Annual Financial Report 2018
BANK OF CYPRUS HOLDINGS GROUP
Annual Financial Report
for the year ended 31 December 2018
Annual Financial Report 2018
Contents
Board of Directors and Executives
Forward Looking Statements and Notes
Directors’ Report of Bank of Cyprus Holdings Public Limited Company
Consolidated Financial Statements of Bank of Cyprus Holdings Group
Independent Auditor’s Report to the Members of Bank of Cyprus Holdings Public Limited
Company on the Consolidated Financial Statements and the Company Financial Statements
Financial Statements of the Bank of Cyprus Holdings Public Limited Company
Annual Corporate Governance Report
Additional Risk and Capital Management Disclosures
Definitions and explanations on Alternative Performance Measures Disclosures
Page
1
2
3
32
258
271
287
330
347
Annual Financial Report 2018
BANK OF CYPRUS HOLDINGS GROUP
Board of Directors and Executives
as at 28 March 2019
Board of Directors of Bank of Cyprus
Holdings Public Limited Company
Prof. Dr. Josef Ackermann
CHAIRMAN
Maksim Goldman
VICE CHAIRMAN
Arne Berggren
Lyn Grobler
Dr. Michael Heger
John Patrick Hourican
Dr. Christodoulos Patsalides
Ioannis Zographakis
Anat Bar-Gera
Maria Philippou
Paula Hadjisotiriou
John Patrick Hourican
CHIEF EXECUTIVE OFFICER
Executive Committee
Dr. Christodoulos Patsalides
DEPUTY CHIEF EXECUTIVE OFFICER AND CHIEF OPERATING OFFICER
Michalis Athanasiou
CHIEF RISK OFFICER
Eliza Livadiotou
FINANCE DIRECTOR
Panicos Nicolaou
DIRECTOR CORPORATE BANKING
Louis Pochanis
DIRECTOR INTERNATIONAL BANKING, WEALTH AND MARKETS
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
Company Secretary
Legal Advisers as to matters of Irish
Law
Katia Santis
Arthur Cox
Legal Advisers as to matters of
English and US Law
Legal Advisers as to matters of
Cypriot Law
Sidley Austin LLP
Chryssafinis & Polyviou
Independent Auditors
Registered Office
Ernst & Young Chartered Accountants
Ernst & Young Building
Harcourt Centre
Harcourt Street
Dublin 2
Ireland
Arthur Cox
10 Earlsfort Terrace
Dublin 2
D02 T380
Ireland
1
BANK OF CYPRUS HOLDINGS GROUP
Forward Looking Statements and Notes
Annual Financial Report 2018
This document contains certain forward-looking statements which can usually be identified by terms used
such as ‘expect’, ‘should be’, ‘will be’ and similar expressions or variations thereof or their negative
variations, but their absence does not mean that a statement is not forward looking. Examples of forward-
looking statements include, but are not limited to, statements relating to the Bank of Cyprus Holdings Public
Limited Company Group (the Group) near term and longer term future capital requirements and ratios,
intentions, beliefs or current expectations and projections about the Group’s future results of operations,
financial condition, expected impairment charges, the level of the Group's assets, liquidity, performance,
prospects, anticipated growth, provisions, impairments, business strategies and opportunities. By their
nature, forward-looking statements involve risk and uncertainty because they relate to events, and depend
upon circumstances, that will or may occur in the future. Factors that could cause actual business, strategy
and/or results to differ materially from the plans, objectives, expectations, estimates and intentions
expressed in such forward-looking statements made by the Group include, but are not limited to: general
economic and political conditions in Cyprus and other European Union (EU) Member States, interest rate
and foreign exchange fluctuations, legislative, fiscal and regulatory developments and information
technology, litigation and other operational risks. Should any one or more of these or other factors
materialise, or should any underlying assumptions prove to be incorrect, the actual results or events could
differ materially from those currently being anticipated as reflected in such forward-looking statements. The
forward-looking statements made in this document are only applicable as from the date of publication of
this document. Except as required by any applicable law or regulation, the Group expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any forward-looking statement
contained in this document to reflect any change in the Group’s expectations or any change in events,
conditions or circumstances on which any statement is based.
Non-IFRