properties Ltd, Elosa Properties Ltd, Garveno Properties Ltd, Flona Properties Ltd, Toreva Properties Ltd,
Resoma Properties Ltd, Singleserve Properties Ltd, Consento Properties Ltd, Mostero Properties Ltd, Helal
Properties Ltd, Yossi Properties Ltd, Gozala Properties Ltd, Molla Properties Ltd, Lezanco Properties Ltd, Pendalo
Properties Ltd, Frontyard Properties Ltd, Bascot Properties Ltd, Bonsova Properties Ltd, Nasebia Properties Ltd,
Vanemar Properties Ltd, Garmozy Properties Ltd, Orasmo Properties Ltd, Palmco Properties Ltd, Crolandia
Properties Ltd, Thermano Properties Ltd, Indene Properties Ltd, Ingane Properties Ltd, Venicous Properties Ltd,
Lasmane Properties Ltd, Lorman Properties Ltd, Caruzoco Properties Ltd, Consoly Properties Ltd, Eracor
Properties Ltd, Alomnia Properties Ltd, Rulemon Properties Ltd, Thelemic Properties Ltd, Maledico Properties
Ltd, Dentorio Properties Ltd, Valioco Properties Ltd, Bascone Properties Ltd, Balisimo Properties Ltd, Artozaco
Properties Ltd, Elizano Properties Ltd and K. Athienitis Kalamon Ltd.
Romania: Otherland Properties Dorobanti SRL, Pittsburg Properties SRL, Battersee Real Estate SRL, Trecoda
Real Estate SRL, Green Hills Properties SRL, Bocaland Properties SRL, Buchuland Properties SRL, Commonland
Properties SRL, Romaland Properties SRL, Janoland Properties SRL, Blindingqueen Properties SRL, Fledgego
Properties SRL, Hotel New Montana SRL, Loneland Properties SRL, Frozenport Properties SRL, Imoreth
Properties SRL, Inroda Properties SRL, Melgred Properties SRL, Tantora Properties SRL, Zunimar Properties
SRL, Allioma Properties SRL and Nikaba Properties SRL.
Further, at 31 December 2016 the Company had 100% shareholding in Iperi Properties Ltd, Obafemi Holdings
Ltd, Stamoland Properties Ltd and Gosman Properties Ltd whose main activities are the holding of shares and
other investments and they are registered in Cyprus.
At 31 December 2016 the Company had 100% shareholding in the companies listed below which are reserved
to accept property:
313
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
46.
Group companies (continued)
Cyprus: Belvesi Properties Ltd, Warmbaths Properties Ltd, Tavoni Properties Ltd, Tezia Properties Ltd, Carnota
Properties Ltd, Demoro Properties Ltd, Primaco Properties Ltd, Amary Properties Ltd, Hamura Properties Ltd,
Gileco Properties Ltd, Meriaco Properties Ltd, Venetolio Properties Ltd, Flymoon Properties Ltd, Senadaco
Properties Ltd, Desogus Properties Ltd, Intelamon Properties Ltd, Weinar Properties Ltd, Holstone Properties
Ltd, Balasec Properties Ltd, Nouralia Properties Ltd, Mazima Properties Ltd, Diafor Properties Ltd, Prosilia
Properties Ltd, Fantasio Properties Ltd, Lancast Properties Ltd, Alepar Properties Ltd, Nelipo Properties Ltd,
Allodica Properties Ltd, Resocot Properties Ltd, Jomento Properties Ltd, Soblano Properties Ltd, Talamon
Properties Ltd, Unoplan Properties Ltd, Paradexia Properties Ltd, Rosalica Properties Ltd, Zandexo Properties
Ltd, Calandomo Properties Ltd, Paramina Properties Ltd, Cramonco Properties Ltd, Bigwaive Properties Ltd,
Tasabo Properties Ltd, Coeval Properties Ltd and Bendolio Properties Ltd.
Romania: Mirodi Properties SRL, Nallora Properties SRL and Selilar Properties SRL.
In addition, the Company holds 100% of the following intermediate holding companies:
Cyprus: Otherland Properties Ltd, Pittsburg Properties Ltd, Battersee Properties Ltd, Trecoda Properties Ltd,
Bonayia Properties Ltd, Bocaland Properties Ltd, Buchuland Properties Ltd, Commonland Properties Ltd,
Romaland Properties Ltd, BC Romanoland Properties Ltd, Blindingqueen Properties Ltd, Fledgego Properties Ltd,
Janoland Properties Ltd, Threerich Properties Ltd, Loneland Properties Ltd, Unknownplan Properties Ltd,
Frozenport Properties Ltd, Imoreth Properties Ltd, Inroda Properties Ltd, Melgred Properties Ltd, Tantora
Properties Ltd, Zunimar Properties Ltd, Selilar Properties Ltd, Mirodi Properties Ltd, Nallora Properties Ltd,
Nikaba Properties Ltd, Allioma Properties Ltd, Hydrobius Ltd and Landanafield Properties Ltd.
The Group also holds 100% of the following companies which are inactive:
Cyprus: Laiki Bank (Nominees) Ltd, Fairford Properties Ltd, Thames Properties Ltd, Paneuropean Ltd, Philiki
Ltd, Cyprialife Ltd, Imperial Life Assurance Ltd, Philiki Management Services Ltd, Nelcon Transport Co. Ltd,
Ilera Properties Ltd, Weinco Properties Ltd, Calomland Properties Ltd, Lameland Properties Ltd, BOC Asset
Management Ltd and Pariza Properties Ltd.
Greece: Kyprou Commercial SA and Kyprou Properties SA.
All Group companies are accounted for as subsidiaries using the full consolidation method.
Termination of the leasing activities of Cyprus Leasing Romania IFN SA
On 26 September 2016 the shareholders of Cyprus Leasing Romania IFN SA decided to:
deregister the company from the Registry of non-banking financial institutions held by the National Bank of
Romania,
terminate the leasing and crediting activity of the company, and
change the name of the company to Cyprus Leasing S.A.
As a consequence of the above, the main activity of the company is now the collection of the existing portfolio
of receivables, including third party collections.
The matter was approved by the National Bank of Romania on 21 November 2016.
314
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
46.
Group companies (continued)
Change in the control holding of MC Investment Assets Management LLC
In the context of the disposal of the majority of the Russian operations in September 2015, the Company
increased its controlling interest in MC Investment Assets Management LLC to 100% from 80% during 2015.
Control over CLR Investment Fund Public Ltd (CLR) without substantial shareholding
The Company considers that it exercises control over CLR through control of the members of the Board of
Directors and is exposed to variable returns through its holding.
Dissolution and disposal of subsidiaries
As at 31 December 2016, the following subsidiaries were in the process of dissolution or in the process of being
struck off: Samarinda Navigation Co Ltd, Kyprou Securities SA, BOC Ventures Ltd, Tefkros Investments Ltd,
Salecom Ltd, Longtail Properties Ltd, Diners Club (Cyprus) Ltd, Leasing Finance LLC, Corner LLC, Omiks Finance
LLC, Unknownplan Properties SRL and Bank of Cyprus (Channel Islands) Ltd.
Tefkros Investments (CI) Ltd, Bank of Cyprus Mutual Funds Ltd, Laiki EDAK Ltd, Limestone Holdings Ltd and
Turnmill Properties Ltd were either dissolved or striken off during the year ended 31 December 2016. Mainport
Properties Ltd, Besadoco Properties Ltd, Odaina Properties Ltd, Icecastle Properties Ltd, Gilfront Properties Ltd,
Glodas Properties Ltd, Denmor Properties Ltd, Benely Properties Ltd, Arcozil Properties Ltd, Varony Properties
Ltd, Coramono Properties Ltd, Galozy Properties Ltd, Primantela Properties Ltd, Browneye Properties Ltd, Givolo
Properties Ltd, Kandoramo Properties Ltd and Cronaland Properties Ltd were disposed of during the year ended
31 December 2016 as part of the Company’s strategy to dispose of repossessed properties.
As part of the Company’s strategy of focusing on its core businesses and markets, the Company decided the
closure of the operations of Bank of Cyprus (Channel Islands) Ltd and to relocate its business to other Group
locations. The company’s licenses in Guernsey for banking and investment business have been surrendered, its
capital has been repatriated to the Company and the company entered the process of liquidation in December
2016.
In accordance with the Group’s strategy to exit from overseas non-core operations, the operations of the Bank
of Cyprus branch in Romania are expected to be terminated during 2017, subject to regulatory approvals. The
remaining assets and liabilities of the branch will be transferred to other entities of the Group.
Carrying value of investments in subsidiaries
1 January
Additions (Note 47.1 and 47.2)
Contribution to subsidiaries
Reduction of share capital of subsidiaries
2016
€000
2015
€000
207.781
236.369
47.962
80
(1.799)
3.000
-
(613)
Impairment of investments in subsidiaries (Note 14)
(24.798)
(30.455)
Repatriation of capital
Disposal of subsidiaries (Note 47.3)
31 December
(30.518)
-
-
(520)
198.708
207.781
315
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
47.
Acquisitions and disposals
47.1
Acquisitions during 2016
47.1.1 Acquisition of S.Z. Eliades Leisure Ltd
In the context of its loan restructuring activities, the Company acquired on 15 June 2016 a 70% interest in the
share capital of S.Z. Eliades Leisure Ltd in exchange for the settlement of borrowings due from it of a total
gross amount of €52.335 thousand. S.Z. Eliades Leisure Ltd operates in land development and the operation of
a golf resort in Cyprus. The fair value of the consideration for the acquisition of the 70% share in S.Z. Eliades
Leisure Ltd amounts to €43.758 thousand. The acquisition did not include any cash consideration. The Company
considers that it controls S.Z. Eliades Leisure Ltd.
47.1.2 Acquisition of K. Athienitis Kalamon Ltd
In the context of the loan restructuring activities of the parent company of K. Athienitis Kalamon Ltd, the
Company acquired on 23 December 2016 a 100% interest in the share capital of K. Athienitis Kalamon Ltd. K.
Athienitis Kalamon Ltd operates in the development and rental of immovable property.
The fair value of the consideration for the acquisition of the 100% share in K. Athienitis Kalamon Ltd amounts
to €4.204 thousand, which is also the cash consideration paid for the acquisition of the company. Part of the
consideration paid was used to reduce the outstanding loan facilities of the parent company of K. Athienitis
Kalamon Ltd. The Company considers that it controls K. Athienitis Kalamon Ltd.
47.2
Acquisition during 2015
47.2.1 Acquisition of shares of Laiki Financial Services Ltd (LFS)
On 30 January 2015, the Annual General Meeting of the shareholders of LFS approved the disposal of the
shares of LFS to the Company for a consideration of €3 million. Previously, LFS was 100% owned by LCP
Holdings and Investments Public Ltd (formerly Laiki Capital Public Co Ltd), a subsidiary of the Company.
In November 2015, CISCO, a subsidiary of the Company, issued 1.000 thousand shares of a nominal value
€1,71 each, at a total premium of €534 thousand, for the transfer of the Company’s investment in LFS to
CISCO. Following the transfer of shares, LFS was dissolved, without liquidation, under the Merger and
Reconstruction Scheme and its net assets were transferred to CISCO in accordance with a court order.
47.3
Disposals during 2015
47.3.1 Disposal of the majority of the Company’s Russian operations
On 25 September 2015, the Company completed the disposal of the majority of the operations of its Russian
operations, comprising (i) its 100% holding in its subsidiary, BOC Russia (Holdings) Ltd, and through this its
80% holding in its Russian banking subsidiary, CB Uniastrum Bank LLC, and its 80% holding in its Russian
leasing subsidiary, Leasing Company Uniastrum Leasing LLC and (ii) certain other Russian loan exposures.
The transaction resulted in a loss on disposal of €31.479 thousand. As part of the sales agreement, the parties
agreed an asset swap arrangement which involved the exchange of certain assets between them that resulted
in a €41.849 thousand receivable for the Company on the date of the transaction.
Following the disposal of the above operations, the remaining net exposure of the Company as at 31 December
2016 in Russia is €10.985 thousand, comprising primarily of customer loans.
47.3.2 Disposal of Aphrodite group
In September 2015, the Company completed the sale of shares representing a 65% shareholding in the
Aphrodite Hills Resort Ltd and Aphrodite Hills (Lakkos tou Frangou) Ltd, for the amount of €500 thousand.
Following the sale, the Company retained a 10% minority equity stake in the Aphrodite group. The transaction
also involved the restructuring of the debt owed by these companies to the Company.
47.3.3 Disposal of Kyprou Leasing SA
Following the disposal of the Company’s leasing operations in Greece to Piraeus Bank SA through a Decree
issued on 26 March 2013, the Company completed the transfer of the legal ownership of its subsidiary, Kyprou
Leasing SA to Piraeus Bank SA during the first quarter of 2015. As a result, certain assets and liabilities of
Kyprou Leasing SA were undertaken by the Company.
316
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
48.
Events after the reporting date
48.1
New holding company and listing on the London Stock Exchange
Bank of Cyprus Holdings Public Limited Company was incorporated in the Republic of Ireland on 11 July 2016
for the purposes of the Group’s listing on the London Stock Exchange (LSE). The Republic of Ireland was
considered to be the most suitable jurisdiction as it is a FTSE eligible Eurozone country, has a common law
legal system similar to that of Cyprus and is a commonly adopted jurisdiction for companies wishing to apply
for listing on the LSE. The Company’s headquarters, management and operations remain in Cyprus. Bank of
Cyprus Holdings Public Limited Company is tax resident in Cyprus.
The Extraordinary General Meeting (EGM) of the shareholders of the Company held on 13 December 2016
approved the scheme of arrangement between the Company, Bank of Cyprus Holdings Public Limited Company
and the shareholders of the Company. The scheme of arrangement introduces Bank of Cyprus Holdings Public
Limited Company as the new holding company of the Company. Additionally the EGM authorised the directors
of the Company to take all actions necessary or appropriate to carry the scheme of arrangement into effect.
The EGM also approved:
(i)
the reduction in the issued share capital of the Company from €892.294.453,30 divided into
8.922.944.533 ordinary shares of a nominal value of €0,10 each to nil by cancelling all the shares
comprising the issued share capital of the Company (the Existing Shares) resulting in the creation of a
capital reduction reserve in the accounts of the Company, equal to the aggregate nominal value of the
Existing Shares so cancelled, and which shall be retained as a non-distributable capital reserve in
accordance with the provisions of subsection (e) of section 64 of the Companies Law, Cap. 113 (the
‘Reduction of Capital’);
(ii) the increase in the authorised share capital of the Company to €4.767.759.272,00 divided into
47.677.592.720 ordinary shares with a nominal value of €0,10 each through the creation of 8.922.944.533
new but unissued ordinary shares with a nominal value of €0,10 each, each of which shall have the same
rights and shall rank pari passu with the existing ordinary shares of the Company;
(iii) to apply the reserve arising in the books of account of the Company as a result of the cancellation of the
Existing Shares in paying up in full at par 8.922.944.533 new ordinary shares with a nominal value of
€0,10 each in the capital of the Company, which shall be issued and allotted, credited as fully paid, to Bank
of Cyprus Holdings Public Limited Company or its nominee(s) in accordance with the Scheme; and
(iv) the authorisation of the directors of the Company to give effect to this special resolution.
The scheme of arrangement was sanctioned by the District Court of Nicosia on 21 December 2016 and the
Existing Shares of the Company were suspended from trading on the CSE and ATHEX with effect from and
including 10 January 2017.
Following the submission of the Court Order to the Registrar of Companies and the Registration, by the latter,
of the reduction of capital, the scheme of arrangement became effective on 18 January 2017. As a result, all of
the shares comprising the issued share capital of the Company were cancelled and the Company issued and
allotted 8.922.944.533 new ordinary shares of nominal value €0,10 each, credited as fully paid to Bank of
Cyprus Holdings Public Limited Company; and Bank of Cyprus Holdings Public Limited Company issued and
allotted New Shares and procured the issue of Depositary Interests representing New Shares, in accordance
with the terms of the scheme of arrangement. Each one New Share or one Depository Interest represents one
New Share for each individual holding of 20 Existing Shares.
On 19 January 2017 the total issued share capital of 446.199.933 ordinary shares of nominal value €0,10 each
of Bank of Cyprus Holdings Public Limited Company was admitted to the standard listing segment of the official
list of the United Kingdom’s Financial Conduct Authority, to trading on the Main Market for listed securities of
the LSE, under the ticker symbol “BOCH”, to listing on the CSE and to trading on the Main Market of the CSE
under the ticker symbol “BOCH/ΤΡΚΗ”, with ISIN IE00BD5B1Y92.
317
BANK OF CYPRUS PUBLIC COMPANY LTD
Notes to the Financial Statements
Annual Financial Report 2016
48.
Events after the reporting date (continued)
48.2
Share-based payments – share options
The Long Term Incentive Plan approved by the shareholders at the annual general meeting on 24 November
2015 as described in Note 32, was replaced on 18 January 2017 by the Share Option Plan implemented by
Bank of Cyprus Holdings Public Limited Company following the introduction of Bank of Cyprus Holdings Public
Limited Company as the new holding company of the Company. The Share Option plan is identical to the Long
Term Incentive Plan except that the number of shares in Bank of Cyprus Holdings Public Limited Company to be
issued pursuant to an exercise of options under the Share Option Plan should not exceed 8.922.945 ordinary
shares of a nominal value of €0,10 each and the exercise price was set at €5,00 per share. The exercise date
was also extended from 3 years to between 4-10 years after the grant date.
48.3
Full repayment of ELA
ELA was fully repaid on 5 January 2017. All ELA collateralised loans have subsequently been released but ELA
pledged properties remain pledged as of 27 March 2017.
48.4
Issue of Tier 2 Capital
In January 2017, the Company issued a €250 million unsecured and subordinated Tier 2 Capital Note (Note)
under the Company’s EMTN Programme. The Note was priced at par with a coupon of 9,25%. The Note
matures on 19 January 2027. The Company has the option to redeem the Note early on 19 January 2022,
subject to applicable regulatory consents.
48.5
Funding through the new series of TLTRO II
In March 2017 the Company has borrowed an additional amount of €230 million through the new series of
TLTRO II, to be received on 29 March 2017.
318
Ernst & Young Cyprus Ltd
Jean Nouvel Tower
6 Stasinou Avenue
P.O.Box 21656
1511 Nicosia, Cyprus
Tel: +357 22209999
Fax: +357 22209998
ey.com/cy
Independent Auditor’s Report
To the Members of Bank of Cyprus Public Company Ltd
Report on the Financial Statements
Opinion
We have audited the financial statements of parent company Bank of Cyprus Public Company
Ltd (the ‘Company’) on pages 194 to 318, which comprise the balance sheet as at 31
December 2016, and the income statement, the statement of comprehensive income, the
statement of changes in equity and the statement of cash flows for the year then ended, and
the notes to the financial statements, including a summary of significant accounting policies.
In our opinion, the financial statements give a true and fair view of the financial position of
the Company as at 31 December 2016, and of its financial performance and its cash flows for
the year then ended in accordance with International Financial Reporting Standards as
adopted by the European Union and the requirements of the Cyprus Companies Law, Cap.
113.
Basis of opinion
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our
responsibilities under those standards are further described in the Auditor’s Responsibilities
for the Audit of the Financial Statements section of our report. We are independent of the
Company in accordance with the International Ethics Standards Board for Accountants’ Code
of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements
that are relevant to our audit of the financial statements in Cyprus, and we have fulfilled our
other ethical responsibilities in accordance with these requirements and the IESBA Code. We
believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our opinion.
Material uncertainty related to going concern
We draw your attention to note 3 “Going concern” to the financial statements which discusses
management’s assessment as to the ability of the Company to continue as a going concern
and the fact that the Company is currently not in compliance with its regulatory liquidity
requirements with respect to its operations in Cyprus, which indicates the existence of a
material uncertainty of the Company’s ability to continue as a going concern. Our opinion is
not modified in respect of this matter.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the financial statements of the current period. In addition to the
matter described in the material uncertainty related to going concern section of our report,
we have determined the matters described below to be the key audit matters to be
communicated in our report. These matters were addressed in the context of our audit of the
319
financial statements as a whole, and in forming our opinion thereon, and we do not provide a
separate opinion on these matters. For each matter included in Appendix A, our description
of how our audit addressed the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of
the financial statements section of our report, including in relation to these matters.
Accordingly, our audit included the performance of procedures designed to respond to our
assessment of the risks of material misstatement of the financial statements. The results of
our audit procedures, including the procedures performed to address the matters below,
provide the basis for our audit opinion on the accompanying financial statements.
The areas of highest risk to the audit and where we focused most effort and resources were:
Impairment of customer loans and advances
•
• Recoverability of deferred tax assets
• Valuation of stock of property
The nature of Key Audit Matters and the procedures performed to support our discussions
and conclusions are described in Appendix A of this report.
Other information included in the annual report
The Board of Directors is responsible for the other information. The other information
comprises the information included in the Annual Report, but does not include the financial
statements and our auditor’s report thereon.
Our opinion on the financial statements does not cover the other information and we do not
express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other
information and, in doing so, consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the audit or otherwise appears to
be materially misstated. If, based on the work we have performed, we conclude that there is
a material misstatement of this other information, we are required to report that fact. We
have nothing to report in this regard.
Responsibilities of the Board of Directors for the Financial Statements
The Company’s Board of Directors is responsible for the preparation of financial statements
that give a true and fair view in accordance with International Financial Reporting Standards
as adopted by the European Union and the requirements of the Cyprus Companies Law, Cap.
113, and for such internal control as the Board of Directors determines is necessary to enable
the preparation of financial statements that are free from material misstatement, whether
due to fraud or error.
320
In preparing the financial statements, the Board of Directors is responsible for assessing the
Company’s ability to continue as a going concern, disclosing, as applicable, matters related to
going concern and using the going concern basis of accounting unless the Board of Directors
either intends to liquidate the Company or to cease operations, or has no realistic alternative
but to do so.
The Board of Directors is responsible for overseeing the Company’s financial reporting
process.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as
a whole are free from material misstatement, whether due to fraud or error, and to issue an
auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with ISAs will always detect a
material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgment and maintain
professional scepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the financial statements, whether
due to fraud or error, design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for
one resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by the Board of Directors.
Conclude on the appropriateness of the Board of Directors’ use of the going concern basis
of accounting and, based on the audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant doubt on the Company’s
ability to continue as a going concern. If we conclude that a material uncertainty exists,
we are required to draw attention in our auditor’s report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of our auditor’s
report. However, future events or conditions may cause the Company to cease to continue
as a going concern.
321
Evaluate the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the underlying
transactions and events in a manner that achieves a true and fair view.
Obtain sufficient appropriate audit evidence regarding the financial information of the
entities or business activities within the Company to express an opinion on the financial
statements. We are responsible for the direction, supervision and performance of the
audit. We remain solely responsible for our audit opinion.
We communicate with the Board of Directors through its Audit Committee regarding, among
other matters, the planned scope and timing of the audit and significant audit findings,
including any significant deficiencies in internal control that we identify during our audit.
We also provide the Board of Directors through its Audit Committee with a statement that we
independence, and to
have complied with relevant ethical requirements regarding
communicate with them all relationships and other matters that may reasonably be thought
to bear on our independence, and where applicable, related safeguards.
From the matters communicated with the Board of Directors, we determine those matters
that were of most significance in the audit of the financial statements of the current period
and are therefore the key audit matters. We describe these matters in our auditor’s report
unless law or regulation precludes public disclosure about the matter or when, in extremely
rare circumstances, we determine that a matter should not be communicated in our report
because the adverse consequences of doing so would reasonably be expected to outweigh the
public interest benefits of such communication.
Report on other legal requirements
Pursuant to the additional requirements of the Auditors and Statutory Audits of Annual and
Consolidated Accounts Laws of 2009 to 2016, we report the following:
We have obtained all the information and explanations we considered necessary for the
purposes of our audit.
In our opinion, proper books of account have been kept by the Company, so far as appears
from our examination of these books.
The financial statements are in agreement with the books of account.
In our opinion and to the best of our information and according to the explanations given
to us, the financial statements give the information required by the Cyprus Companies Law,
Cap. 113, in the manner so required.
In our opinion, the management report has been prepared in accordance with the
requirements of the Cyprus Companies Law, Cap. 113, and the information given is
consistent with the financial statements.
In our opinion, and in the light of the knowledge and understanding of the Company and its
environment obtained in the course of the audit, we have not identified material
misstatements in the management report.
322
In our opinion, the information included in the corporate governance statement in
accordance with the requirements of subparagraphs (iv) and (v) of paragraph 2(a) of Article
151 of the Cyprus Companies Law, Cap. 113, and which is included as a specific section of
the management report, have been prepared in accordance with the requirements of the
Cyprus Companies Law, Cap, 113, and is consistent with the financial statements.
In our opinion, and in the light of the knowledge and understanding of the Company and its
environment obtained in the course of the audit, we have not identified material
misstatements in the corporate governance statement in relation to the information
disclosed for items (iv) and (v) of subparagraph 2(a) of Article 151 of the Cyprus
Companies Law, Cap. 113.
In our opinion, the corporate governance statement includes all information referred to in
subparagraphs (i), (ii), (iii) and (vi) of paragraph 2(a) of Article 151 of the Cyprus
Companies Law, Cap. 113.
Other matter
This report, including the opinion, has been prepared for and only for the Company's members
as a body in accordance with Section 34 of the Auditors and Statutory Audits of Annual and
Consolidated Accounts Laws of 2009 to 2016 and for no other purpose. We do not, in giving
this opinion, accept or assume responsibility for any other purpose or to any other person to
whose knowledge this report may come to.
Savvas Pentaris
Certified Public Accountant and Registered Auditor
for and on behalf of
Ernst & Young Cyprus Limited
Certified Public Accountants and Registered Auditors
Nicosia
27 March 2017
323
APPENDIX A – Key Audit Matters
Impairment of customer loans and advances
Nature of the key audit matter
Provisions for credit losses is the area which involves the highest level of critical judgment.
They are calculated on a collective basis for portfolios of loans of similar credit risk
characteristics and on an individual basis for significant loans. The determination of the
provision for loan losses requires the exercise of significant judgment and assumptions by
management. We consider this as a key audit matter since this is an accounting estimate
with high estimation uncertainty, the balances of the provisions are material and the nature
of the calculation is subjective.
The disclosures regarding provisions for credit losses are included in notes 5.1, 14 and 41
to the financial statements.
How our audit addressed the key audit matter
Among others, we have performed the following procedures:
• We assessed and tested the design and operating effectiveness of the controls over
impairment provisions data and calculations. These controls included those over the
identification of which loans and advances were impaired, the data transfer from source
systems to impairment models and model output to the general ledger, and the
calculation of the impairment provisions. In addition, we tested IT controls for systems
used for impairment calculation. We determined that we could rely on these controls for
the purposes of our audit.
• We obtained an understanding of the estimation process for the provisions for credit
losses.
• For collective impairment provisions the appropriateness of the methodology was
independently assessed by reference to IFRS and market practices and model
calculations were tested through re-performance. The underlying logic of data
preparation, transformation and related formulas for computing collective provisions
was assessed via a source code review of the related IT components involved.
• The appropriateness of management’s judgements was also independently considered
in respect of segmentation, economic factors and judgemental overlays and the
valuation of recovering the collateral.
• For
individual
impairment provisions, the appropriateness of provisioning was
independently assessed for a sample of loans selected on the basis of risk.
• We engaged specialists to review the model developed by the Company for forecasting
future property prices movement over the period of realization of collateral.
• We performed data integrity validation checks to ensure that the inputs used by the
Company in the calculation of provisions are correct.
324
Recoverability of deferred tax assets
Nature of the key audit matter
The Company has recognized deferred tax assets in respect of tax losses that may be
carried forward to future years. The recoverability of the deferred tax assets requires
management’s estimation on the future profitability of the Company so as to assess
whether sufficient taxable profits will be generated against which the tax losses carried
forward (which is the largest part of the deferred tax assets recognized by the Company)
may be utilized. For this assessment, management prepares a forecast for the following
years and this forecast is a result of management’s best estimates and expectations
regarding the Company’s future performance. The estimation of future taxable profits is
inherently judgmental, particularly when this extends beyond the normal planning cycle.
We consider this as a key audit matter due to the materiality of the balances and the
subjective nature of the calculation.
The disclosures regarding the deferred tax assets are included in notes 5.5 and 15 to the
financial statements.
How our audit addressed the key audit matter
Among others, we have performed the following procedures:
• We updated our understanding of the process for evaluating the recoverability of the
deferred tax assets. The main management controls are review type controls.
• In order to obtain sufficient audit evidence that it was probable that sufficient taxable
profits would exist to utilize the deferred tax assets, we tested the supporting calculations
based on the Company’s 3 year plan which formed the basis of the projections until 2028
(expiry date of the majority of the tax losses) and the tax rates applied.
• The basis for management’s assessment of recoverability including the profit projections
and underlying assumptions and the calculations performed to arrive at taxable profits
from these projections, was challenged using our knowledge of the business, future
strategy and past performance. We utilized the services of valuation specialists to assist
in performing our substantive audit procedures related to the Company’s recoverability
exercise. The specialists were involved in the review of key assumptions used in the
valuation.
• The range of reasonably possible alternative outcomes was assessed.
• The completeness and accuracy of the disclosures was also assessed.
325
Valuation of stock of property
Nature of the key audit matter
The Company has acquired a significant number of properties over the last couple of years
as a result of restructuring agreements with clients. These properties are classified by the
Company as stock of property in accordance with IAS 2. Given the large increase in the
number of properties acquired and the high estimation uncertainty in the property valuation
to determine the net realizable value, especially taking into account the current liquidity of
the property market in Cyprus, we consider this a key audit matter.
The disclosures regarding stock of property are included in notes 5.8 and 26 to the financial
statements.
How our audit addressed the key audit matter
Among others, we have performed the following procedures:
• We obtained an understanding of the valuation process of stock of property.
• We assessed and tested the design and operating effectiveness of the controls over the
valuation process of stock of property.
• For a sample of properties, we obtained the valuation reports received by the Company
from independent valuers and ensured that the fair value used in the calculation of the
net realizable value (“NRV”) is in accordance with these valuations.
• We obtained from the Company the comparison of the cost with the NRV and ensured that
the lower of the two was recorded as the value of the stock of property as at the reporting
date.
• We assessed the reasonableness of the selling costs incorporated in the Company’s
calculation of the NRV.
• We assessed the reasonableness of the external valuers’ assumptions used in the
valuations by utilizing the services of an independent valuation specialist.
• We performed substantive analytical review procedures.
326
Annual Corporate Governance Report
2016
327
BANK OF CYPRUS GROUP
Annual Corporate Governance Report 2016
Annual Financial Report 2016
Introduction
The Board of Directors (the ‘Board’) of the Bank of Cyprus Public Company Limited (the ‘Company’) is
committed to good governance which is vital to creating trust and engagement between the Company and its
stakeholders and contributes towards its long-term success. The Board aims to ensure on an ongoing basis
that the Company is a modern, transparent and competitive organisation that applies best practices of
corporate governance and corporate administration. By adopting these best practices, the Company achieves a
dynamic and effective communication between the Board, management and shareholders, leading to the
successful implementation of its strategy.
A key objective of the governance framework of the Company together with its subsidiaries (the ‘Group’) is to
ensure compliance with applicable legal and regulatory requirements. The Company is subject to the Code of
Corporate Governance of the Cyprus Stock Exchange (‘CSE Code’) as well as the Directive on Governance and
Management Arrangements of the Central Bank of Cyprus (‘CBC Directive on Governance’).
The Company has also elected to comply with the UK Corporate Governance Code 2014 published by the
Financial Reporting Council in the UK (the ‘UK Code’) as of 4 October 2016.
Part A
The Company has adopted the CSE Code as well as the UK Code, has incorporated their provisions in the
Group’s Policy on Corporate Governance and fully implements their principles. The policy together with the
Board manual, the terms of reference and the practices followed by the Board and its committees, constitute
important foundations for maximising shareholder value.
Part B
The Company confirms that it has complied with the provisions of the CSE Code. Details of how the Company
applied the main and supporting principles of the CSE Code throughout 2016 are set out in this Corporate
Governance Report and in the Remuneration Policy Report. The narrative that follows also covers the
disclosure requirements set out in the UK Code.
The Directors further consider that the Company has also complied with the provisions of the UK Code as of 4
October 2016, other than as set out herein:
Provision C.3.1 of the UK Code recommends that the audit committee should comprise of three
independent non-executive members. During 2016 the Audit Committee was comprised of 2
independent non-executive Directors and one non-independent non-executive Director. As of 1 January
2017 the Audit Committee is comprised of three independent non-executive Directors.
Provision B.7.1 recommends the annual election of the Directors by shareholders. The Articles of
Association of the Company provide for one third of the Directors to retire and offer themselves for re-
election. The Articles of Association of the Company will be amended prior to the next Annual General
Meeting (‘AGM’) so that henceforth all Directors will retire every year and offer themselves for re-election
if they wish.
The Company continually monitors and reviews its governance framework and that of its subsidiary companies
(where applicable) through effective oversight. The Directors are aware that in case they have material
concerns about the overall governance of the Group, these should be reported without delay to the Board and,
if their concerns are not satisfactorily addressed, the Directors should report these concerns to the Central Bank
of Cyprus (‘CBC’).
The Board has delegated authority to committees of the Board to support its oversight of risk and control. The
committees are the Group Audit Committee (‘the AC’), the Group Risk Committee (‘the RC’), the Group
Nominations and Corporate Governance Committee (‘the NCGC’), the Group Human Resources and
Remuneration Committee (‘the HRRC’) and the recently constituted Technology Committee (‘the TC’). Details
of these committees are set out in section 3 of this report. The chairperson of each committee reports on
matters discussed during committee meetings to the subsequent scheduled meetings of the Board and minutes
of these meetings are tabled at the Board as soon as possible for noting and/or discussion, as necessary. The
committee terms of reference are reviewed annually by the relevant committees and by the Board and are
available on the Group’s website www.bankofcyprus.com or by request to the Company Secretary.
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1.
Board of Directors
The authorities of the members of the Board derive from the Articles of Association of the Company, and are
specified by the CSE and UK Codes, the relevant Companies, Stock Exchange and Banking Laws and the
Directives of the CBC. The role of the Board and its committees is well described and analysed in the Board
manual that has been fully revised to incorporate all additional responsibilities that emanate from the UK Code.
The Board is responsible for ensuring that the management maintains an appropriate system of internal
controls which provides assurance of effective operations, internal financial controls and compliance with rules
and regulations. It has the overall responsibility for the Group and approves and oversees the implementation
of the Group’s strategic objectives, risk strategy and internal governance.
The Group considers that it has a robust governance framework with a clear organisational structure, well
defined, transparent and consistent lines of responsibility and effective processes through which to identify,
manage, monitor and report risks to which it is or might be exposed. It has appropriate internal control
mechanisms, including sound administrative and accounting procedures, Information Technology (‘IT’) systems
and controls. The governance framework is subject to review at least once every year.
1.1
Composition of the Board of Directors
As at 31 December 2016 the Board was comprised of ten Directors: the Group Chairman who was independent
on appointment, two executive Directors and seven non-executive Directors, six of whom were considered to be
independent non-executive Directors in accordance with the provisions of the UK Code and the CSE Code. On 7
February 2017, Mrs Lyn Grobler was appointed as independent non-executive Director, bringing the total
number of Directors to eleven. On 1 March 2017, Mr. Wilbur Ross resigned from the Board following his
appointment as U.S. Secretary of Commerce. The Board has appointed Mr. James B. Lockhart III on the same
date, pending the approval of the European Central Bank (‘ECB’). Mr. Lockhart will replace Mr. Ross on both
the NCGC and the RC. The names and brief biographical details of the Directors are included in section 2 of this
report.
The NCGC reviews annually the structure, size, tenure and composition of the Board (including skills,
knowledge, experience, independence and diversity) to ensure that there is an appropriate mixture of skills,
experience as well as gender. The Committee also ensures plans are in place for the selection, appointment
and orderly succession of executive Directors and senior managers. In addition, where any appointment or
resignation will alter the overall size of the Board, a review is undertaken to ensure that the composition
remains appropriate and the Board and its committees comprise of Directors with an all-embracing perception
of the Group’s activities and the risks associated with them. The Board considers its current size and
composition appropriate given the size and operations of the Group and the time demands placed on the
Directors.
The Group carries out a review of the ongoing fitness and probity of Directors and Executive Committee (ExCo)
members on an annual basis, whereby they are asked to confirm any changes in their circumstances in respect
of their compliance with the CBC Directive on the Assessment of the Fitness & Probity of the members of the
management body and managers of authorised credit institutions (‘CBC Fitness & Probity Directive’). Following
the review of 2016, no changes were reported. In January 2017 the Attorney General of Cyprus instituted
criminal proceedings against a number of individuals relating to events occurring before the financial crisis of
2013 and the bailing-in of the Company. The individuals charged include three persons currently employed by
the Company namely a current executive member of the Board, the Finance Director and the Group Treasurer
who at the time were all officers of the Company. The Board has indicated that it fully supports the three
executives and confirms their fitness and probity.
1.1.1
Executive Directors
The Group Chief Executive Officer (‘CEO’) and the Group Deputy CEO & Chief Operating Officer (‘DCEO & COO’)
are employees of the Company. The CEO’s termination of employment is subject to four months’ notice to be
given by either party. The DCEO & COO’s employment is mainly based on the provisions of the collective
agreement between the Company and the labour union.
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1.
1.1
Board of Directors (continued)
Composition of the Board of Directors (continued)
1.1.2 Non-Executive Directors
Non-executive Directors are not Company employees and do not participate in the daily management of the
Group. They are responsible for monitoring executive activity and contributing to the development of strategy.
Their role is to constructively challenge the Company’s existing strategy and contribute to the development of
new strategies, to scrutinize the performance of senior management in meeting agreed goals and objectives, to
monitor the reporting of the performance, and to satisfy themselves on the integrity of financial information
and that the systems of financial controls, compliance and risk management frameworks and the internal
control framework are robust and defensible.
1.2
The Role of the Board
The Board’s role is to provide leadership of the Group and promote the Group’s vision, values, culture and
behaviour, within a framework of prudent and effective controls, which enables risk to be assessed and
managed. The Board also ensures that its obligations towards its shareholders and other stakeholders are
understood and met.
The Board is accountable for ensuring that, as a collective body, it has the appropriate skills, knowledge,
diversity and experience to perform its role effectively. The Board is collectively responsible for the long-term
success of the Group; it sets the Group’s strategic objectives, integrates sustainability into the way business is
conducted, ensures that the necessary financial and human resources are in place for the Group to meet its
objectives and reviews management performance.
Furthermore, the Board has the responsibility to present a fair, balanced and understandable assessment of the
Company’s position and prospects, including in relation to the annual and interim financial statements and
other price-sensitive public reports and reports required by regulators and by law.
The Board is the decision-making body for all matters of importance that are significant to the Group as a whole
because of their strategic, financial or reputational implications or consequences. Specific decisions and
matters are reserved for approval by the Board. These are:
Objectives and strategy
Overall risk policy and risk management procedures
Annual and three-year budgets and business plans
Capital expenditures for amounts over €20 million
Unusual transactions
Mergers, acquisitions and disposals of the Group’s assets for amounts over €20 million
Directors’ conflicts of interest
The selection, appointment, re-appointment of Directors of the Company, and the termination of the
services of the Chief Executive Officer
The succession planning
The establishment and oversight of policies for selecting, developing and replacing senior management
and heads of internal control functions
The Remuneration Policy
The appointment of individuals who may have a material impact on the risk profile of the Group is also subject
to Board approval. Their appropriateness for the role is monitored on an on-going basis.
The Board is responsible for determining the nature and extent of the principal risks the Group is willing to take
in achieving its strategic objectives and ensuring the maintenance of an effective risk management and
oversight process across the Group. The Board approves the Group Risk Appetite Statement on an annual basis
and receives regular updates on the Group’s risk environment and exposure to the Group’s material risk types
through the Risk Report reviewed monthly.
Detailed information relating to Group risk management is set out in Notes 43 to 46 of the Consolidated
Financial Statements and the Additional Risk Disclosures section of the 2016 Annual Financial Report.
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1.
1.2
Board of Directors (continued)
The Role of the Board (continued)
1.2.1
Information and Support
The Board meets on a regular basis and has a formal schedule of matters for consideration which is annually
reviewed. The Board receives regular reports and presentations from the Group CEO and other senior
management on strategy and developments in the operations of the Group. Regular reports are also provided
on the Group’s risk appetite, top and emerging risks, risk management, credit exposures and the Group’s loan
portfolio, asset and liability management, liquidity, litigation, compliance and reputational issues.
The key areas of focus in 2016 for the Board were:
Three-year financial plan
Group strategy and long term objectives in light of the regulatory and economic environment:
Voluntary exit plan for employees
Set up and operation of Real Estate Management Unit (‘REMU’)
Acquisitions and divestments
Risk and governance:
Approval of the Group’s Risk Appetite Statement
Approval of Internal Capital Adequacy Assessment Process (‘ICAAP’) Report
Approval of Internal Liquidity Adequacy Assessment Process (‘ILAAP’) Report
Discussion of International Financial Reporting Standards (‘IFRS’) provisioning parameters
Review of monthly risk reports
Legal issues/actions against the Company
Review and approval of Group financial results (monthly, quarterly and annual)
Directors & Officers (D & O) liability insurance
Deposit strategy and Emergency Liquidity Assistance (‘ELA’) repayment plan
Budget and performance oversight:
Review the monthly management accounts
Approval of the annual budgets and capital plans
External environment:
Review of the banking industry outlook
Cyprus economic developments
Monitoring key regulatory issues affecting the Group:
Supervisory Review and Evaluation Process (‘SREP’)
On-site inspections and approval of relevant responses to the Single Supervisory Mechanism (‘SSM’)
Discussion of new regulatory developments and requirements
Key regulatory correspondence and related response
Review the progress of managing non-performing exposures
Approval of appointments to the Board and major subsidiary boards and review of corporate governance
matters
Approval of changes to management structure of the Group
Discussion, approval and oversight of the listing on the London Stock Exchange (LSE)
Establishing a Board Technology Committee.
In early 2016 the Board approved a framework of oversight of major subsidiaries which included close working
relations between the Chairpersons of the relevant subsidiary board committees with the respective Group
committees.
1.2.2 Meetings of the Board of Directors
During 2016 the Board held 17 meetings. Further details on the number of the meetings of the Board and its
committees and attendance by individual Directors are set out below. In March 2016 the Board held an offsite
two day meeting specifically focused on strategy.
Agendas and papers are circulated in a timely manner prior to each meeting and all members of the Board are
informed in writing of forthcoming Board meetings to allow them adequate time to review the relevant
information to enable them to fully discharge their duties.
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1.
1.2
Board of Directors (continued)
The Role of the Board (continued)
1.2.2 Meetings of the Board of Directors (continued)
The attendance of the members of the Board for 2016 is presented in the following table:
Board of Directors 1/1/2016-31/12/2016
Name
Josef Ackermann (Chairman)
Maksim Goldman (Vice Chairman)
Wilbur L. Ross (Vice-Chairman)
Arne Berggren
Michael Heger*
John P. Hourican
Marios Kalochoritis
Christodoulos Patsalides
Michael Spanos
Ioannis Zographakis
Total meetings
* Appointed on 9 June 2016
Board of
Directors
17/17
16/17
13/17
17/17
9/9
17/17
17/17
16/17
16/17
17/17
17
AC
HRRC
NCGC
RC
AC & RC
Joint
11/12
12/12
12/12
12
4/4
9/9
9/9
9
8/8
8/8
7/8
8
17/20
20/20
10/10
19/20
20/20
20
6/7
4/7
7/7
3/3
7/7
7/7
7
The Company Secretary is closely involved in preparing the schedule of all Board and committee meetings and
the agendas for these meetings, in conjunction with the Chairman, ensuring that relevant information is
dispatched timely to all members of the Board.
Under the supervision of the Chairman of the Board, the Company Secretary’s responsibilities include
facilitating the flow of information within the Board and its committees, between senior management and non-
executive Directors and between heads of internal control functions and non-executive Directors, as well as
facilitating the induction, development and evaluation of members of the Board.
All Directors have access to the advice and services of the Company Secretary and the Corporate Governance
Compliance Officer who can provide relevant information related to Board procedures and the CSE and UK
Codes. Independent professional advice is also available to the Directors in accordance with the internal policy
that was formulated and approved by the Board. All Directors have the benefit of directors’ and officers’
liability insurance in respect of legal actions against them.
1.2.3
Conflicts of interest
The Board manual has documented procedures relating to directors’ conflicts of interest, setting out how these
are to be identified, reported and managed to ensure that the Directors act at all times in the best interests of
the Company. The Board Manual is reviewed and revised if necessary, at least annually.
The Group’s Policy on Conflicts of Interest which applies to all employees and Directors clarifies the duty of all
employees to avoid, disclose and manage conflicts of interests. The policy is reviewed annually and is
communicated throughout the Group.
The Board has adopted a Dealing Code for transactions in the Company’s securities by Persons Discharging
Managerial Responsibilities (PDMRs). The Dealing Code complies with the European Market Abuse Regulation.
All Directors have complied with the Dealing Code during 2016. All Directors and PDMRs have been informed in
writing about their obligations under the Dealing Code.
None of the Directors had, during the year or at the end of the year, a material interest, directly or indirectly in
any contract of significance with the Group.
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1.
1.2
Board of Directors (continued)
The Role of the Board (continued)
1.2.4
Time commitment
The Board has determined the time commitment expected of non-executive Directors to be 30-35 days per
annum. Time devoted to the Company can be considerably more, particularly if serving on Board committees.
The NCGC considers, amongst others, whether a potential Director is able to devote the requisite time and
attention to the Company’s affairs, prior to the Board’s approval of the individual’s appointment.
The CBC Fitness and Probity Directive which incorporates the provisions on the management body of credit
institutions in Article 91 of the European Capital Requirements Directive (‘CRD IV’), determines that a Director
cannot hold more than one of the following combinations:
One executive directorship with two non-executive directorships
Four non-executive directorships
Executive or non-executive directorships held within the same group count as a single directorship.
Directorships in organisations which do not pursue predominantly commercial objectives do not count for the
purposes of the above guidelines.
The Company has been classified as a ‘significant institution’ under the European Union (Capital Requirements)
Regulation 2014. The ECB which supervises the Company following the European Union Regulation 468/2014
which established the framework for cooperation within the SSM between the ECB and national competent
authorities may in exceptional cases, and taking into consideration the nature and complexity of the business of
the Group, authorise members of the Board to hold one additional directorship.
At the time of their appointment, the CBC was the relevant competent authority to grant permission to five of
the Directors to hold one additional non-executive directorship to the above. At present only Mr. Maksim
Goldman holds an additional directorship (five non-executive directorships). Mr. Wilbur Ross who resigned on 1
March 2017 also held five non-executive directorships.
The Directors hold positions on the board of directors of other companies as noted in their biographical details
included in section 2 of this report. Their participation in other boards does not prevent them from devoting the
necessary time and attention to their duties as members of the Board of the Company and is within the limits
set by the CBC Fitness and Probity Directive. It was estimated that in 2016 each non-executive Director spent
at least 36 days on board-related duties.
1.2.5 Group Chairman and Group Chief Executive Officer
There is a clear and distinct segregation of duties between the Chairman of the Board and the Group CEO. The
terms of reference of these two roles form part of the Group Board Manual which has been approved by the
Board and they distinguish between the running of the Board and the executive responsibility for running the
Company’s business.
The Chairman ensures the effective functioning of the Board on all aspects of its role including:
Providing leadership to the Board of Directors
Ensuring that the Board determines the nature and extent of the significant risks the Company is willing
to embrace in the implementation of its strategy
Ensuring that the members of the Board have sufficient time to consider strategic and other critical issues
and obtain answers to any questions or concerns they may have and are not faced with unrealistic
deadlines for decision making
Encouraging the active participation of members of the Board
Ensuring conflicts of interests are disclosed and members abstain from participating in the decision-
making and voting on any matter on which they may have a conflict of interest
Ensuring that adequate time is allowed for discussion of complex or contentious or strategic issues and,
where appropriate, arranging for informal meetings beforehand to enable thorough preparation for the
Board discussion
Promoting high standards of corporate governance
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1.
1.2
Board of Directors (continued)
The Role of the Board (continued)
1.2.5 Group Chairman and Group Chief Executive Officer (continued)
The Chairman commits a substantial amount of time to the Group. There were no changes to the other
significant commitments of the Chairman during the year ended 31 December 2016. During the year the
Chairman and non-executive Directors met without the executive Directors present, to discuss a range of
business matters.
The Group CEO is responsible to develop and present to the Board the strategy of the Group and execute the
approved strategy, lead the senior management team in the day-to-day running of the business, make
decisions on all matters affecting the operations, performance and strategy of the Group’s business with the
exception of those matters reserved for the Board. The Group CEO’s service contract was reviewed and
renewed on 1 February 2016 for a further two-year period.
1.2.6
Senior Independent non-Executive Director
The Senior Independent Director (‘SID’) is available to shareholders and Directors if they have concerns that
are not resolved through normal communication channels. He provides a sounding board for the Chairman,
providing support to the Chairman in delivering his objectives. He chairs an executive session of the non-
executive Directors to assess the performance of the Chairman as part of the annual evaluation of Board
performance provided for in the CBC Governance Directive.
1.3
Board Balance and Independence
Both the CSE Code and the UK Code provide that at least 50% of the Board of Directors, excluding the
Chairman, should be independent non-executive Directors, so that no individual or small group of individuals
can dominate the Board’s decision-taking.
The NCGC and the Board considers the independence status of each Director on appointment. In addition the
independence status of each Director is reviewed on an annual basis to ensure that the determination regarding
independence remains appropriate.
In 2016 the Board considered the principles relating to independence contained in the CSE Code and the UK
Code, as well as the CBC Fitness and Probity Directive and concluded that the status of each Director as
determined remained appropriate. The status of each Director is presented in the biographical details in section
2 of this report.
Mr. Maksim Goldman is a senior executive of a corporation controlled by a significant shareholder in the
Company and therefore he is not considered independent by reference to the provisions of the CBC Directive on
Fitness and Probity, the CSE Code and the UK Code. The Board considers that each non-executive Director
brings independent challenge and judgement to the working of the Board, through their character, objectivity
and integrity.
The Board comprises a majority of independent non-executive Directors to ensure that no individual or small
group can dominate its decision making.
A relevant ‘Confirmation of Independence’ based on the independence criteria of provision A.2.3 of the CSE
Code is signed by each of the independent non-executive Directors and is submitted to the Cyprus Stock
Exchange together with the Corporate Governance Report.
2.
2.1
Members of the Board of Directors
Non-Executive Directors
Josef Ackermann (Chairman)
Born in 1948. Dr. Ackermann is the former Chairman of the Management Board and the Group Executive
Committee at Deutsche Bank. Dr. Ackermann joined Deutsche Bank's Board of Managing Directors in 1996,
where he was responsible for the investment banking division. Under his leadership, this business unit
developed into one of Deutsche Bank's principal revenue sources and entered the top group of global
investment banks. Prior to Deutsche Bank, Dr. Ackermann was President of Schweizerische Kreditanstalt
(SKA), today's Credit Suisse.
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2.
2.1
Members of the Board of Directors (continued)
Non-Executive Directors (continued)
Josef Ackermann (Chairman) (continued)
Dr. Ackermann has held numerous board positions including sitting on the Board of Directors at Zurich
Insurance Group, Royal Dutch Shell plc, Siemens AG and EQT Holdings AB among others. Dr. Ackerman also
served as Vice-Chairman of the Foundation Board of the World Economic Forum. Dr. Ackermann is also an
Honorary Fellow of the London Business School, was visiting professor in finance at the London School of
Economics, and was appointed honorary professor at the Johann Wolfgang Goethe University in Frankfurt. Dr.
Ackermann studied economics and social sciences at the University of St. Gallen, where he earned his
doctorate, and holds an honorary doctorate from the Democritus University of Thrace in Greece.
Dr. Ackermann has extensive experience of the financial services industry, having spent more than 40 years in
various senior strategic, investment and oversight roles in Scheizerische Kreditanstalt and Deutsche Bank.
Term of Office:
External Appointment:
Appointed to the Board in November 2014
Independent:
On appointment
Investor AB
Renova Management AG
Honorary Chairman of the St. Gallen Foundation for
International Studies
Honorary Senate Member of the Foundation Lindau
Nobel Prizewinners Meetings at Lake Constance
Vice Chair and Member of the Board of Trustees of The
Conference Board
Committee Membership:
Chairman of
Governance Committee
the Nominations
and Corporate
Wilbur L. Ross (Vice-Chairman)
Born in 1937. Mr. Ross is the Founder, Chairman and Chief Strategy Officer of WL Ross & Co. LLC, a private
equity firm. Mr. Ross was also formerly the Chief Executive Officer of WL Ross prior to April 30, 2014 when he
became its Chairman and Chief Strategy Officer. In March 2014 Mr. Ross became the Chairman and Chief
Executive Officer of WL Ross Holding Corp, a special purpose acquisition company. Mr. Ross formerly served as
a Member of the Board of Directors of many banks, financial and other companies, including but not limited to
The Governor and Company of the Bank of Ireland until June 2014, BankUnited, Inc., until March 2014; Talmer
Bancorp., Assured Guaranty, International Textile Group; NBNK Investments PLC; PB Materials Holdings, Inc.;
Ohizumi Manufacturing; Ocwen Financial Corp.; Navigator Holdings until November 2014; Plascar Participacoes
SA until 2014 and Air Lease Corporation from 2010 to December 2013; International Coal Group from April
2005 to June 2011, Montpelier Re Holdings Ltd. from 2006 to March 2010, The Greenbrier Companies from
June 2009 until January 2013. Mr. Ross was Executive Managing Director of Rothschild Inc. for 24 years before
acquiring that firm's private equity partnerships in 2000. He is a graduate of Yale University and of Harvard
Business School. Through the course of Mr. Ross' career, he has assisted in restructuring more than $400
billion of corporate liabilities.
Mr. Ross has been elected to both the Private Equity Hall of Fame and the Turnaround Management Association
Hall of Fame. He has been appointed by President Clinton to the Board of Directors of the U.S-Russia
Investment Fund and has served as Privatization Advisor to New York City Mayor Guiliani. He was awarded a
medal by President Kim Dae Jung for assisting Korea during its financial crisis and in 2014 was awarded the
Order of the Rising Sun with Gold and Silver Stars by the Japanese Government.
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2.
2.1
Members of the Board of Directors (continued)
Non-Executive Directors (continued)
Wilbur L. Ross (Vice-Chairman) (continued)
Term of Office:
External Appointment:
Appointed to the Board in November 2014
Resigned on 1 March 2017 following his
appointment as U.S. Secretary of Commerce
Independent:
Yes
WL Ross Holding Corp.
Arcelor Mittal
EXCO Resources, Inc.
DSS Holdings LP
Sun Bancorp
Brookings Economic Studies Council
Palm Beach Civic Association
The Japan Society Inc.
Margritte Museum
British American Business Inc.
Harvard Business School Club of New York Inc.
Yale University School of Management Board of
Advisors
Partnership of New York City
Committee Membership:
Member of the Nominations and Corporate Governance
Committee
Member of the Risk Committee
Arne Berggren (Chairman of the Risk Committee)
Born in 1958. Mr. Berggren has been involved in corporate and bank restructurings, working for both the
private sector as well as for international organisations since the early 90s, starting with Nordea during the
Swedish financial crisis. This was followed by bank crises management and bank restructuring assignments in
numerous countries in Latin America, Eastern Europe and Asia, and more recently during the current financial
crisis in the Baltics, Spain and Slovenia. He has been Head of Financial Restructuring and Recovery at Carnegie
Investment Bank AB and Swedbank AB and as CEO of Swedcarrier AB he led the restructuring of parts of
Swedish Rail. Mr Berggren has held numerous Board positions in the financial and corporate sector, including a
position on the Board of Directors at LBT Varlik Yönetim AS and DUTB Ldt. He is a graduate of the University of
Uppsala, Sweden.
Mr. Berggren has significant experience in corporate and bank restructurings, bank crises management and risk
management and has extensive experience in oversight from a number of directorships.
Term of Office:
Appointed to the Board in November 2014
Independent:
Yes
External Appointment:
Eusticon AB
Pireaus Bank Group
Committee Membership:
Chairman of the Risk Committee
Member of the Audit Committee
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2.
2.1
Members of the Board of Directors (continued)
Non-Executive Directors (continued)
Maksim Goldman (Vice Chairman)
Born in 1971. Mr. Goldman currently serves as Director of Strategic Projects at Renova where he is responsible
for coordinating the business development of various significant assets under management of the Group.
Previously, Mr. Goldman served as Deputy Chief Investment Officer of Renova Group, responsible for
implementing the investment policy and support of key mergers and acquisitions transactions. During 2005 to
2007 he worked as Vice President and International Legal Counsel of Sual-Holding, which was the management
company for OAO ‘SUAL’, the second largest aluminium company in Russia, and also participated in the creation
of UC Rusal through combination of the assets of Sual-Holding, Rusal and Glencore. From 1999 to 2005 Mr.
Goldman worked as an associate at Chadbourne & Parke LLP in New York and in Moscow. Mr. Goldman holds a
J.D. from the School of Law, University of California (Los Angeles). He also holds a Bachelor of Arts degree in
History at the University of California (Los Angeles).
Mr. Goldman has extensive experience in investments and business developments and benefits from oversight
experience in a number of external directorships.
Term of Office:
Appointed to the Board in November 2014
Independent:
No
Lyn Grobler
External Appointment:
United Company RUSAL Plc
OAO ‘Volga’
FC ‘Ural’
United Company of Kalahari Ltd
Committee Membership:
Member of the Risk Committee
Member of the Nominations and Corporate Governance
Committee
Born in 1964. Mrs Grobler is an experienced executive with a strong track-record in technology and IT roles.
She was appointed Group Chief Information Officer (CIO) at Hyperion Insurance Group in 2016. Prior to this
she was Vice President and CIO Corporate Functions at BP where she led the transformation of both the
organisation and the digital landscape through introducing sustained change in process, capability and
technology, having held a variety of roles across IT and global trading over 16 years. Before BP, Mrs Grobler
managed large scale global technology projects and strategies within banking and trading based in both London
and South Africa. Mrs Grobler has been recognised as one of the 25 most influential women in UK IT and has
been shortlisted for CIO of the Year at the 2016 Women in IT awards. Mrs Grobler holds an HND in Computer
systems from Durban University in South Africa.
Mrs Grobler has significant experience in IT and digital transformation and benefits from oversight experience in
a number of external directorships.
Term of Office:
Appointed to the Board in February 2017
Independent:
Yes
External Appointment:
Board Intelligence Ltd
Hyperion Services Ltd
Howden Broking Group
Committee Membership:
Chairperson of the Technology Committee
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2.
2.1
Members of the Board of Directors (continued)
Non-Executive Directors (continued)
Michael Heger
Born in 1955. Dr. Heger currently serves as the general manager of finance and investment and as an
independent senior advisor for S.I.F. International Holding S.A., Luxembourg at its representative office in
Vienna. Previously, during 2009-2012 he served as general manager and chief executive officer of Metal Trade
Overseas AG in Zug, Switzerland. He began his career in 1980 as a manager in export finance and legal affairs
for Waagner-Biro AG in Vienna, Austria. Having spent two years at Waagner-Biro AG, he moved to UniCredit
Bank Austria Group, where he held various management positions from 1982 to 2002. Between 2001-2002, he
served as general manager and head of structured trade finance at Bank Austria AG. From 2002-2003, he
served as the deputy general manager and head of International division for Raiffeisenlandesbank
Niederosterreich-Wien AG. Dr. Heger then joined MPH Management and Participation Holding S.A., a special
purpose company for equity participation in commercial and industrial companies, financial institutions and in
property developments as well as for financial and consulting services for domestic and international clients and
commodity trading, as the general manager of finance and investment and head of the representative office
from 2004-2009. Dr. Heger holds a doctorate in law from the University of Vienna and obtained a postgraduate
degree in law from the College of Europe in Bruges, Belgium.
Dr. Heger has extensive banking experience having spent more than 20 years in various senior positions in
UniCredit Bank Austria Group and has considerable strategic knowledge of industrial and commercial
companies, financial institutions and property developments.
Term of Office:
External Appointment:
Appointed to the Board in June 2016
None
Independent:
Yes
Committee Membership:
Member of the Audit Committee
Member of the Human Resources and Remuneration
Committee
Member of the Technology Committee
Marios Kalochoritis
Born in 1973. Mr. Kalochoritis is a Financial Executive with experience in investment banking, hedge fund
management, private equity, wealth management and as a Chief Financial Officer. Geographically he has
covered North and South America, Western and Eastern Europe and the Middle East. He is experienced in
start-ups and turnout situations. He is the founder and Managing Partner of Loggerhead Partners, a Consulting
and Advisory firm, based out of Dubai. Previously he spent five and a half years in Cyprus where, as the
Managing Director, he had set up and ran the operations and risk management of a global macro hedge fund.
Prior to that he was Senior Vice President for Credit Suisse Bank in Zurich and he was heading business
development for Central and Eastern Europe and Turkey. Between 2003 and 2006 he was the Chief Financial
Officer for Amana Group in Dubai, a major regional construction group. He had moved to Dubai following a
couple of years in New York where he was the co-founder of a boutique investment bank. He started his career
at Enron in Houston where, as a financial analyst and later an associate in the finance department, he analysed
and made investments in oil & gas, energy and other infrastructure opportunities around the world. He also
interned with J.P. Morgan Bank in New York and McKinsey & Co in Athens. He holds an MBA from Harvard
Business School and a BSc in Finance from Louisiana State University.
Mr. Kalochoritis is an experienced financial services professional having served in various senior roles in
banking and other industries.
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2.
2.1
Members of the Board of Directors (continued)
Non-Executive Directors (continued)
Marios Kalochoritis (continued)
Term of Office:
External Appointment:
Appointed to the Board in September 2013
Carouge Investments
Loggerhead Management Consultants
Loggerhead Holdings
Independent:
Yes
James B. Lockhart III
Committee Membership:
Member of the Risk Committee
Member of the Human Resources and Remuneration
Committee
Born in 1946. Mr. Lockhart serves as Vice Chairman of WL Ross & Co LLC in New York since 2009 and as a
member of Investment Committees and the Management Committee thereof. Prior to this position, Mr
Lockhart served in the U.S Government in several positions. In 2008-2009 he was the Director (CEO) and
Chairman of the Federal Housing Finance Agency (FHFA) Oversight Board. In 2006-2007 he served as the
Director (CEO) of the Office of Federal Housing Enterprise Oversight. He also served on the Troubled Asset
Relief Program’s (TARP’s) Financial Stability Oversight Board which is chaired by the Federal Reserve Chairman.
From 2002 to 2006, Mr. Lockhart served as the Principal Deputy Commissioner and Chief Operating Officer of
the Social Security Administration (SSA). He served on the Executive Committee of President Bush’s
Management Council and as Secretary of Social Security’s Board of Trustees. Mr. Lockhart’s private sector
financial services experience includes senior positions with NetRisk, National RE, Smith Barney, pension Benefit
Guaranty Corporation, Alexander & Alexander Services and Gulf Oil Corporation. He graduated from Harvard
University with an MBA and from Yale University with a bachelor’s degree in Liberal Arts.
Mr. Lockhart has extensive experience in the financial services and through his government roles has important
insight in the regulatory environment as well as oversight experience of banking institutions.
Term of Office:
External Appointment:
Appointed to the Board in March 2017
(subject to ECB approval)
Independent:
Yes
WL Ross & Co. LLC
Cascade Bancorp
Shellpoint Partners LLC
Bruce Museum
Bipartisan Policy Centre Commission on Retirement
Security
Committee Membership:
Member of the Risk Committee (subject to ECB
approval)
Member of the Nominations and Corporate Governance
Committee (subject to ECB approval)
Michael Spanos (Senior Independent Director)
Born in 1953. Mr. Spanos is Managing Director of M.S. Business Power Ltd, which provides consultancy
services on strategic and business development (since 2008). Mr. Spanos worked at Lanitis Bros Ltd from 1981
to 2008 as Marketing Manager, General Manager and Managing Director. Between 2005 and 2009, Mr. Spanos
served as Vice-Chairman of the Board of Directors of the Cyprus International Institute (Republic of Cyprus and
Harvard School of Public Health). Mr. Spanos has also served on other boards, such as Coca-Cola Içecek
(2012-2016), Heineken-Lanitis Cyprus Ltd (2005 to 2007), Lumiere TV Public Ltd (2000 to 2012), A. Petsas &
Sons Public Ltd (2000 to 2007) and CypriaLife Insurance Ltd (1995 to 2000). Mr. Spanos is a former member
of the Central Bank of Cyprus Board of Directors. Mr. Spanos holds a Master's degree in economics from North
Carolina State University.
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2.
2.1
Directors (continued)
Non-Executive Directors (continued)
Michael Spanos (Senior Independent Director) (continued)
Mr. Spanos as an experienced Managing Director and member of a number of Boards has in-depth knowledge
of international business, management, finance and strategic development.
Term of Office:
Appointed to the Board in November 2014
Independent:
Yes
Ioannis Zographakis
External Appointment:
M.S. Business Power Ltd
Green Dot (Cyprus) Ltd
Lanitis Bros Ltd
Committee Membership:
Chairman of the Human Resources and Remuneration
Committee
Born in 1963. Mr. Zographakis is a senior Executive with a broad and diverse international experience in the
banking industry. He has worked with Citibank for over 20 years, in the USA, UK and Greece. His line/business
positions and divisional/corporate responsibilities, have provided him with an extensive background in corporate
governance, business restructuring, re-engineering, crisis management, separation of businesses, business
strategy, profit & loss management, finance, product and segment management, operations & technology
management, and dealing with various regulatory bodies and industry related organisations. He started his
career in 1990 with Citibank in Greece as a Management Associate for Europe, Middle-East & Africa (EMEA). He
then worked as the Deputy Treasurer and Treasurer for the Consumer Bank in Greece, before moving to the
USA in 1996 as the Director of Finance for CitiMortgage. In 1997 he became the Financial Controller for
Citigroup's Consumer Finance business in the US and then he was the Chief Financial Officer for the Consumer
Assets Division. From 1998 until 2004 he worked in the Student Loan Corporation (SLC), a Citigroup subsidiary
and a New York Stock Exchange traded company. He started as the Chief Financial Officer, became the Chief
Operations Officer and in 2001 he was named the Chief Executive Officer. In 2005 he moved back to Europe as
Citibank's Consumer Lending Head for EMEA and UK Retail Bank Head. Deciding to move closer to home in
2006, he took the position as Citibank's Retail Bank Head in Greece where he stayed until 2011, before moving
back to Cyprus consulting on financial services when requested. He has been a Director for the Student Loan
Corporation in the US, a Director for Tiresias (Greek Credit Bureau) and the Secretary of the Audit Committee,
a Director and member of the Audit Committee for Diners Club Greece, the Vice-Chairman of the Citi Insurance
Brokerage Board in Greece and the Chairman of the Investments and Insurance Supervisory Committee in
Citibank Greece. He holds an MBA from Carnegie Mellon University in the USA and a Bachelor’s degree in Civil
Engineering from Imperial College in London.
Mr. Zographakis has extensive experience of the banking industry, having spent more than 20 years in various
senior operational and financial roles in Citibank and on the Board of a number of financial entities.
Term of Office:
External Appointment:
Appointed to the Board in September 2013
None
Independent:
Yes
Committee Membership:
Chairman of the Audit Committee
Member of the Risk Committee
Member of the Technology Committee
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2.
2.2
Directors (continued)
Executive Directors
John Patrick Hourican (CEO)
Born in 1970. Mr. Hourican served as Chief Executive of The Royal Bank of Scotland (‘RBS’) Group’s
Investment Bank (Markets & International Banking) from October 2008 until February 2013. Between 2007
and 2008, he served on behalf of a consortium of banks (RBS, Fortis and Santander) as Chief Financial Officer
of ABN AMRO Group and as a Member of its Managing Board. He joined RBS in 1997 as a Leveraged Finance
banker. He held a variety of senior positions within RBS's wholesale banking division, notably on the division's
Board as Finance Director and Chief Operating Officer. He also ran the bank’s Leveraged Finance business in
Europe and Asia. Mr. Hourican started his career at PriceWaterhouse and he is a Fellow of the Institute of
Chartered Accountants in Ireland. He is a graduate of the National University of Ireland and Dublin City
University.
Mr. Hourican is an experienced Chief Executive Officer, Finance Director and Chief Operating Officer having
served in various senior roles for over fifteen years with the Royal Bank of Scotland.
Term of Office:
External Appointment:
Appointed to the Board in December 2013
Atradius N.V.
Independent:
No
Committee Membership:
None
Christodoulos Patsalides (DCEO & COO)
Born in 1962. From 1989 to 1996, Dr. Patsalides worked for the Central Bank of Cyprus in the management of
Government External Debt and Foreign Exchange Reserves Department. In 1996, Dr. Patsalides joined the
Company where he has held a number of positions in corporate banking, treasury and private banking, among
others. From December 2013 to April 2016, Dr. Patsalides served as Finance Director and was responsible for
finance, treasury, investor relations, economic research and procurement. In his current capacity as the DCEO
& COO, he is responsible for human resources, corporate affairs, central operations, legal services, organisation
and methods, information technology, business transformation and administrative operations. Dr. Patsalides
holds a PhD and an MSc in economics from the London School of Economics and a BSc in economics from
Queen Mary College in London.
Dr. Patsalides is an experienced financial services professional having served in a number of senior roles in the
Group including as Finance Director.
Term of Office:
External Appointment:
Appointed to the Board in November 2014
Cyprus Anti-Cancer Society
Independent:
No
Committee Membership:
None
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3.
Board Committees
BOC PLC
Board of Directors
Group Nominations & Corporate
Committee
Group Human Resources &
Remuneration Committee
Group Audit Committee
Group Risk Committee
Non-Executive responsibility
for leading the process for
Board appointments and for
identifying and nominating,
for approval by the Board,
candidates for appointment to
the Board and oversight of the
corporate governance
arrangements of the Group
Non-Executive responsibility for
setting the overarching
principles, parameters and
governance framework of the
Group's remuneration policy
and the remuneration of senior
executives
Non-Executive responsibility
for oversight of, and advice
to the Board on, matters
relating to financial
statements and oversight of
compliance function and
internal audit function
Non-Executive
responsibility for
oversight of and advice
to the Board on, high
level risk related matters
and risk governance
In order to exercise proper oversight of risk and control, the Board has set up four main Board committees in
accordance with the relevant requirements of the CSE Code, the UK Code and the relevant provisions of the
CBC Governance Directive. The key roles of the Board committees are described above.
The Board has made a conscious decision to delegate a broader range of issues to the Board committees. This
linkage is important between the committees and the Board given that it is impractical for all independent non-
executive Directors to be members of all the committees. The terms of reference of the committees are based
on the relevant provisions of the CSE and UK Codes and the CBC Governance Directive (where applicable).
The overall responsibility for approving and monitoring the Group’s strategy, risk appetite and policies for
managing risks lies with the Board, which exercises this responsibility through two of its main committees,
namely the Risk Committee and the Audit Committee.
In addition to a number of cross-committee memberships, the chairperson of each committee reports to each
meeting of the Board on the activities of the committee since the previous Board meeting and the Board
receives the minutes of each of the committee’s meetings.
The Board has recently set up a Technology Committee to drive the digital transformation of the Company. The
Committee is comprised of three non-executive members and is chaired by Mrs Lyn Grobler whose extensive
knowledge and experience in this industry will be instrumental.
3.1
Nominations and Corporate Governance Committee
At 31 December 2016 the NCGC comprised three non-executive Directors, two of whom were independent. It
is chaired by the Chairman of the Board and its composition is fully compliant with the CSE Code, the UK Code
and the CBC Governance Directive. The members of the Committee as at the date of this report following Mr.
Ross’ resignation are:
Josef Ackermann (Chairman)
Maksim Goldman
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3.
3.1
Board Committees (continued)
Nominations and Corporate Governance Committee (continued)
Biographical details, including each member’s background, experience and independence status are set out in
section 2 of this report.
The NCGC leads the process for appointments and renewals of the Board and Board committees, overseeing the
process for non-executive Director appointments and renewals to key subsidiary boards as well as overseeing
subsidiary governance to ensure that appropriate and proportionate governance arrangements are in place for
Group subsidiaries. Furthermore, the role of the NCGC is to support and advise the Board in relation to the
Directors’ development and succession planning and to ensure that the Board is comprised of members who are
best able to discharge the duties and responsibilities of Directors.
The Committee with the support of the Corporate Governance Compliance Officer, keeps the Board’s
governance arrangements under review and makes appropriate recommendations to the Board to ensure that
these arrangements are consistent with best practice and corporate governance standards.
During 2016, the Committee held 8 meetings. Matters considered by the Committee were:
Structure, size, diversity and composition (skills, knowledge and expertise) of the Board and Board
committees
The independence of the non-executive members
Board and individual member performance evaluation
Effectiveness of performance of each committee
Nominations, appointments to the Board and major subsidiary boards
The alignment of the corporate governance framework to the UK Code
Director rotation
Diversity Policy and gender diversity targets
Annual Corporate Governance Report
Corporate governance quarterly reports
Changes to the management structure of the Company
Potential conflicts of interest with Directors’ other appointments
Updated the Corporate Governance Guidelines for Group subsidiaries to align practice across the Group,
and to enhance the oversight framework for subsidiaries
Remediation plan and response to ECB’s risk governance and appetite thematic review
Approval of the annual Director training agenda
The Committee reviewed a gap analysis of the existing corporate governance framework with the UK Code and
implemented an action plan to close the few identified gaps by the time the London listing was achieved. To
this effect, it approved the revision to the Group Board of Directors manual, the terms of reference of Board
committees and the Corporate Governance Policy.
The Committee reviewed the composition of the boards of Eurolife Ltd and General Insurance of Cyprus Ltd and
recommended to the Board the appointment of independent Directors to these subsidiaries. Additionally, the
Director rotation of the Company was discussed and a recommendation was made to the Board. The
Committee also began a search for the nomination of a new member to the Board in line with the
recommendations deriving from the Board performance evaluation and the assessment of the composition of
the Board.
The Committee also approved the revised:
Group Board Nominations Policy
Group Corporate Governance Policy
Board manual
Terms of reference of the main committees
in order to align them with the provisions of the UK Code.
The internal evaluation report on the performance of the Board, its committees and members was ratified and
submitted to the Board for approval.
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3.
3.1
Board Committees (continued)
Nominations and Corporate Governance Committee (continued)
3.1.1 Diversity
The non-executive Directors have diverse skills, knowledge and experience that combine to provide
independent perspective and effective board dynamics. The effectiveness of the Board depends on ensuring
the right balance of Directors with banking or financial services experience and broader commercial experience.
Following review in 2016, the NCGC determined that the skills of the Board were appropriate and relevant to
the business of the Group including financial services, strategy development, finance, risk management,
business experience, economics etc. Directors bring their individual knowledge, skills and experience to bear in
discussions on the major challenges facing the Group. The Group recognises the benefits of having a diverse
Board and is committed to this respect. In reviewing board compositions and identifying suitable candidates,
the NCGC considers the benefits of all aspects of diversity including the skills identified as relevant to the
business of the Group, industry experience, nationality, gender, age and other relevant qualities in order to
maintain an appropriate range and balance of skills, experience and background on the Board.
During 2016, the NCGC reviewed the Board Diversity Policy (the latest version of which is available on the
Group’s website www.bankofcyprus.com) which sets out to achieve gender diversity by 2020 with appointments
based on meritocracy. The Board has set a target to achieve and maintain 40% female representation by the
end of 2020 and a plan prepared by the Company Secretary has been approved by the NCGC describing all key
intervening milestones leading to the accomplishment of this target. On 30 August 2016 the Board had
appointed Mrs Lyn Grobler subject to ECB approval, which was provided on 7 February 2017.
The Code of Conduct similarly ensures equal opportunities to all members of staff and treats diversity with
fairness and respect aiming to provide fair treatment for everyone at work.
3.1.2 Appointment, Retirement and re-election of Directors
The Board recognises the need to identify the best qualified and available people to serve on the Board. It is
responsible for the appointment of Directors. In accordance with the Board Nominations Policy all
appointments are made on merit against objective criteria (including skills and experience) with due regard for
the benefits of diversity on the Board. The Board plans for its own renewal with the assistance of the NCGC
which regularly reviews Board composition, tenure and succession planning.
According to the Articles of Association of the Company one third of the Directors retire each year and if eligible
offer themselves for re-election. At the AGM of shareholders on 25 October 2016, Mr. Maksim Goldman, Mr.
Michael Spanos and Mr. Arne Berggren resigned and, being eligible, offered themselves for re-election. Dr.
Michael Heger was elected to the Board following his appointment on 9 June 2016. Mrs Lyn Grobler was also
elected to the Board subject to ECB approval which was provided on 7 February 2017.
The Board may at any time appoint any person who is willing to act as Director and who fulfils the criteria as
these are determined in the Board Nominations Policy, either to fill a vacancy or as an addition to the existing
Board, but the total number of Directors should not exceed 13. Any Director so appointed is subject to election
at the Annual General Meeting following his appointment.
The NCGC, prior to assessing candidates, identifies the skills and experience required for the role, assesses the
time commitment involved and, having regard to the formal assessment of the skills profile of the Board and
succession planning, recommends the nomination to the Board. The recruitment process for non-executive
Directors is supported by an experienced third party professional search firm which develops an appropriate
pool of candidates and provides independent assessments of the candidates. The Group then works with that
firm to shortlist candidates, conduct interviews/meetings (including meetings with members of the NCGC) and
complete comprehensive due diligence. In accordance with the Board Nominations Policy, the assessment
process and the due diligence completed is extensive and includes self certification confirmations of probity and
financial soundness and external checks involving a review of various publicly available sources.
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3.
3.1
Board Committees (continued)
Nominations and Corporate Governance Committee (continued)
3.1.2 Appointment, Retirement and re-election of Directors (continued)
The process also involves the NCGC satisfying itself as to the candidate’s ability to devote sufficient time to the
role, independence, fitness and probity and assessing and documenting its consideration of possible conflicts of
interest. The NCGC then makes recommendations to the Board. The process described above was followed in
the selection of Mrs Lyn Grobler in August 2016. Egon Zehnder, an external search consultancy firm with no
other connection to the Company was engaged in respect of this non-executive Director appointment.
Non-executive Directors are appointed for an initial three-year term, and are typically expected to serve two
three-year terms. The Board may invite Directors to serve additional periods once their performance has been
assessed as adequate. A non-executive’s term of office will not extend beyond 12 years in total and any re-
appointment beyond 6 cumulative years will be subject to rigorous review and should take into account the
need for progressive refreshing of the Board. The Articles of Association of the Company will be amended prior
to the next AGM so that henceforth all Directors will retire every year and offer themselves for re-election, if
they so wish.
Letters setting out the terms of appointment of each of the non-executive Directors, including the time
commitment expected of each of them, are available on the Company’s website www.bankofcyprus.com.
Directors are required to devote adequate time to the business of the Group, which includes attendance at
regular meetings, training sessions and briefings and preparation time for meetings. In addition, non-executive
Directors are normally required to sit on at least one committee of the Board, which involves the commitment
of additional time. Certain non-executive Directors such as the Senior Independent Director and committee
chairpersons are required to allocate additional time in fulfilling those roles.
3.1.3 Directors’ induction and ongoing development
Full, formal and tailored induction programmes, with particular emphasis on risk management and internal
control systems are arranged for newly appointed Directors. The programmes also entail a series of meetings
with senior executives and other Directors to enable new Directors to familiarise themselves with the business,
management and governance structure including the function of the Board and the role of the committees. The
Company Secretary under the supervision of the Chairman develops programmes based on the Director’s
individual needs. Following appointment, each Director receives a relevant package and undergoes an
induction programme.
Focused training of the Board is arranged in conjunction with scheduled Board meetings where information is
provided to ensure that Directors receive adequate insight into a particular area and through dedicated training
sessions on particular issues (refer to table below for 2016 training schedule) usually identified by the Directors
and the Company Secretary. A training schedule is prepared at the beginning of each year and Directors are
expected to attend accordingly.
All the members of the Board were provided on appointment with an information pack which includes, among
others, the Board manual, key legislation, directives and regulations and the Company’s Articles of Association.
As demonstrated in the table below, specialised training sessions were provided covering issues relating to the
London Stock Exchange listing with the contribution of external advisors.
Name
Overseas listing
Legal and other
considerations
J. Ackermann
M. Goldman
W. L. Ross
A Berggren
M. Heger
J. Hourican
M. Kalochoritis
C. Patsalides
M. Spanos
Y. Zographakis
√
√
√
√
√
√
√
√
√
√
London Stock
Exchange listing
Corporate
Governance
considerations
√
√
√
√
√
√
√
√
√
√
345
Further London
Stock Exchange
listing
considerations
√
√
√
√
√
√
√
√
√
√
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3.
3.1
Board Committees (continued)
Nominations and Corporate Governance Committee (continued)
3.1.3 Directors’ induction and ongoing development (continued)
The training material is distributed to all Directors regardless of attendance. In 2016 the Company introduced
e-learning and three such sessions were made available to the Directors at the end of the year to cover such
matters as Anti-Money Laundering (‘AML’), Whistleblowing and Anti-Bribery and Corruption.
Directors are also offered the option of attending suitable external educational courses, events or conferences
designed to provide an overview of current issues of relevance to Directors. The Company Secretary ensures
all Directors are provided with relevant information on a timely basis to enable them to consider issues for
decision-making and discharge of their oversight responsibilities. The Directors also have access to the advice
of the Group external legal advisors and to independent professional advice, at the Group’s expense, if and
when required. Board committees have similar access and are provided with sufficient resources to undertake
their duties. The Directors also receive comprehensive guidance from the Company Secretary on Board
procedures as well as guidance on duties and obligations by the Group Corporate Governance Compliance
Officer.
In the performance of their roles, executive Directors develop and refresh their skills and knowledge of the
Group’s business and operations through regular interactions, meetings and briefings with senior management
and through presenting on the Group’s business to investors and analysts. They remain abreast of
developments affecting the financial services sector and banking by representing the Group’s interests at
conferences, advisory groups and other events and meetings with regulators and other authorities.
3.1.4
Board Performance Evaluation
The Board is committed to regular and at least annual evaluation of its effectiveness and that of its committees.
The internal evaluation of performance of the Board, its committees and individual members conducted in June
2016 by the Corporate Governance Compliance Officer, indicated a strong and diverse composition of
experiences that could be further enhanced by appointing members with IT background, while at the same time
striving for gender diversity. The annual Board performance evaluation report made several recommendations
and an action plan for the implementation of these recommendations was set up. The assessment carried out
through questionnaires considered overall performance relative to the role of the Board.
The outcome of the Board evaluation was considered by the NCGC and collectively discussed by the Board
which concluded that the Board continues to be effective. The Board also concluded that each Director
continues to make a valuable contribution to the deliberations of the Board and all the members of the Board
have the appropriate qualifications and broad relevant experience and continue to be effective and demonstrate
continuing commitment to the role.
The Senior Independent Director led the process of evaluation of the Chairman’s performance based on a
discussion during an executive session of the non-executives (without the Chairman). The Board concluded
that the Chairman continues to lead the Board effectively, continues to make valuable contribution and
demonstrates continuing commitment to the role.
3.2
Remuneration and Human Resources Committee
Information on the composition and the role of the Committee as well as issues reviewed during 2016 is
presented in the Remuneration Policy Report, on page 356 of this report. The Committee is chaired by the
Senior Independent Director and its composition complies with the requirements of the CSE Code and the UK
Code. From 1 January 2016 the Committee comprised of only two independent non-executive Directors
pending the appointment of Michael Heger who became the third independent non-executive member of the
Committee as from 9 June 2016, upon the approval of his appointment to the Board by the ECB.
3.2.1
Loans to Directors and Other Transactions
Details of loans to Directors and other transactions with the Group are set out in Note 48 of the Consolidated
Financial Statements for the year ended 31 December 2016.
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3.
3.2
Board Committees (continued)
Remuneration and Human Resources Committee (continued)
3.2.1
Loans to Directors and Other Transactions (continued)
The Banking Law currently forbids the extension of any credit to any independent member of the Board, but the
CBC may exempt any exposure from time to time having regard to the exceptionally low risk arising from the
exposures concerned. Furthermore, any credit to be extended to non-independent members of the Board must
comply with the following provisions of the Law:
be approved by a resolution of the Board carried by a majority of two-thirds of the members that
participated in the relevant Board meeting and the member concerned should neither be present during
the discussion nor vote on the resolution,
the exposure granted should be on the same commercial terms as would apply to customers for similar
exposures in the ordinary course of banking practice,
the total value of exposures in respect of all members of the management body should not exceed at any
time 10% of the Company’s own funds, or such other lower percentage as the CBC may determine from
time to time,
the total value of any unsecured exposures granted to all members of the Board should not exceed at
any time 1% of the Company’s own funds or such other lower percentage as the CBC may determine
from time to time,
the total value of exposure to any member of the Board should not exceed at any time the amount of
€500.000 or such other lower amount as the CBC may determine from time to time, and
no financing is permitted to any executive member of the management body that does not comply to the
commercial terms or exceeds the limits that apply to all staff or such other lower amount as the CBC may
determine from time to time.
All members of the Board of Directors complied with the relevant provisions of the CSE Code and the Banking
Law as at 31 December 2016.
3.3
Audit Committee
The Audit Committee during 2016 comprised three non-executive Directors, two of whom were independent.
As of 1 January 2017, Maksim Goldman resigned from the AC and was replaced by Michael Heger in order for
the Company to comply with the UK Code and the requirement that the audit committee be comprised only of
independent non-executive Directors.
The members of the Audit Committee as at the date of this report are as follows:
Ioannis Zographakis (Chairman)
Arne Berggren
Michael Heger (since 1 January 2017)
The Board considers that the AC as a whole has a relevant mix of skills and financial/banking experience. The
Board further believes that Ioannis Zographakis can be regarded as having recent and relevant financial
experience for the purposes of the UK Code and can be regarded as an AC financial expert. Biographical
details, including each member’s background, experience and independence status are set out in section 2 of
this report.
The role of the Committee, inter alia, is:
To oversee the system of internal controls including reviewing its effectiveness
To monitor the integrity of the Group's financial statements and related announcements
To monitor the effectiveness of the internal audit function
To advise the Board on appointment of the external auditors and be responsible for oversight and
remuneration of the external auditor
To review the Company’s financial and accounting policies and practices
To monitor the effectiveness of the Group's whistle-blowing procedures
To monitor the effectiveness of the anti-money laundering function of the Company and all other aspects
of regulatory/ethics compliance
and make recommendations to the Board on such matters.
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3.3
Board Committees (continued)
Audit Committee (continued)
The role of the Committee is fundamental to ensuring the financial integrity and accuracy of the Company’s
financial reporting. Good, open relationships between the Committee, the Finance Director, the Group Internal
Audit Director and the Director of Group Compliance as well as the external auditors, are essential to adding
value to the organisation. This is achieved by holding management to account for the implementation of all
audit recommendations (internal and external) and inviting appropriate divisional directors to meetings to
explain how they are delivering the agreed actions for which they are responsible. In addition to providing
assurance within the governance and accountability structures of the Group, it is essential that the Committee
contributes, delivers results and adds value to the Group.
The Committee has:
Endorsed the going concern assessment for the purposes of the basis of preparation of the financial
statements.
Reviewed and monitored the appropriateness and completeness of the published financial statements and
related announcements to shareholders of the Company and any formal announcements relating to the
Group’s financial performance, including significant financial reporting judgments and estimates made by
the Group.
Discussed key areas of judgments and estimates in the Group’s financial results with the external
auditors, Ernst & Young Cyprus Ltd; particular areas for discussion included their findings/observations as
part of their audit/review of the Group’s financial statements, including inter alia, loan provisioning and
impairment policies, going concern issues and the recoverability of deferred tax assets.
Advised the Group Board that the Group Annual Financial Report and financial statements, taken as a
whole, is fair, balanced and understandable and provides the information necessary for shareholders to
assess the Group’s position and performance, business model and strategy.
Considered for disclosure all material relevant issues that have concerned management and the Group
statutory auditors during the year.
Reviewed accounting policies and practices, including approval of the critical accounting policies.
Considered management’s recommendations in respect of provisions for impairment of loans and
advances and any other impairment losses and charges as reported in the Group’s financial statements.
The Committee has the responsibility for examining any significant transactions in any form, carried out by the
Company and/or its subsidiary companies, where any member of the Board, CEO, senior executive officer,
Secretary, auditor or large shareholder has, directly or indirectly, any significant interest. It ensures that these
transactions are carried out within the framework of the Company’s normal commercial practices (at arm’s
length).
The Committee received regular reports from the Group Finance Director, the Group Internal Audit Director and
the Director of Group Compliance.
The Committee reviewed the adequacy of resources, qualifications and experience of staff in the finance
division. Reports were submitted to the Committee on internal control matters. The Group Finance Director,
the Group Internal Audit Director, the Director of Group Compliance, external auditors and other senior
executives attended the Committee’s meetings. The Committee has regular discussions with the external
auditor, the Group Internal Audit Director and the Director of Group Compliance with opportunity to discuss
issues without management present.
The AC considered loan impairment allowances and charges, discussing with management the basis of
calculation and the reasons for significant changes. Judgements and estimates discussed included impairment
of customer advances; interest income recognition on acquired loans, and the disclosures relating to provisions
and contingent liabilities for legal proceedings and regulatory matters; and the recoverability of deferred tax
assets which entails significant judgement due to the uncertainties that exist in projecting into the future.
Further the AC considered management’s assessment of the appropriateness of preparing the financial
statements of the Group for all quarters of year 2016 on a going concern basis. The considerations assessed by
the AC are set out in Note 3 of the Consolidated Financial Statements.
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3.3
Board Committees (continued)
Audit Committee (continued)
The AC and the RC liaise closely and in joint committee meetings review the appropriateness of and
completeness of the system of internal controls. The AC is primarily responsible to review the manner and
framework in which management ensures and monitors the adequacy of the nature, extent and effectiveness of
internal controls system, including accounting control systems, thereby maintaining an effective system of
internal controls.
The Board has delegated authority to the NCGC to draw up the Corporate Governance Report, but the Audit
Committee retains its duty to review and approve the Annual Corporate Governance Report.
In addition AC has responsibility for:
Assisting the Board in meeting its obligations under relevant Stock Exchange listing rules and other
applicable laws and regulations
Monitoring and reviewing the effectiveness of the Group’s internal audit function and its operations
3.3.1
Committee Activities in 2016
The Committee held 12 meetings during 2016.
The AC considered the following key significant accounting and other related issues in its review of the financial
statements for the year ended 31 December 2016. In addressing these issues, the AC considered the
appropriateness of management’s judgments and estimates and where appropriate, discussed those judgments
and estimates with the external auditor:
Discussion of the results of the audit of the financial statements with the external auditors
Discussion of the IFRS provisioning parameters
Consideration of key accounting judgements and estimates
Review of monthly audit reports and internal control issues
Appointment of the external auditors
Assessment of the independence of external auditors
Review of the Annual Audit Report of the Group Internal Audit Division and major audit findings
Review of the Triennial Audit Plan 2016-2018
Review and approval of the Audit Plan, the AML Compliance Department Action Plan, the Regulatory &
Ethics Compliance Department Action Plan
Consideration of major compliance issues and reports submitted to it by the Group Compliance Division
Review and approval of the AML Compliance Department Annual Report, the AML Risk Management
Report, the Regulatory & Ethics Compliance Department Annual Report
Review of the monthly reports of the AML Compliance Department and the Regulatory & Ethics
Compliance Department
Approval of the enhanced AML on-site visit methodology to the various branches of the first line of
defence
Review of quarterly Customer Complaints Management Report
Review of the Annual Corporate Governance Report
Review of quarterly reports of Cybercrime and Security Incident Response Plan
Review and approval of the AML risk appetite statement, AML Policy, Customer Acceptance Policy and
Sanctions Policy
Review and approval of the various regulatory & ethics compliance policies
Review of the independence of the Group Internal Audit Division and the Group Internal Audit Director
Review of Group Internal Audit Succession Planning
Review and approval of the quarterly Financial Results
Review of the provisions for impairment of loans and advances
Review and discussion of the prospectus and financial information and reports prepared for the listing on
the London Stock Exchange (LSE)
Approval of audit, tax compliance and non-audit fees for year
Review of the Triennial Assessment of the Group’s internal control framework
Approval of the revised Group Internal Audit charter
Update on the Quality Assurance and Improvement Program of the Group Internal Audit Division
Approval of revised terms of reference of the Audit Committee
Review of group subsidiaries’ audit reports
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3.3
Board Committees (continued)
Audit Committee (continued)
3.3.1
Committee Activities in 2016 (continued)
Review of Management Responses to the ECB’s onsite inspection on risk management and risk control
system
Updated on important forthcoming regulatory developments
Approval of a roadmap for the rotation of auditors
Approval of non-audit work assigned to the auditors to ensure independence
3.3.2
Internal Audit independence
The Group Internal Audit and Group Compliance Divisions report directly to the Board through the AC. They
are organisationally independent of units with executive functions and are not subordinated to any other unit of
the Company, except the Director of Group Compliance who has a dotted reporting line to the DCEO & COO,
for administration matters.
The Committee’s activities included the consideration of reports submitted by the Group Internal Audit and
Group Compliance Divisions. The Committee has satisfied itself that the Group Internal Audit Division was
effective and adequately resourced through regular meetings held with and reports provided by the Group
Internal Audit Director on internal audit issues, including the effectiveness and adequacy of resources. In early
2016 it received the final report of the triennial review of the effectiveness of the system of internal controls of
the Group both on a consolidated and an individual basis that had started in 2015. The Committee received
reports over the course of 2016 on the activities of the internal audit function and reviewed its planned
activities for the following year.
Management’s responses to Group Internal Audit’s findings and recommendations were reviewed and
monitored. The monthly reports issued by the Group Internal Audit Director and Director of Group Compliance
enable the Committee to focus discussion on specific areas of concern and root causes and to track remediation
progress over time.
The Committee proposes to the Board the appointment or replacement of the Group Internal Audit Director and
the Director of Group Compliance. It submits a report to the Board on: a) the adequacy of the audits carried
out, the conclusions and the proposals of the Group Internal Audit, and b) subjects that are related to the
independence and smooth execution of audit work carried out by Group Internal Audit.
The independence of the two functions as well as the independence of the Group Internal Audit Director was
reviewed by the AC.
3.3.3 Arrangements relating to the external auditor
The objectivity and independence of the external auditors is safeguarded through monitoring of their
relationship with the Group by the AC, including the monitoring of the balance between audit and auxiliary non-
audit services. The external auditors provided written confirmation of their objectivity and independence to the
Group. In addition, the external auditors do not provide internal audit services to the Group. The AC reviews
annually a detailed analysis of the audit and non-audit fees relating to work done by the external auditors. The
Committee reviews this to confirm the independence of the external auditors and refers this analysis to the
Board.
The AC discussed the EU Regulation on audit reform of public interest entities and its implications relating to
the rotation of the external auditors. In accordance with the transitional provisions under the new regulatory
framework, the maximum tenure for the current auditors to remain as statutory auditors is year-end 2020.
The AC agreed on a roadmap for auditor rotation, with the tender process starting in 2017 and leading to the
appointment of a new auditor when practicable in the context of the independence constraints imposed by the
new framework.
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3.
3.4
Board Committees (continued)
Risk Committee
The Risk Committee on 31 December 2016 comprised five non-executive Directors all of whom were
independent. The members of the Committee as at the date of this report following Mr. Ross’ resignation are:
Arne Berggren (Chairman)
Maksim Goldman (since 1 January 2017, replaced Dr. Michael Heger)
Marios Kalochoritis
Yiannis Zographakis
Biographical details, including each member’s background, experience and independence status are set out in
section 2 of this report.
To ensure coordination with the work of the AC, the chairman of the AC is a member of the RC and the
chairman of the RC is a member of the AC. At least one member of the RC is also a member of the HRRC to
ensure that remuneration decisions take into account a risk perspective.
The RC is responsible for advising the Board on high-level risk related matters and risk governance and for non-
executive oversight of risk management and internal controls (other than financial reporting).
The main purpose of the Committee is to review, on behalf of the Board, the aggregate risk profile of the
Group, including performance against risk appetite for all risk types and to ensure that both the risk profile and
Risk Appetite remain appropriate. Specifically it:
Advises the Board on risk appetite and alignment with strategy
Monitors the effectiveness of the Group’s risk management and internal control systems except from
financial reporting and compliance internal control systems
Monitors the Group’s risk appetite and risk profile against key performance/risk indicators as set out in
the Group’s Risk Appetite Statement
Identifies the potential impact of key issues and themes that may impact the risk profile of the Group
Ensures that the Group’s overall risk profile and Risk Appetite remain appropriate given the external
environment, any key issues and themes impacting the Group and the internal control environment
Seeks to identify and assess future potential risks which, by virtue of their uncertainty, of low probability
and unfamiliarity may not have been factored adequately into review by other Board Committees
Advises the Board on alignment of remuneration with Risk Appetite (through advice to the Group HRRC).
Advises the Board on risks associated with proposed strategic acquisitions and disposals
The Group, like all other financial institutions, is exposed to risks, the most significant of which are credit risk,
liquidity and funding risk, market risk, operational risk and property price risk. The Group monitors and
manages these risks through various control mechanisms and reviews the mitigating actions proposed by
management.
To ensure consistency of scope and approach by subsidiary company committees, the RC has established core
terms of reference to guide subsidiary companies when adopting terms of reference for the non-executive risk
committees. The Committee’s endorsement is required for any proposed material changes to subsidiary
company risk committee terms of reference and for appointments to such committees.
Detailed information relating to Group Risk Management is set out in Notes 43 to 46 of the Consolidated
Financial Statements and the Additional Risk Disclosures section of the 2016 Annual Financial Report.
During 2016 the RC held 20 meetings. Key areas of focus for the Committee during the year were to set
strategies and ensure compliance with reference to non-performing exposures management, review risk policies
where necessary to comply with the changing regulatory environment and better support business needs and
review the enhancements of the provisioning methodology.
The Committee identified the current and potential impact of key issues and themes that have an actual or
potential impact on the Group’s risk profile and performed deep dive discussions in order to better understand
and provide guidance to the management. Deep-dive discussions for 2016 covered such matters as the
recoveries portfolio, corporate management department and small and medium enterprises of Recoveries and
Restructurings Division, REMU, liquidity and funding risk, interest rate risk and loan origination optimisation
programme.
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3.4
Board Committees (continued)
Risk Committee (continued)
3.4.1
Committee Activities in 2016
The Risk Committee undertook the following key activities in 2016:
Oversight of executive risk management. Regular reports were received from the Group Chief Risk
Officer including a risk map which provides analysis of risk profiles for categories of risk identified in the
Group Risk Appetite Statement.
Review of risk management and internal controls. The Committee recommended to the Board the annual
reports of Risk Management, Information Security, ICAAP and ILAAP.
Review of risk appetite. The Committee reviewed the alignment of risk appetite and Group strategy.
Regular reviews were undertaken of the Group’s risk profile against the key performance indicators set
out in the Risk Appetite Statement which considered the need for any adjustment to the risk appetite.
Review of the top and emerging risks.
Review of acquisitions and disposals. The Committee received reports on risk issues relating to disposals
and advised the Board accordingly.
Review of the operational risk. The Committee received regular reports on the Group’s operational risk
management framework.
Review of risk management policies. Approved a number of risk management related policies such as
Group Information Security Policy, Country Risk Policy, Market Risk Policy, Framework for Model Risk
Governance, Valuation Policy, Business Continuity Management Policy, Fraud Management Policy,
Operational Risk Management Policy and Reputational Risk Policy.
Review of the terms of reference and Committee’s effectiveness. The Committee undertook a review of
its terms of reference and of its own effectiveness.
Approval/recommendation for approval of a large number of restructurings and contractual or non-
contractual write-offs.
Approval/recommendation for approval of special restructuring products and solutions.
Update on Group Regulatory/Supervisory Activity.
Approval of risk-related limits.
Update on the Assets-Liabilities Committee meetings minutes.
Preparation of the 2017 Committee’s calendar aiming to fully cover governance and regulatory
requirements and the Committee’s terms of reference.
4.
Internal Control
The Board is responsible for the adequacy and effectiveness of the system of internal controls in the Group.
This system ensures that:
The effectiveness of the governance framework is monitored and periodically assessed and appropriate
steps are taken to address any deficiencies
The appropriate compliance framework is in place
The integrity of the accounting and financial reporting systems, including financial and operational
controls and compliance with legal and supervisory requirements and relevant standards, is adequate
The appropriate information security framework for the protection of confidential information is in place
Policies and procedures have been designed in accordance with the nature, scale and complexity of the Group’s
operations in order to provide reasonable but not absolute assurance against material misstatements, errors,
losses, fraud or breaches of laws and regulations. The Group’s key policies and procedures pertain to the
Group’s capital adequacy assessment process, compliance policies and obligations and the internal control
system.
The Board, through the AC and RC, conducts reviews on a frequent basis, regarding the effectiveness of the
Group’s internal control systems, as well as in relation to the procedures used to ensure the accuracy,
completeness and validity of the information provided to investors. The reviews cover all systems of internal
controls, including financial, operational and compliance controls, as well as risk management systems. In
carrying out their reviews, the AC and RC receive regular business and operational risk assessments, regular
reports from the Group Internal Audit Director, the Director of Group Compliance and the Group Chief Risk
Officer, internal and external audit reports, as well as regulatory reports. Additionally, the Board receives a
confirmation on an annual basis by the Group CEO as to the effectiveness of compliance, risk management and
information security system of internal controls.
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4.
Internal Control
The Board, through the AC and RC, has received confirmation that executive management has taken or is
taking the necessary actions to remedy all weaknesses identified through the operation of the Company’s
framework of internal controls.
Based on the internal audit work carried out in 2016, significant steps have been made which further
strengthened the Group’s system of internal controls. An area where progress was made is the non-performing
exposure management and the arrears management process, even though it still poses the most important risk
for the Group. Moreover, there is still room for improvement in certain areas within the Information Systems
and Information Security environment. Overall, the Board of Directors confirms the effectiveness of internal
controls.
The Board confirms that it is not aware of any violation of the Cyprus Securities and Stock Exchange Laws and
Regulations, except those that are known by the relevant authorities (where applicable).
4.1
Going concern
Management has made an assessment of the Group’s ability to continue as a going concern. The conditions
that existed during 2016 and the developments up to the date of approval of the consolidated financial
statements that have been considered in management’s going concern assessment include, amongst other, the
operating environment in Cyprus and of the Group.
Management believes that the Group is taking all necessary measures to maintain its viability and the
development of its business in the current economic environment. Management, taking into consideration a
number of factors and the uncertainties that existed at the reporting date, is satisfied that the Group has the
resources to continue in business for the foreseeable future and, therefore, the going concern principle is
appropriate for the reasons set out in Note 3 of the consolidated financial statements despite a number of
uncertainties as set out in Notes 4.2.3 and 45 of the consolidated financial statements.
4.2
Group Code of Conduct and Whistleblowing Policy
The Group has set out the standards that are expected from all the employees of the Group in a Code of
Conduct applicable to all employees and Directors which gives guidance on how these standards should be
applicable.
The Group also has a Whistleblowing Policy in place for all staff, including Directors, which is in accordance with
international practice. The policy is reviewed annually. The policy’s general principles are:
Concerns in good faith, about wrongdoing or malpractice can be raised in confidence without fear of
victimization, discrimination, disadvantage or dismissal
Procedures for the reporting of any matters of concern are clearly provided. The persons concerned must
be able to bypass the main channels for whistleblowing if these prove inappropriate, and use the
anonymous reporting line
Disclosures are managed in a timely consistent and professional manner
The appointment of the Chairman of the AC, an independent non-executive Director as a Whistleblowing
Champion with specific responsibilities
The Board and Group CEO are committed to this Policy, which encourages staff to raise concerns.
5.
Other matters
On 15 November 2016, the Company announced that it is applying for a standard listing on the London Stock
Exchange with a view to applying for a premium listing at a future date. To achieve this objective, the
Company proposed to introduce a new parent company of the BOC Group, by a way of a scheme of
arrangement. In addition to the listing on the LSE, the shares would also be listed on the Cyprus Stock
Exchange. The Company has determined that an Irish-incorporated holding company would be appropriate
since Ireland is a FTSE eligible Eurozone country, has a common law legal system similar to that of Cyprus and
is a commonly adopted jurisdiction for companies wishing to apply for a listing on the LSE. To facilitate the
scheme, a new company called Bank of Cyprus Holdings Public Limited Company (‘BOCH’) would be
incorporated in Ireland and the shareholders of Bank of Cyprus Public Company Ltd would continue to own
100% of the Company. The Directors of the Company would also be the Directors of BOCH.
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5.
Other matters
At the Extraordinary General Meeting of the shareholders of the Company on 13 December 2016 the scheme
was approved. Under the scheme, the share capital of the Company was reduced by the cancellation of all the
existing shares resulting in a reserve arising in the books of accounts. This reserve was then used to issue fully
paid-up shares in BOCH. As a result, the Company would become a wholly owned subsidiary of BOCH. The
scheme of arrangement was sanctioned by the District Count of Nicosia on 21 December 2016 and became
effective on 18 January 2017.
5.1
Company Secretary
The Board appointed Mrs Katia Santis as Company Secretary.
5.2
Group Internal Auditor
The Board appointed Mr. George Zornas as Group Internal Audit Director.
5.3
Corporate Governance Compliance Officer
The Board appointed Mr. Marios Skandalis as Corporate Governance Compliance Officer.
6.
Remuneration Policy Report
The Remuneration Policy Report was prepared by the Board following a proposal by the HRRC in accordance
with Annex 1 of the CSE Code and the UK Code. It is presented in the Annual Financial Report of the Group,
after the Report on Corporate Governance. The Remuneration Policy Report is presented to the AGM of
shareholders for approval. Information on the remuneration of the members of the Board for the year 2016 is
disclosed in Note 48 of the Consolidated Financial Statements of the Group, as well as in the Remuneration
Policy Report.
7.
Shareholder Relations
On 30 August 2016, the Board appointed Mrs Annita Pavlou, Manager Investor Relations Department, as
Investor Relations Officer, responsible for the communication between shareholders and the Group, following
the departure of Mr. Constantinos Pittalis. Information concerning the Group is provided to shareholders,
prospective investors, brokers and analysts in a prompt and unbiased manner free of charge.
The Senior Independent Director, Mr. Michael Spanos, is available to shareholders if they have concerns that
are not resolved through the normal communication channels.
All shareholders of the Company are treated on an equal basis. There are no shareholders of securities with
special control rights. Shareholders are promptly and accurately informed of any material changes regarding
the Group, including its financial condition, financial results, ownership and governance.
The Board of Directors provides to holders of at least 5% of the Company’s share capital the opportunity to
request the inclusion of items on the agenda of General Meetings. The Board is available at the AGM to answer
shareholders’ questions.
Any change or addition to the Articles of Association of the Company is only valid if approved by special
resolution at a meeting of the shareholders.
Major shareholders do not have different voting rights from those of other shareholders. As at 31 December
2016 the following were the major shareholders in Bank of Cyprus Public Company Limited:
Cyprus Popular Bank Public Co Ltd
Lamesa Holding S.A
TD Asset Management
European Bank for Reconstruction and Development
Tyrus Capital S.A.M
Osome Invstments Ltd
Senvest Management LLC
9.62%
9.27%
5.24%
5.02%
3.47%
3.32%
3.22%
The powers of the Directors are determined by the Companies Law and the Company’s Articles of Association.
The Directors are authorised to issue and allot shares subject to annual shareholder approval at the AGM.
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7.
Shareholder Relations (continued)
The AGM was held on 25 October 2016 at the Company’s headquarters. The Chairman of the Board (who is
also the Chairman of the NCGC) and the Chairmen of the AC, the RC and the HRRC were present to hear the
views of the shareholders and answer questions. As is the practice, all Directors of the Board at the time of the
AGM attended the AGM. At the 2016 AGM, separate resolutions were proposed on each substantially separate
issue and voting was conducted by poll. The results of every AGM of the Company including details of votes
cast for and against on each resolution are posted on the Group’s website www.bankofcyprus.com and released
to the Stock Exchange.
The AGM of the Company in 2017 is scheduled to be held on 29 August 2017.
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1.
Introduction
In accordance with the provisions of the Code of Corporate Governance (the ‘CSE Code’) published by the Cyprus
Stock Exchange (‘CSE’) (4th Edition (Revised) April 2014) and in particular Annex 1 of the Code, the Human
Resources and Remuneration Committee (‘HRRC’) prepares the Annual Board of Directors’ Remuneration Policy
Report which is ratified by the Board of Directors (the ‘Board’) and submitted to the shareholders’ Annual General
Meeting. The Board of Directors Remuneration Policy Report for the year 2016 was ratified by the Board on 27
March 2017.
The Bank of Cyprus Group’s objective to attract, develop, motivate and retain high value professionals is
considered fundamental in achieving the goals and objectives of the Group and ensuring that the right people are
in the right roles whilst managing the Group’s remuneration strategy and policies in a manner aligned with the
Group’s shareholders.
2.
Human Resources and Remuneration Committee
The HRRC is responsible for the development and periodic review of the Group Remuneration Policy which is
proposed to the Board for ratification. In addition, the Board, through the Committee, is ultimately responsible for
monitoring the implementation of the Group Remuneration Policy.
The Group’s aim is to align its Remuneration Policy and human resources practices, with its long term objectives,
its risk tolerance, capital and liquidity availability, the interests of its shareholders and ensure that they are
consistent with and promote sound and effective management of risk and do not encourage excessive risk-taking.
In developing its Remuneration Policy, the Group takes into account the provisions that are included in the CSE
Code, the CBC Directive on Governance and Management Arrangements of Credit Institutions (the ‘CBC
Governance Directive’) which came into effect in August 2014 and incorporated the requirements for
Remuneration Policies included in the European Capital Requirements Directive (‘CRD IV’) and the European
Banking Authority (‘EBA’) Guidelines on sound remuneration policies issued in December 2015, as well as
regulatory restrictions pertinent to the banking sector currently.
It is acknowledged that the implementation of the relevant requirements by financial institutions and the policies
and practices that are to be adopted will evolve over time, as further experience and knowledge is gained and with
the development of best practice in this area. Within this context, the Group aims to review its remuneration
policies and practices on an ongoing basis and amend them where necessary, with the aim of ensuring that they
are consistent with and promote sound and effective risk management.
Every year, the Committee proposes to the Board the Annual Remuneration Policy Report as part of the Annual
Report of the Group, which is submitted to the shareholders’ Annual General Meeting for approval. The
Committee also reviews the related party transactions note (Note 48) of the Consolidated Financial Statements of
the Group and the Remuneration Report itself.
3.
3.1
Governance of Group Remuneration Policy
Principles of the CSE Code of Corporate Governance
Companies should implement official and transparent procedures for developing policies concerning the
remuneration of executive Directors and fixing the remuneration of each Board member separately.
The level of remuneration should be sufficient to attract and retain the Directors needed to run the Company
successfully, but companies should avoid paying more than is necessary for this purpose. Part of the
remuneration of executive Directors should be determined in such a way as to link rewards to corporate and
individual performance.
The Company’s Corporate Governance Report includes a statement of the Remuneration Report and relevant
criteria, as well as the total remuneration of the executive and non-executive members of the Board.
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3.
3.2
Governance of Group Remuneration Policy (continued)
EBA Guidelines
In accordance with EBA guidelines for identification of those employees whose professional activities are deemed
to have a material impact on the Group’s risk profile, the Group maintains a list of these employees known as
Other Risk Takers.
3.3
Terms of Reference of the Human Resources and Remuneration Committee
The Role of the Committee
The Committee’s primary role is to ensure that people contribute to sustainable growth by staying ahead of
challenges and opportunities.
The role of the Committee is:
To ensure that the Group is equipped with the human capital necessary for the achievement of its strategic
goals, whose reward will be based on personal performance and Group results
To ensure that the Group is equipped with the organisational capital to be able to effect continuous
improvement
To ensure that the Group is equipped with the information capital and the technology necessary to facilitate
process improvements that will create a comparative advantage in the market
To propose adequate remuneration considered necessary to attract and retain high value-adding
professionals. Therefore, remuneration has to be satisfactory vis-a-vis peer companies
To set the overarching principles and parameters of compensation & benefits policies across the Group and
exercise oversight for such issues
To consider the remuneration arrangements of the executive Directors of the Group, other identified staff
and the employee compensation policy bearing in mind the EBA Guidelines on remuneration policies and
practices, the CBC Governance Directive and the CSE Code
The Committee reviews the implementation and effectiveness of the Remuneration Policy and ensures this is in
line with the Remuneration Framework as this is described in the CBC Governance Directive.
The Committee exercises oversight of negotiations with the labour union in Cyprus and provides guidance and
support to management. It advises the Board on the approval of the collective agreements and reviews the
framework of industrial relations and collective agreements to ensure they are relevant to best practices and
conducive to good performance.
It ensures that internal control functions are involved in the design, review and implementation of the
Remuneration Policy and that staff members who are involved in the design, review and implementation of the
Remuneration Policy and practices have relevant expertise and are capable of forming independent judgment on
the suitability of the Remuneration Policy and practices, including their suitability for risk management.
The Committee reviews any voluntary retirement/separation schemes for material subsidiaries in cooperation with
the Group Human Resources Division (‘HRD’) and succession planning for all divisions and subsidiaries for
Identified Staff throughout the Group.
The Committee monitors compliance with the Code of Conduct and reviews disciplinary controls and measures of
the Group as presented by HRD on an annual basis. It also reviews the annual training plan as presented by HRD
and approved by the Group CEO and ensures that it creates and/or develops the right competencies and
behaviours that are necessary for meeting the Company’s strategic priorities.
The Committee reviews and approves the content of any resolutions submitted for approval at the General
Meeting of the shareholders, which are prepared by the Company Secretary in cooperation with the Group’s legal
advisers in accordance with Annex 3 of the Code and concern possible plans for the compensation of members of
the Board in the form of shares, share warrants or share options.
357
BANK OF CYPRUS GROUP
Annual Corporate Governance Report 2016
Remuneration Report for the year 2016
Annual Financial Report 2016
Remuneration Policy Report for the year 2016 (continued)
3.
3.3
Governance of Group Remuneration Policy (continued)
Terms of Reference of the Human Resources and Remuneration Committee (continued)
Senior Management and other Identified Staff
The Committee reviews and approves remuneration packages of Group divisional directors, senior managers and
subsidiaries’ general managers, including salary, pension policy, option plans, and other types of compensation,
recommended by the Group CEO or by the chairmen of the Risk and Audit Committees (in the case of the heads of
internal control functions) in consultation with the Group CEO and HRD.
The Committee also reviews the performance appraisals of Group divisional directors (except heads of internal
control functions), senior managers and subsidiaries’ general managers performed by the Group CEO.
The Committee reviews and approves appointments, transfers and dismissals of Group divisional directors, senior
managers and subsidiaries’ general managers (except heads of internal control functions), recommended by the
Group CEO, and ensures that all contractual obligations are adhered to.
The chairman of the Committee is available to shareholders in the Annual General Meeting to answer any
questions regarding the Remuneration Policy of the Group.
Appointment of the Committee
The Committee on 31 December 2016 comprised of 3 independent non-executive members who are appointed by
the Board on an annual basis. The members of the Committee as at the date of this Report are as follows:
Michael Spanos (Chairman)
Marios Kalochoritis
Michael Heger (since 9 June2016)
Biographical details, including each member’s background, experience and independence status are set out in
section 2 of the Corporate Governance Report.
On 23 October 2015 Maksim Goldman resigned from the Committee to limit his participation to two committees
and thereafter the Committee continued with only two Independent non-executive members until 9 June 2016
when Michael Heger was appointed to the Board and to the HRRC. The chairman of the Committee is the Senior
Independent Director.
4.
Committee’s Activities in 2016
The Committee held 9 meetings during 2016 and, inter alia, undertook the following activities:
Review and approval of the Group’s Remuneration Policy
Evaluation of Highly Valued Employees (‘HVEs’), with emphasis on front line
Review of the training plan for the year
Review of the update on the Long Term Incentive Plan (‘LTIP’)
Review of Management Practices Survey
Review of the Remuneration Report
Review of changes to the management structure of the Company
Review and approval of the staff optimisation plan
Review and update on the Performance Appraisal Policy
Review of the performance appraisal for senior management
Approval of the revised terms of reference of the HRRC
Approval of the Employee Recognition Policy and the Internal Communication Policy
Update on collective agreement process with the local labour union
4.1
Remuneration of non-Executive Directors
The remuneration of non-executive Directors is not linked to the profitability of the Group. It is related to the
responsibilities and time devoted for Board meetings and decision-making for the governance of the Group, and
for their participation in the committees of the Board and any participation in the boards of Group subsidiary
companies. The shareholders’ AGM held on 25 October 2016 approved the same levels of remuneration as those
approved on 24 November 2015.
358
BANK OF CYPRUS GROUP
Annual Corporate Governance Report 2016
Remuneration Report for the year 2016
Annual Financial Report 2016
4.
4.1
Committee’s Activities in 2016 (continued)
Remuneration of non-Executive Directors
The Committee proposes fees payable to the Chairman and the two Vice Chairmen, while the Chairman makes
recommendations for the remuneration of the non-executive Directors to the Board for approval by the AGM,
considering the following factors:
Τhe time allocated and effort exerted by non-executive Directors to meetings and decision-making in the
management of the Group
Τhe undertaken level of risk
Τhe increased compliance and reporting requirements
Τhe requirement not to link remuneration of non-executive Directors to the profitability of the Group
Τhe requirement that non-executive Directors do not participate in the pension schemes of the Group
Τhe requirement not to include share options as remuneration of non-executive Directors
Neither the Chairman nor any Director participates in decisions relating to their own personal remuneration.
The Chairman receives annual fees of €120.000, each of the Vice Chairmen of €80.000, the Senior Independent
Director of €70.000 and the members of €45.000. Additionally the Group reimburses all Directors for expenses
incurred in the course of their duties.
The chairmen of the Audit and Risk Committees receive annual fees of €45.000 each and members receive
€25.000. The chairmen of the HRRC and the NCGC receive annual fees of €30.000 each. Each member of the
HRRC receives €20.000 per annum, while each member of the NCGC receives €15.000 per annum.
4.2
Remuneration and Other Benefits of Executive Directors
Executive Directors
The Committee reviews and approves the remuneration packages vis-a-vis their performance.
Contracts of Employment
The employment contract of the Group CEO, Mr. John Patrick Hourican, has been renewed for a period of two
years from 1 February 2016 to 31 January 2018.
Following the final Supervisory Review and Evaluation Process (SREP) 2016 decision received in December 2016,
the ECB’s prohibition on variable pay was lifted and replaced with a limitation on variable remuneration to 10% of
net revenues.
Service Termination Agreements
The service contract of the Group CEO includes a clause for termination, by service of four months’ notice to that
effect by the executive Director, without cause but at the Company’s sole discretion. In such a case, the Company
shall have the right to pay the Director, in lieu of notice for immediate termination.
The terms of employment of Dr. Christodoulos Patsalides, DCEO & COO and executive member of the Board, are
mainly based on the provisions of the collective agreement in place, which provides for notice or compensation
based on years of service.
Bonus
No bonus was recommended by the Company’s Board of Directors for executive Directors for 2016.
Retirement Benefit Schemes
The Group CEO, Mr. John Patrick Hourican, and the DCEO & COO, Dr. Christodoulos Patsalides, participate in a
defined contribution plan on the same basis as other employees.
The main characteristics of the retirement benefit schemes are presented in Note 14 of the Consolidated Financial
Statements for the year ended 2016.
359
BANK OF CYPRUS GROUP
Annual Corporate Governance Report 2016
Remuneration Report for the year 2016
Annual Financial Report 2016
4.
4.2
Committee’s Activities in 2016 (continued)
Remuneration and Other Benefits of Executive Directors (continued)
Share Options
No share options were granted to executive Directors during 2016.
Other Benefits
Other benefits provided to the executive Directors include medical fund contributions and life insurance. The CEO
is provided with other benefits related to his relocation and residence in Cyprus. The relevant costs for executive
management are disclosed in Note 48 of the consolidated financial statements for the year ended 2016.
360
BANK OF CYPRUS GROUP
Annual Corporate Governance Report 2016
Remuneration Report for the year 2016
Annual Financial Report 2016
5.
Information Regarding the Remuneration of Directors for Year 2016
Remuneration
for
participation in
the Board of
Directors and
its Committees
Total
remuneration
for services
Remuneration
and benefits
from other
Group
companies
Remuneration
in the form of
profit and/or
bonus
distribution
Assessment of
the value of
benefits that
are considered
to form
remuneration
Total
remuneration
and benefits
Annual
contribution
to
retirement
benefits
Remuneration
for services*
Executive Directors
John P. Hourican
Christodoulos
Patsalides
Non-Executive
Directors
Josef Ackermann
Maksim Goldman
Wilbur L. Ross
Arne Berggren
Michael Heger
Marios Kalochoritis
Michael Spanos
Ioannis Zographakis
1.743.634
214.760
-
-
1.743.634
214.760
-
-
-
-
-
-
-
150.000
120.000
120.000
115.000
50.500
90.000
100.000
115.000
150.000
120.000
120.000
115.000
50.500
90.000
100.000
115.000
1.958.394
860.500
2.818.894
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1.743.634
150.433
214.760
17.550
150.000
120.000
120.000
115.000
50.500
90.000
100.000
115.000
-
-
-
-
-
-
-
-
2.818.894
167.983
* Includes employers’ contributions excluding contributions to retirement benefits.
27 March 2017
361
Additional Risk and Capital Management
Disclosures
2016
362
BANK OF CYPRUS GROUP Annual Financial Report 2016
Additional Risk and Capital Management Disclosures
(Unaudited)
Mid-Year Financial Report 30 June 2015
1.
Credit risk
The Central Bank of Cyprus (CBC) issued to credit institutions the Loan Impairment and Provisioning
Directives of 2014 and 2015 (Directive), which provides guidance to banks for loan impairment policy and
procedures for provisions. The purpose of this Directive is to ensure that credit institutions have in place
adequate provisioning policies and procedures for the identification of credit losses and prudent application of
International Financial Reporting Standards (IFRSs) in the preparation of their financial statements.
The Directive requires certain disclosures in relation to the loan portfolio quality, provisioning policy and levels
of provision. The disclosures required by the Directive, in addition to those presented in Notes 2 and 43 of the
consolidated financial statements for the year ended 31 December 2016, are set out in the following tables.
The tables disclose Non-Performing Exposures (NPEs) based on the definitions of the European Banking
Authority (EBA) standards.
According to the EBA standards, NPEs are defined as those exposures that satisfy one of the following
conditions:
(i)
The debtor is assessed as unlikely to pay its credit obligations in full without the realisation of the
collateral, regardless of the existence of any past due amount or of the number of days past due.
(ii) Defaulted or impaired exposures as per the approach provided in Regulation (EU) No 575/2013 Article
178.
(iii) Material exposures (as defined below) which are more than 90 days past due.
(iv) Performing forborne exposures under probation for which additional forbearance measures are
(v)
extended.
Performing forborne exposures under probation that present more than 30 days past due within the
probation period.
Exposures include all on and off balance sheet exposures, except those held for trading, and are categorised
as such for their entire amount without taking into account the existence of collateral.
The following materiality criteria are applied:
When the problematic exposures of a customer that fulfil the NPE criteria set out above are greater than
20% of the gross carrying amount of all on balance sheet exposures of that customer, then the total
customer exposure is classified as non-performing; otherwise only the problematic part of the exposure
is classified as non-performing.
Material arrears/excesses are defined as follows:
- Retail exposures:
- Loans: Arrears amount greater than €500 or number of instalments in arrears is greater than
one.
- Overdrafts: Excess amount is greater than €500 or greater than 10% of the approved limit.
- Exposures other than retail: Total customer arrears/excesses are greater than €1.000 or greater
than 10% of the total customer funded balances.
NPEs may cease to be considered as non-performing only when all of the following conditions are met:
The extension of forbearance measures does not lead to the recognition of impairment or default.
(i)
(ii) One year has passed since the forbearance measures were extended.
(iii) Following the forbearance measures and according to the post-forbearance conditions, there is no past
due amount or concerns regarding the full repayment of the exposure.
363
BANK OF CYPRUS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2016
1.
Credit risk (continued)
The tables below present the analysis of loans and advances to customers in accordance with the EBA standards.
Gross loans and advances to customers
Provision for impairment and fair value adjustment on initial
recognition
31 December 2016
General governments
Other financial corporations
Non-financial corporations
Of which: Small and Medium sized
Enterprises2
Of which: Commercial real estate2
Non-financial corporations by
sector
Construction
Wholesale and retail trade
Accommodation and food service
activities
Real estate activities
Manufacturing
Other sectors
Households
Of which: Residential mortgage
loans2,
Of which: Credit for consumption2
Total on-balance sheet
Group gross
customer
loans and
advances1
Of which
NPEs
€000
103.626
487.262
11.590.608
€000
4.241
372.797
6.818.489
Of which exposures with
forbearance measures
Total exposures
with
forbearance
measures
€000
4.978
234.505
5.052.743
Of which on
NPEs
€000
4.073
203.512
3.738.859
Total provision
for impairment
and fair value
adjustment on
initial
recognition
€000
2.685
220.013
3.020.161
Of which
NPEs
€000
1.615
216.926
2.932.686
Of which exposures with
forbearance measures
Total
exposures with
forbearance
measures
€000
Of which on
NPEs
€000
1.861
119.703
1.211.059
1.555
119.701
1.178.127
9.398.025
6.116.979
4.306.269
3.294.185
2.642.367
2.564.855
1.030.218
998.465
8.951.533
5.535.377
4.413.488
3.252.816
2.240.852
2.168.019
1.004.617
974.143
2.921.229
2.060.864
2.242.250
1.060.451
1.334.040
705.634
2.900.224
682.641
1.691.610
7.948.599
1.438.774
394.884
976.496
3.838.722
2.803.740
1.942.888
1.009.104
445.368
262.566
664.801
165.308
473.014
1.237.836
1.168.475
334.936
317.645
5.413.446
2.601.852
2.166.098
1.469.563
603.504
551.690
192.535
179.947
1.062.416
589.843
312.853
242.723
292.588
283.181
65.865
62.917
20.130.095
11.034.249
8.095.966
5.889.332
4.480.695
4.319.702
1.667.559
1.617.028
1 Excluding loans and advances to central banks and credit institutions.
2 The analysis shown in lines ‘non financial corporations’ and ‘households’ is non-additive across categories as certain customers could be in both categories.
364
BANK OF CYPRUS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2016
1.
Credit risk (continued)
31 December 2015
General governments
Other financial corporations
Non-financial corporations
Of which: Small and Medium sized
Enterprises2
Of which: Commercial real estate2
Non-financial corporations by
sector
Construction
Wholesale and retail trade
Accommodation and food service
activities
Real estate activities
Manufacturing
Other sectors
Households
Of which: Residential mortgage
loans2
Of which: Credit for consumption2
Total on-balance sheet
Gross loans and advances to customers
Provision for impairment and fair value adjustment on initial
recognition
Group gross
customer
loans and
advances1
Of which
NPEs
€000
115.358
450.287
13.687.340
€000
4.858
269.232
9.447.487
Of which exposures with
forbearance measures
Total exposures
with
forbearance
measures
€000
5.241
164.356
6.250.424
Of which on
NPEs
€000
4.448
141.861
5.101.675
Total provision
for impairment
and fair value
adjustment on
initial
recognition
€000
345
175.712
3.938.616
Of which
NPEs
€000
345
158.570
3.852.385
Of which exposures with
forbearance measures
Total
exposures with
forbearance
measures
€000
Of which on
NPEs
€000
1.771
86.439
1.651.274
1.518
85.905
1.618.835
7.595.447
5.361.281
2.724.405
2.254.873
2.412.273
2.364.850
752.559
736.962
10.998.641
8.009.181
5.684.179
4.661.835
2.996.289
2.931.498
1.418.013
1.390.942
4.023.260
2.286.348
3.440.287
1.308.725
1.484.868
975.111
3.034.255
809.277
2.049.332
8.339.490
1.789.356
510.071
1.423.937
4.246.315
2.912.440
2.133.845
1.391.760
552.581
329.840
705.072
219.188
740.175
1.286.170
1.193.223
327.292
310.740
5.565.680
2.879.120
2.168.251
1.622.346
614.752
553.454
181.776
172.587
1.109.776
637.137
306.799
255.511
315.413
298.330
70.554
66.974
22.592.475
13.967.892
9.332.461
7.381.829
5.400.843
5.204.523
2.066.776
2.016.998
__________________________
1 Excluding loans and advances to central banks and credit institutions.
2 The analysis shown in lines ‘non financial corporations’ and ‘households’ is non-additive across categories as certain customers could be in both categories.
365
BANK OF CYPRUS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
1.
Credit risk (continued)
Annual Financial Report 2016
The analysis of loans and advances to customers excluding loans and advances to general governments by year of origination is presented in the tables below for
balances as at 31 December 2016 and 2015.
Gross loans and advances
Loans and advances to non-financial
corporations
Loans and advances to other financial
corporations
Loans and advances to households
31
December
2016
Total gross
loans and
advances
NPEs
Provision
for
impairment
Fair value
adjustment
on initial
recognition
Total
gross loans
and
advances
NPEs
Provision
for
impairment
Fair value
adjustment
on initial
recognition
Total gross
loans and
advances
NPEs
Provision
for
impair-
ment
Fair value
adjustment
on initial
recognition
Total
gross
loans and
advances
NPEs
Provision
for impair-
ment
Fair value
adjustment
on initial
recognition
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
Within 1 year
2.613.418
956.324
105.081
50.621
1.797.382
729.022
76.321
47.403
43.695
1.179
316
-
772.341
226.123
28.444
3.218
1– 2 years
1.717.484
572.168
86.962
29.105
1.219.786
433.754
75.491
27.943
5.365
4.786
106
-
492.333
133.628
11.365
1.162
2 – 3 years
799.077
253.268
84.858
24.802
464.035
135.966
52.981
20.453
18.857
8.132
6.370
2
316.185
109.170
25.507
4.347
3 – 5 years
1.608.809
1.038.286
347.856
99.381
983.008
688.261
251.112
65.055
93.601
68.433
30.235
11.724
532.200
281.592
66.509
22.602
5 – 7 years
3.503.311
1.874.723
610.315
161.315
1.630.886 1.026.092
420.738
91.948
46.032
37.689
20.662
5.299 1.826.393
810.942
168.915
64.068
7 – 10 years
6.428.917
4.336.616
1.605.626
406.134
3.439.414 2.558.051
1.101.876
226.763
193.260
171.045
34.657
66.445 2.796.243 1.607.520
469.093
112.926
More than 10
years
3.355.453
1.998.623
710.866
155.088
2.056.097 1.247.343
461.356
100.721
86.452
81.533
32.953
11.244 1.212.904
669.747
216.557
43.123
Total
20.026.469 11.030.008 3.551.564
926.446
11.590.608 6.818.489
2.439.875
580.286
487.262
372.797
125.299
94.714 7.948.599 3.838.722
986.390
251.446
General
governments
Total on
balance sheet
103.626
4.241
678
2.007
20.130.095 11.034.249 3.552.242
928.453
The table includes rescheduled loans amounting to €1.049 million which cannot be split by origination date and are included in the ‘Within 1 year time’ time band.
366
BANK OF CYPRUS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
1.
Credit risk (continued)
Annual Financial Report 2016
Gross loans and advances
Loans and advances to non-financial
corporations
Loans and advances to other financial
corporations
Loans and advances to households
31
December
2015
Total
gross
loans and
advances
NPEs
Provision
for
impairment
Fair value
adjustment
on initial
recognition
Total
gross loans
and
advances
NPEs
Provision
for
impairment
Fair value
adjustment
on initial
recognition
Total gross
loans and
advances
NPEs
Provision
for
impair-
ment
Fair value
adjustment
on initial
recognition
Total
gross
loans and
advances
NPEs
Provision
for impair-
ment
Fair value
adjustment
on initial
recognition
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
Within 1 year
1.967.003
887.825
98.983
48.404
1.394.714
677.063
86.665
43.736
6.008
5.116
647
-
566.281
205.646
11.671
4.668
1– 2 years
1.120.993
475.365
107.696
50.225
686.925
336.853
77.867
45.069
20.575
7.749
6.129
-
413.493
130.763
23.700
5.156
2 – 3 years
921.065
526.017
141.108
46.619
603.367
386.855
114.675
29.302
52.486
1.368
4.144
9.421
265.212
137.794
22.289
7.896
3 – 5 years
3.456.302
2.164.384
778.143
175.892
2.041.959 1.482.521
591.352
104.429
162.440
97.952
55.027
15.426 1.251.903
583.911
131.764
56.037
5 – 7 years
4.567.922
2.819.809
745.431
280.559
2.344.246 1.744.733
525.483
202.312
32.368
26.951
10.731
3.569 2.191.308 1.048.125
209.217
74.678
7 – 10 years
7.433.478
5.225.683
1.669.249
470.583
4.516.382 3.485.351
1.219.077
336.014
115.629
76.868
25.015
18.569 2.801.467 1.663.464
425.157
116.000
More than 10
years
3.010.354
1.863.951
652.126
135.480
2.099.747 1.334.111
461.967
100.668
60.781
53.228
24.167
2.867
849.826
476.612
165.992
31.945
Total
22.477.117 13.963.034 4.192.736
1.207.762
13.687.340 9.447.487
3.077.086
861.530
450.287
269.232
125.860
49.852 8.339.490 4.246.315
989.790
296.380
General
governments
Total on
balance sheet
115.358
4.858
697
(352)
22.592.475 13.967.892 4.193.433
1.207.410
The table above includes rescheduled loans amounting to €915 million which cannot be split by origination date and are included in the ‘Within 1 year’ time band.
367
BANK OF CYPRUS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2016
2.
Liquidity risk and funding
2.1
Encumbered and unencumbered assets
Asset encumbrance arises from collateral pledged against secured funding and other collateralised obligations.
An asset is classified as encumbered if it has been pledged as collateral against secured funding and other
collateralised obligations and, as a result, is no longer available to the Group for further collateral or liquidity
requirements. The total encumbered assets of the Group amounted to €3.446.873 thousand as at 31
December 2016 (2015: €14.023.263 thousand).
An asset is classified as unencumbered if it has not been pledged as collateral against secured funding and
other collateralised obligations. Unencumbered assets are further analysed into those that are available and
can be pledged and those that are not readily available to be pledged. As at 31 December 2016, the Group
held €12.608.521 thousand (2015: €4.686.789 thousand) of unencumbered assets that can be pledged and
can be used to support potential liquidity funding needs and €4.595.181 thousand (2015: €3.067.147
thousand) of unencumbered assets that are not readily available to be pledged for funding requirements in
their current form.
As at 31 December 2016 loans and advances to customers include loans of a nominal amount of €787 million
(2015: €14.763 million) in Cyprus, which are pledged as collateral for Emergency Liquidity Assistance (ELA).
Additionally, they include mortgage loans of a nominal amount €1.002 million (2015: €1.004 million) in
Cyprus, which are pledged as collateral for the covered bond issued by the Company in 2011 under the
Covered Bond Programme. Furthermore they include housing loans of a nominal amount €765 million
(2015: nil) in Cyprus pledged as collateral for the funding from the European Central Bank (ECB) (Note 30 of
the consolidated financial statements for the year ended 31 December 2016). At 31 December 2016 the
Company’s subsidiary Bank of Cyprus UK Ltd has pledged as collateral loans and advances to customers of
€244 million (2015: nil) with the Funding for Lending Scheme (FLS) of the Bank of England. These are
available for use as collateral for the subsidiary’s participation in the FLS. As at 31 December 2016, the
subsidiary had drawn down Treasury bills of €29 million (2015: nil) under the FLS. These Treasury bills are
not recorded on the consolidated balance sheet as ownership remains with the Bank of England.
The table below presents an analysis of the Group’s encumbered and unencumbered assets and the extent to
which these assets are currently pledged for funding or other purposes. The carrying amount of such assets is
disclosed below.
31 December 2016
Cash and bank placements
Investments
Loans and advances to customers
Non-current assets and disposal
group classified as held for sale
Property
Encumbered
Unencumbered
Pledged as
collateral
€000
139.975
359.813
2.853.511
which can be
pledged
€000
2.092.643
298.419
8.659.324
which are not
readily available to
be pledged
€000
361.615
15.412
4.136.566
Total
€000
2.594.233
673.644
15.649.401
-
11.065
346
11.411
93.574
1.547.070
81.242
1.721.886
Total on-balance sheet
3.446.873
12.608.521
4.595.181
20.650.575
31 December 2015
Cash and bank placements
Investments
Loans and advances to customers
Non-current assets and disposal
group classified as held for sale
Property
Total on-balance sheet
Bonds guaranteed by the Cyprus
Government
Total
154.896
892.728
12.882.139
2.210.295
62.688
1.834.519
371.791
53.871
2.474.974
2.736.982
1.009.287
17.191.632
-
15.018
33.485
48.503
93.500
564.269
133.026
790.795
14.023.263
4.686.789
3.067.147
21.777.199
1.000.000
-
-
1.000.000
15.023.263
4.686.789
3.067.147
22.777.199
368
BANK OF CYPRUS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2016
2.
Liquidity risk and funding (continued)
2.1
Encumbered and unencumbered assets (continued)
Encumbered assets primarily consist of loans and advances to customers and investments in debt securities
and property. These are mainly pledged for the funding facilities under the Eurosystem monetary policy
operations and the ELA of the CBC (Note 30 of the consolidated financial statements for the year ended 31
December 2016) and for the covered bond. In the case of the ELA, as collateral is not usually released upon
repayment of the funding, there may be an inherent buffer which could be utilised for further funding if
required. Investments are mainly used as collateral for repurchase transactions with commercial banks as
well as supplementary assets for the covered bond (Note 45 of the consolidated financial statements for the
year ended 31 December 2016). Encumbered assets include cash and other liquid assets placed with banks
as collateral under ISDA/GMRA agreements which are not immediately available for use by the Group but are
released once the transactions are terminated. Cash is mainly used to cover collateral required for (i)
derivatives and repurchase transactions and (ii) trade finance transactions and guarantees issued. It is also
used as part of the supplementary assets for the covered bond.
In August 2016, the Company cancelled two own-issued bonds guaranteed by the Republic of Cyprus of €500
million each. The bonds bore an annual fixed interest rate at 5%. The bonds were guaranteed by the
Republic of Cyprus and were issued in accordance with the relevant legislation and decrees on the ‘Granting of
Government Guarantees for the Conclusion of Loans and/or the Issue of Bonds by Credit Institutions Law’. No
liability from the issue of these bonds was presented in debt securities in issue in the consolidated balance
sheet as all the bonds were held by the Company. The bonds were listed on the Cyprus Stock Exchange (CSE)
and were pledged as collateral for obtaining funding from central banks. One of the bonds was released in
June 2016 from the ELA pool of collateralised assets. After taking into consideration the significant reduction
of ELA funding, the Board of Directors of the Company at its meeting held on 16 August 2016, decided to
proceed with the cancellation of the two bonds. Given the decision for the cancellation, the CBC released the
second bond on 19 August 2016. The two bonds were cancelled on 25 August 2016, following the
approval/consent from the competent authorities (Note 45 of the consolidated financial statements for the
year ended 31 December 2016).
On 29 September 2015, the terms of the Covered Bond Programme and the outstanding €1.000 million
covered bond were amended to a Conditional Pass–Through structure. As part of the restructuring, the
outstanding principal of the retained covered bond was reduced to €650 million with a new maturity date of
12 December 2018. The credit rating of the covered bond was upgraded to an investment grade rating and
the covered bond has become eligible collateral for the Eurosystem credit operations. As from 2 October
2015, it has been placed as collateral for accessing funding from the ECB (Note 45 of the consolidated
financial statements for the year ended 31 December 2016).
The credit ratings of the Republic of Cyprus by the main credit rating agencies continue to be below
investment grade. As a result, the ECB is not able to include Cyprus Government Bonds in its asset purchase
programme, or as eligible collateral for Eurosystem monetary operations, as was the case when the waiver for
collateral eligibility due to the country being under an economic adjustment programme existed.
In August, October and December 2016 the CBC has released loans and advances with contractual value of €2
billion, €2,5 billion and €7,3 billion respectively held as collateral for ELA.
Following the full repayment of ELA on 5 January 2017, all ELA collateralised loans have subsequently been
released, but ELA pledged properties remain pledged as of 27 March 2017.
Unencumbered assets that are available and can be pledged include Cyprus loans and advances which are less
than 90 days past due as well as loans of overseas subsidiaries and branches which are not pledged.
Customer loans of overseas subsidiaries and branches cannot be pledged with the CBC as collateral for ELA.
Moreover, for some of the overseas subsidiaries and branches, these assets are only available to be pledged
for other purposes for the needs of the particular subsidiary/branch and not to provide liquidity to any other
entity of the Group. Balances with central banks are reported as unencumbered and can be pledged, to the
extent that there is excess available over the minimum reserve requirement. The minimum reserve
requirement is reported as unencumbered since it is not readily available as collateral.
369
BANK OF CYPRUS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2016
2.
Liquidity risk and funding (continued)
2.1
Encumbered and unencumbered assets (continued)
Unencumbered assets that are not readily available to be pledged primarily consist of loans and advances
which are prohibited by contract or law to be encumbered or which are over 90 days past due or for which
there are pending litigations or other legal actions against the customer, a proportion of which would be
suitable for use in secured funding structures but are conservatively classified as not readily available for
collateral. Properties whose legal title has not been transferred in the name of the Company or the subsidiary
are not considered to be readily available as collateral.
Insurance assets held by Group insurance subsidiaries are not included in the table below as they are
primarily due to the insurance policyholders.
The carrying and fair value of the encumbered and unencumbered investments of the Group as at 31
December 2016 and 2015 are as follows:
31 December 2016
Carrying value
of encumbered
investments
Fair value of
encumbered
investments
Carrying value of
unencumbered
investments
Fair value of
unencumbered
investments
€000
€000
€000
€000
Equity securities
Debt securities
1.562
1.562
52.514
52.514
358.251
358.454
261.317
262.491
Total investments
359.813
360.016
313.831
315.005
31 December 2015
Equity securities
Debt securities
1.027
1.027
891.701
900.287
91.644
24.915
91.644
24.915
Total investments
892.728
901.314
116.559
116.559
2.2
Liquidity regulation
In addition to the liquidity ratios applicable at each banking location that the Group operates, the Group has to
comply with the Liquidity Coverage Ratio (EU) 2015/61 (LCR). It also monitors its position against the Basel
Quantitative Impact Study (QIS) Net Stable Funding Ratio (NSFR). The LCR is designed to promote short-term
resilience of a Group’s liquidity risk profile by ensuring that it has sufficient high quality liquid resources to
survive an acute stress scenario lasting for 30 days. The NSFR has been developed to promote a sustainable
maturity structure of assets and liabilities.
The Capital Requirements Regulation (CRR) requires phased-in compliance with the LCR standard as from 1
October 2015 with an initial minimum ratio of 60%, increasing to 70% in 2016, 80% in 2017 and 100% as
from January 2018. Starting from January 2016, the LCR is calculated monthly based on the final published
Delegated Regulation (EU) 2015/61. The Delegated Regulation was enacted in September 2016 and the LCR
is calculated under this Regulation.
In October 2014, the Basel Committee on Banking Supervision published a final standard for the NSFR with
the minimum requirement to be introduced in January 2018 at 100%. The methodology for calculating the
NSFR is based on an interpretation of the Basel standards published in October 2014 and includes a number of
assumptions which are subject to change prior to adoption by the European Commission through the CRR.
As at 31 December 2016 the Group is not in compliance with its regulatory liquidity requirements with respect
to the LCR. On the basis of Regulation (EU) 2015/61 the Group’s LCR as at 31 December 2016 was 49%
(2015: 0%); on the basis of Basel QIS standards the Group’s NSFR was 95% (31 December 2015: 83%).
Following the full repayment of ELA funding on 5 January 2017, the Group is aiming to build up available
liquid assets in order to comply gradually with its regulatory liquidity ratios.
370
BANK OF CYPRUS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2016
2.
Liquidity risk and funding (continued)
2.2
Liquidity regulation (continued)
Furthermore, the Company and the other units must comply with their local regulatory liquidity ratios. The
minimum regulatory liquidity ratios for the operations in Cyprus are set by the CBC. As at 31 December 2016
the Company was not in compliance with the regulatory liquidity requirements with respect to its operations in
Cyprus.
2.3
Liquidity reserves
31 December 2016
31 December 2015
Composition of the liquidity
reserves
Liquidity
reserves
€000
Liquidity
reserves of
which Delegated
Reg (EU)
2015/61 LCR
eligible Level 1
€000
Liquidity
reserves
€000
Liquidity
reserves of
which Delegated
Reg (EU)
2015/61 LCR
eligible Level 1
€000
Cash and balances with central
banks
Nostro and overnight placements
with banks
Other placements with banks
Liquid investments
Available ECB Buffer
Other investments
Total
1.505.120
1.146.015
1.421.733
1.002.649
423.603
376.145
154.787
124.998
6.340
-
-
537.722
477.604
256.325
19.594
-
-
178.792
8.637
-
-
2.421
178.792
-
2.590.993
1.402.340
2.644.082
1.183.862
Investments under Liquidity Reserve are shown at market value net of haircut (as prescribed by regulators) in
order to reflect the actual liquidity value that can be obtained and include only the international issues of
Government of Cyprus. Under LCR Liquidity Reserves, all Cyprus Government Bonds remain eligible for
inclusion as Level 1 assets given that they are issued by a Member State. LCR does not require liquid assets
to be eligible as collateral for central bank operations and are included at market value.
The Liquidity Reserves are managed by Group Treasury.
ELA was fully repaid on 5 January 2017. ELA is available to solvent Euro area credit institutions and although
the Company has received no specific assurance, management expects that the Company will continue to
have access to the central bank liquidity facilities, in line with applicable rules if it were to face a ‘stress event’
that gave rise to temporary liquidity problems. If a stress event were to occur in the future, the Company
would seek to utilise ELA funding, assuming it has sufficient available eligible collateral at the time.
The Council of Ministers and the Committee on Financial and Budgetary Affairs of the House of
Representatives had approved in January 2014 the issuance of up to €2,9 billion of guarantees for
bonds/loans issued by credit institutions under the ‘Granting of Government Guarantees for Loans and/or
issuance of Bonds by Credit Institutions Law of 2012’. The European Commission announced in June 2016 the
eighth extension of the bank guarantee scheme, which continued until 31 December 2016. Based on the
prevailing conditions, the Ministry of Finance has not applied for a further extension of the bank guarantee
scheme.
371
BANK OF CYPRUS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2016
2.
Liquidity risk and funding (continued)
2.3
Liquidity reserves (continued)
In May 2016, the Company raised new funding from ECB using as collateral a pool of housing loans that
satisfy the criteria of the Additional Credit Claims as set out in accordance with the Implementation of the
Eurosystem Monetary Policy Framework Directives of 2015 and 2016.
In 2014, the Group participated in the TLTRO of the ECB for an amount of €500 million. On 29 June 2016 the
Company repaid the amount borrowed through the TLTRO amounting to €500 million and borrowed the same
amount from the MRO. In December 2016, the Group borrowed an amount of €600 million through the new
series of TLTRO (TLTRO II) announced by the ECB in March 2016. Additionally, an amount of €50 million was
borrowed through the LTRO. As a result, in December 2016 all the ECB funding that was borrowed through
the MRO, was switched to longer term funding.
Following the full repayment of ELA on 5 January 2017, all ELA collateralised loans have subsequently been
released, but ELA pledged properties remain pledged as of 27 March 2017.
In January 2017, the Company issued a €250 million unsecured and subordinated Tier 2 Capital Note (Note)
under the Company’s EMTN Programme. The Note was priced at par with a coupon of 9,25%. The Note
matures on 19 January 2027. The Company has the option to redeem the Note early on 19 January 2022,
subject to applicable regulatory consents.
In March 2017 the Company has borrowed an additional amount of €230 million through the new series of
TLTRO II, to be received on 29 March 2017.
3.
Other risks
3.1
Operational risk
Operational risk is defined as the risk of a direct or indirect impact loss resulting from inadequate or failed
internal processes, people and systems or external events. The Group includes in this definition compliance,
legal and reputational risk.
The Group recognises that the control of operational risk is directly related to effective and efficient
management practices and high standards of corporate governance. To that effect, the management of
operational risk is geared towards maintaining a strong internal control governance framework and managing
operational risk exposures through a consistent set of management processes that drive risk identification,
assessment, control and monitoring.
The main objectives of operational risk management within the Group are: (i) the development of operational
risk awareness and culture, (ii) the provision of adequate information to the Group’s management at all levels
in relation to the operational risk profile at a Company, Unit and activity level, so as to facilitate decision
making for risk control activities, and (iii) the control of operational risk to ensure that operational losses do
not cause material damage to the Group’s franchise and have minimal impact on the Group’s profitability and
corporate objectives.
Operational risks can arise from all business lines and from all activities carried out by the Group and are thus
diverse in nature. To enable effective management of all material operational risks, the operational risk
management framework adopted by the Group is based on the three lines of defence model, through which
risk ownership is dispersed throughout the organisation. The first line of defence comprises management and
staff who have immediate responsibility of day-to-day operational risk management and own the risk. Each
business unit owner is responsible for identifying and managing all the risks that arise from the unit’s
activities as an integral part of their first line responsibilities.
The second line of defence comprises the risk management function whose role is to provide operational risk
oversight and independent and objective challenge to the first line of defence, supported by other specialist
control and support functions such as the Group Compliance, Legal, Information Technology and Information
Security, Health and Safety functions. The third line of defence comprises the Internal Audit function, which
provides independent assurance over the integrity and effectiveness of the risk management framework
throughout the Group.
372
BANK OF CYPRUS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2016
3.
Other risks (continued)
3.1
Operational risk (continued)
During 2016, significant progress has been achieved towards further enhancement of Operational Risk
Management, since a new improved system was launched which provides for the integration of all risk-control
data in one place and enables a centralised risk repository to report, manage and assess operational risks.
Furthermore, a Data Governance Office and a Data Governance Framework were established, as the Group is
focusing on effective management of its data, and improvement of data quality.
Operational risk loss events are classified and recorded in the Group’s internal loss database to enable risk
identification, corrective action and statistical analysis. During the year ended 31 December 2016, 86 loss
events with gross loss equal to or greater than €1.000 each were recorded (2015: 151).
The Group strives to continuously enhance its risk control culture and increase awareness of its employees on
operational risk issues through ongoing staff training.
The Group also maintains adequate insurance policies to cover for unexpected material operational losses.
Business resilience is treated as a priority and as such the Group places significant importance on continuously
enhancing the continuity arrangements for all markets in which the Group operates, to ensure timely recovery
in the case of events that may cause major disruptions to the business operations.
3.2
Regulatory risk
The Group’s operations are supervised by the CBC and the ECB as a supervisory body for all the banks in the
Eurozone area (referred to as the Single Supervisory Mechanism, SSM). The ECB and the national central
banks together constitute the Eurosystem, the central banking system of the Eurozone. The ECB exercises its
supervisory responsibilities in cooperation with the national central banks. As such, in Cyprus the ECB
cooperates with the CBC, as the Company is considered as a significant credit institution for the purposes of
the ECB Regulation.
The overseas subsidiaries and branches of the Group are also supervised by the national regulatory authorities
in the countries where they operate.
In this context, the Group is exposed to a series of regulatory and legal risks:
Legislative action and regulatory measures which may materially impact the Group and the financial and
economic environment in which it operates.
The Group's business and operations are subject to substantial regulation and supervision and can be
negatively affected by its non-compliance with regulatory requirements and any adverse regulatory and
governmental developments.
The implementation of a more demanding and restrictive regulatory framework (including CRD IV/CRR)
with respect to, amongst others, capital ratios, leverage, liquidity and disclosure requirements,
notwithstanding the benefit to the financial system, poses additional risks for banks.
Changes in laws or regulations might also restrict certain types of transactions, affect the Group's
strategy and lead to modification of the customer charges for banking products or transactions.
The Group is subject to certain regulatory and legal constraints in originating new loans, managing and
restructuring existing loans and foreclosing on collateral.
The Group’s Restructuring Plan, approved by the CBC in November 2013, restricts certain actions of the
Group. These restrictions were affirmed by the ECB, in its capacity as SSM, including a prohibition on the
distribution of dividends and the provision of variable remuneration to Group employees as well as a
requirement that the Company should obtain the prior approval of the ECB before providing capital or
funding to any subsidiary. Notwithstanding, the ECB’s prohibition on variable pay, lifted and replaced with
a limitation on variable remuneration to 10% of net revenues in 2016 SREP decision.
As a result of the Group’s dependency on ELA funding over the last years, its limited access to interbank
and wholesale markets and a reduction in deposits in Cyprus in earlier years, the Group is not in
compliance with its regulatory liquidity requirements.
The Group is exposed to tax risk and failure to manage such risk may adversely impact the Group.
373
BANK OF CYPRUS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2016
3.
Other risks (continued)
3.2
Regulatory risk (continued)
The EU Bank Recovery and Resolution Directive 2014/59/EU (BRRD) establishes a framework for the recovery
and resolution of European Union (EU) credit institutions. The stated aim of the BRRD is to provide
supervisory resolution authorities, with common tools and powers to address banking crises pre-emptively in
order to ensure the continuity of the institution’s critical financial and economic functions whilst safeguarding
financial stability and minimising taxpayers’ exposure to losses. The BRRD includes the concept of loss
absorption and a minimum requirement for own funds and eligible liability (MREL).
The BRRD also has significant funding implications for credit institutions, which include the establishment of
pre-funded resolution funds of 1% of deposits covered under the EU Deposit Guarantee Schemes Directive
2014/49 to be built up by 31 December 2024. The BRRD has been implemented in Cyprus.
The EU has also established a Single Resolution Mechanism (SRM), set up under the Single Resolution
Mechanism Regulation No 806/2014 as part of the European Banking Union. Under the SRM, a single
resolution process applies to all credit institutions supervised by the SSM. This process is co-ordinated by the
Single Resolution Board (SRB). The Company is subject to the supervision of the SSM and accordingly the
SRM.
The SRM Regulation is closely connected with the BRRD. For credit institutions within the SSM, the SRB
effectively takes on the role of the relevant national resolution authority established under the BRRD. The
Company is subject to the supervision of the SRB.
On 1 January 2016 the Directive 2009/138/EC of the European Parliament and of the Council and the relevant
Regulations on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) came in
force. Additionally on 11 April 2016 the Law on Insurance and Reinsurance Services and Other Related Issues
(Law 38(I)/2016) became effective. The new legal and regulatory framework introduced significantly
increased quantitative and qualitative requirements. The Insurance Companies Control Service (Ministry of
Finance) supervises the minimum required capital which should be maintained by insurance companies in
order to ensure they meet the solvency capital requirement. Additional targets are set by the insurance
subsidiaries of the Group, EuroLife Ltd and General Insurance of Cyprus Ltd, in order to maintain sound capital
ratios which can support operational targets. The insurance subsidiaries of the Group manage their capital
base by monitoring the coverage of solvency capital requirements on a quarterly basis using high quality own
funds. Both subsidiaries are compliant with the solvency capital requirements imposed by the Insurance
Companies Control Service during 2016.
The Cyprus Investment and Securities Corporation Ltd (CISCO) is a member of the Investor Compensation
Fund (ICF) which was established pursuant to Article 59(1) and (2) of Law 144(Ι)/2007 which provides for the
Provision of Investment Services, the Exercise of Investment Activities, the Operation of Regulated Markets
and other Related Matters as an investor compensation fund for ICF clients other than credit institutions. The
powers and functions of the ICF are regulated by the provisions of the aforementioned law and of the
Directive 144-2007-15 of the CySEC for the Continuance of the Operation and the Operation of the IF Investor
Compensation Fund. CISCO is obliged to contribute annually an amount of up to 0,1% of the eligible funds
and financial instruments of the member’s clients and to contribute when called upon by CySEC an
extraordinary supplementary contribution, if it deems that the existing means for the payment of
compensation are inadequate, particularly in the event of a liquidation procedure of a member of the ICF. The
amount of the extraordinary supplementary contribution is not designated (nor capped).
The EU Investor Compensation Schemes Directive 97/9/EC (the ICSD) requires member states to establish
investor compensation schemes (ICS) to protect investors with respect to firms carrying on investment
business (which may be an investment firm or a credit institution). An ICS will typically make payouts if an
investment firm or credit institution carrying on investment business fails.
In Cyprus, the Investor Compensation Fund for Clients of Banks (the Fund) was established pursuant to
Article 59(1) and (2) of Law 144(Ι)/2007 which provides for the Provision of Investment Services, the Exercise
of Investment Activities, the Operation of Regulated Markets and other Related Matters. Such a Fund is
administered by the CBC. The Company is obligated to contribute annually an amount of up to 0.001% of the
eligible funds and financial instruments of the Company's clients.
374
BANK OF CYPRUS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2016
3.
Other risks (continued)
3.3
Intensity of competition
The Group faces intense competition in the markets in which it operates. In Cyprus the competition primarily
originates from other commercial banks, co-operative credit institutions, branches and subsidiaries of foreign
banks, and insurance companies offering savings and investment products.
Following the acquisition of certain operations of Laiki Bank in 2013, the Group’s market share in loans and
deposits in Cyprus was significantly boosted, even though depositor psychology led to substantial deposit
outflows from the Cyprus banking system. During 2015 and 2016 the Group’s market share in deposits
increased due to deposit inflows. The Group remains today the biggest and most systemically important local
banking organisation in Cyprus.
Any intensification of competition as a result of more competitive interest rates being offered on deposits and
advances compared to those offered by the Group, may create pressure on Group profitability.
3.4
Litigation risk
The Group may, from time to time, become involved in legal or arbitration proceedings which may affect its
operations and results. Litigation risk arises from pending or potential legal proceedings against the Group
(Note 38 of the consolidated financial statements for the year ended 31 December 2016) and in the event that
legal issues are not properly dealt with, by the Group, resulting in the cancellation of contracts with customers
thus exposing the Group to legal actions against it.
3.5
Political risk
External factors which are beyond the control of the Group, such as developments in the European and the
global economy, as well as political and government actions in Cyprus can affect the operations of the Group,
its strategy and prospects, either directly or indirectly through their possible impact on the domestic economy.
Cyprus is a small open economy particularly exposed to weakness in Russia, the UK and Greece. Cyprus is
also exposed to international developments particularly in the European Union and the Eurozone that may
lead to a payments crisis or changes in the regulatory and supervisory framework.
The exit of the UK following the EU referendum of 23 June 2016 may lead to an economic recession in the UK
itself and to possible disruptions in the Eurozone with pressure to bear on the euro and the currency markets
generally.
An exit of the UK from the EU may impact Cyprus. Cyprus has trade, investment links with the UK, and it is a
popular tourist destination for British tourists. In 2016 the UK accounted for 36% of all tourist arrivals. The
possible loss of UK tourist arrivals may be mitigated at least in part, by increases in arrivals of tourists from
other countries, as tourist traffic may continue to divert away from other regional destinations. In total about
9% of Cyprus imports and 7% of Cyprus exports are with the UK based on available statistics for 2015.
Additionally there is a relatively sizeable community of British expatriates in Cyprus, many of whom have
purchased homes and live permanently on the island.
Consequences for the Cyprus economy may potentially derive from the wider implications for the UK economy
and on the EU from exiting. Additionally, the exit of the UK from the EU will change the balance of power in
the EU and will also exacerbate the division between the northern and southern countries.
Developments in other non-EU countries with which Cyprus maintains significant economic links, the
unresolved Cyprus problem, and political and social unrest or escalation of military conflict in neighboring
countries and/or other overseas areas may adversely affect the Cyprus economy.
Russia is an important economic partner of Cyprus both in terms of tourism and international business flows.
Any developments that impact negatively on these linkages will have a negative impact on the economy and
will thus affect the Group’s operations.
375
BANK OF CYPRUS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2016
3.
Other risks (continued)
3.5
Political risk (continued)
As a result of sanctions and the steep decline in oil and commodity prices, Russia entered a steep recession in
2015 when the economy contracted by 3,7% and further by 0,6% in 2016. Russia’s economy is expected to
grow again in 2017 by 0,8% (European Commission, European Economic Forecast, Winter 2017). This will be
largely due to a trimmed down budget based on more realistic oil prices. Rating agencies have even raised the
country’s outlook from negative to stable. However, uncertainty is linked with oil price dynamics, geopolitical
tensions and a possible prolongation of sanctions. A re-emergence of volatility amongst emerging economies,
driven by further tightening of monetary policies in the US or by changes in global trade policies, could also
adversely impact the Russian economy.
In relation to Greece, the economy contracted by 0,2% in 2015 and registered zero growth in 2016 in real
terms according to Eurostat. The economy is projected to expand by 2,7% in 2017 and by 3,1% in 2018
according to the European Commission (European Economic Forecast, Winter 2017).
Negotiations over the Greek bailout programme have resumed and there seems to be an understanding
among the creditors regarding fiscal targets and debt relief. The IMF may also be in a position to soon join the
programme. Greece will need to make significant debt repayments in July. The creditors have still to decide on
the release of bailout funds and Greece is required to introduce reforms prior to that.
Global economy risks remain elevated as highlighted by extremely low interest rates, which turned negative in
many European countries and Japan. Changes in monetary policies or loss of confidence in the ability of
central banks to manage economic pressures, might lead to financial distress in the emerging world with
broader consequences for economic activity in the advanced countries.
The euro will come under pressure if adverse developments in the cohesion of the Eurozone escalate further.
Greece continues to entail risks amidst a fragmenting European Union. Elections in a number of Eurozone
countries in 2017 including France, Germany and possibly Italy, may cause further instability.
Given the above, the Group recognises that unforeseen political events can have negative effects on the
fulfilment of contractual relationships and obligations of its customers and other counterparties, which may
have a significant impact on the Group’s activities, operating results and position.
4.
Capital management
The primary objective of the Group’s capital management is to ensure compliance with the relevant regulatory
capital requirements and to maintain strong credit ratings and healthy capital adequacy ratios in order to
support its business and maximise shareholder value.
The Capital Requirements Regulation (CRR) and amended Capital Requirements Directive IV (CRD IV) became
effective, comprising the European regulatory package designed to transpose the new capital, liquidity and
leverage standards of Basel III into the European Union’s legal framework on 1 January 2014. CRR
establishes the prudential requirements for capital, liquidity and leverage that entities need to abide by. It is
immediately binding on all EU member states. CRD IV governs access to deposit-taking activities and internal
governance arrangements including remuneration, board composition and transparency. Unlike the CRR, CRD
IV needs to be transposed into national laws, and allows national regulators to impose additional capital buffer
requirements. CRR introduced significant changes in the prudential regulatory regime applicable to banks
including amended minimum capital adequacy ratios, changes to the definition of capital and the calculation of
risk weighted assets and the introduction of new measures relating to leverage, liquidity and funding. CRR
permits a transitional period for certain of the enhanced capital requirements and certain other measures,
such as the leverage ratio, which will be largely fully effective by 2019. In addition, the Regulation (EU)
2016/445 of the ECB on the exercise of options and discretions available in Union law (ECB/2016/4) provides
certain transitional arrangements which supersedes the national discretions unless they are stricter than the
EU Regulation 2016/44.
The CET1 ratio of the Group at 31 December 2016 stands at 14,5% (transitional) and the total capital at
14,6%.
The minimum Pillar I total capital requirement is 8,0% and may be met, in addition to the 4,5% CET1
requirement, with up to 1,5% by Additional Tier 1 capital and with up to 2,0% by Tier 2 capital.
376
BANK OF CYPRUS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2016
4.
Capital management (continued)
The Group is also subject to additional capital requirements for risks which are not covered by the Pillar I
capital requirements (Pillar II add-ons). Following the enactment of the amendments in the Cypriot Banking
Law in February 2017 regarding the gradual phase-in of the Capital Conservation Buffer (CCB) and based on
the Supervisory Review and Evaluation Process (SREP) performed by the ECB in 2016, the Group’s minimum
CET1 capital ratio as from 1 January 2017 has been reduced to 9,50% compared to 10,75% fully phased-in of
CCB (minimum CET1 capital ratio at 31 December 2016: 11,75% fully phased-in of CCB), comprising of a
4,5% Pillar I requirement, a 3,75% Pillar II requirement and a phased-in CCB of 1,25%. The ECB has also
provided non-public guidance for an additional Pillar II CET1 buffer.
The overall Total Capital Ratio requirement as from 1 January 2017 following the amendments in the Cypriot
Banking Law in February 2017 regarding the gradual phase-in of CCB, has been reduced to 13,00% compared
to 14,25% (fully phased-in of CCB), comprising of a Pillar I requirement of 8% (of which up to 1,5% can be in
the form of Additional Tier 1 capital and up to 2,0% in the form of Tier 2 capital), a Pillar II requirement of
3,75% (in the form of CET1), as well as a phased-in CCB of 1,25%.
The minimum CET1 requirement including Pillar II, applicable for the year 2016 was determined by the ECB at
11,75% in November 2015 and includes CCB on a fully loaded basis.
The Group's capital position at 31 December 2016 exceeds both its Pillar I and its Pillar II add-on capital
requirements. However, the Group's Pillar II add-on capital requirements are a point-in-time assessment and
therefore are subject to change over time.
Based on the provisions of the Macroprudential Oversight of Institutions Law of 2015 which came into force on
1 January 2016, the CBC is the designated Authority responsible for setting the macroprudential buffers that
derive from the CRD IV.
In accordance with the provisions of this law, the CBC sets, on a quarterly basis, the Countercyclical Capital
buffer (CCyB) level in accordance with the methodology described in this law. The CCyB is effective as from 1
January 2016 and is determined by the CBC ahead of the beginning of each quarter. The CBC has set the
level of the CCyB at 0% for the year of 2016 and for the first quarter of 2017.
In accordance with the provisions of this law, the CBC is also the responsible authority for the designation of
banks that are Other Systemically Important Institutions (O-SIIs) and for the setting of the O-SII buffer
requirement for these systemically important banks. The Group has been designated as an O-SII and the CBC
set the O-SII buffer for the Group at 2%. This buffer will be phased-in gradually, starting from 1 January
2019 at 0,5% and increasing by 0,5% every year thereafter, until being fully implemented (2,0%) on 1
January 2022.
Following the enactment of the amendments in the Cypriot Banking Law on 3 February 2017, the Capital
Conservation Buffer (CCB) is gradually phased-in at 0,625% in 2016, 1,25% in 2017, 1,875% in 2018 and is
fully implemented on 1 January 2019 at 2,5%.
The BRRD requires that from January 2016 EU member states shall apply the BRRD’s provisions requiring EU
credit institutions and certain investment firms to maintain minimum requirement for own funds and eligible
liabilities (‘‘MREL’’), subject to the provisions of the Commission Delegated Regulation (EU) 2016/1450.
Although the precise calibration and ultimate designation of the Bank’s MREL liabilities has not yet been
finalised, the Bank is monitoring developments in this area very closely.
The Group’s overseas banking subsidiaries comply with the regulatory capital requirements of the local
regulators in the countries in which they operate. The insurance subsidiaries of the Group comply with the
requirements of the Superintendent of Insurance including the minimum solvency ratio. The regulated
investment firms of the Group comply with the regulatory capital requirements of the CySEC laws and
regulations.
377
BANK OF CYPRUS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2016
4.
Capital management (continued)
4.1
Capital position
The capital position of the Group under CRD IV/CRR basis (after applying the transitional arrangements set by
the CBC) is presented below.
Regulatory capital
Transitional Common Equity Tier 1 (CET1)3,5
Transitional Additional Tier 1 capital (AT1)
Tier 2 capital (T2)
Transitional total regulatory capital5
Risk weighted assets – credit risk4
Risk weighted assets – market risk
Risk weighted assets – operational risk
Total risk weighted assets
Transitional Common Equity Tier 1 ratio
Transitional total capital ratio
31 December
2016
€000
31 December
2015
€000
2.727.997
2.747.772
-
-
21.423
30.290
2.749.420
2.778.062
16.861.793
17.618.578
6.231
7.811
1.997.200
2.039.888
18.865.224
19.666.277
%
%
14,5
14,6
14,0
14,1
During 2016 the CET1 was positively affected by the profit for the year and by the disposal of non-core assets
and it was negatively affected by the phase in of transitional adjustments, mainly deferred tax asset. The
RWA were positively affected by the Group’s ongoing efforts for risk-weighted assets optimisation. As a result
of the above, the CET1 ratio increased by 50 bps during the year.
Additional information on capital management can be found in the 2016 Pillar 3 Disclosures Report,
www.bankofcyprus.com (Investor Relations).
3
4
5
CET1 includes regulatory deductions, primarily comprising deferred tax assets and intangible assets amounting to €88.407 thousand and
€35.193 thousand as at 31 December 2016 and 31 December 2015 respectively.
Includes Credit Valuation Adjustments (CVA).
Following the Regulation (EU) 2016/445 of the ECB of 14 March 2016 on the exercise of options and discretions available in Union law
(ECB/2016/4), the deferred tax asset phase-in period reduced from 10 to 5 years, with effect as from the reporting of 31 December 2016.
378
BANK OF CYPRUS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2016
5.
Leverage ratio
According to CRR Article 429, the leverage ratio, expressed as a percentage, is calculated as the capital
measure divided by the total exposure measure of the Group.
The leverage ratio of the Group is presented below:
Transitional basis
Capital measure (CET 1)
Total exposure measure
Leverage ratio (%)
Fully loaded basis
Capital measure (CET 1)
Total exposure measure
Leverage ratio (%)
Additional
www.bankofcyprus.com (Investor Relations).
information on
leverage can be
31 December
2016
€000
31 December
2015
€000
2.727.997
2.747.772
22.833.225
22.866.525
11,9
12,1
2.611.563
2.568.503
22.785.112
22.687.256
11,5
11,3
found
in
the 2016 Pillar 3 Disclosures Report,
6.
Internal Capital Adequacy Assessment Process (ICAAP), Internal Liquidity Assessment
Process (ILAAP), Pillar II and Supervisory Review and Evaluation Process (SREP)
The Group prepared the ICAAP and ILAAP reports for year 2015. Both reports were approved by the Board of
Directors and have been submitted to the ECB in April 2016. Currently, the Group is preparing the ICAAP and
ILAAP reports for the year 2016, due for submission around April 2017.
The Group also undertakes a quarterly review of its ICAAP results. During the quarterly review, the Group’s
risk profile and risk management policies and processes are reviewed and any changes since the full ICAAP
exercise are taken into consideration. The quarterly review identifies whether the Group is exposed to new
risks and assesses the adequacy of capital resources in order to cover its risks, as these have evolved
(compared to the full ICAAP exercise). Given completion of the full ICAAP report in April 2016, two quarterly
reviews have taken place in the third quarter of 2016 and in the fourth quarter of 2016 covering the period up
to end of June 2016 and the period up to end of September 2016, respectively.
A quarterly review is also performed for the ILAAP through quarterly stress tests submitted to the Assets and
Liabilities Committee (ALCO) and Board Risk Committee, as from 2016. During the quarterly review, the
liquidity risk drivers are assessed and, if needed, the stress test assumptions are amended accordingly. The
quarterly review identifies whether the Group has an adequate liquidity buffer to cover the stress outflows.
The ECB, as part of its supervisory role, has been conducting the SREP and onsite inspections on the Group.
SREP is a holistic assessment of, amongst other things, the Group’s business model, internal governance and
institution-wide control arrangements, risks to capital and adequacy of capital to cover these risks and risks to
liquidity and adequacy of liquidity resources to cover these risks. The objective of the SREP is for the ECB to
form an up-to-date supervisory view of the Group’s risks and viability and to form the basis for supervisory
measures and dialogue with the Group. Additional capital and other requirements could be imposed on the
Group as a result of these supervisory processes, including a revision of the level of Pillar II add-ons as the
Pillar II add-on capital requirements are a point-in-time assessment and therefore subject to change over
time.
379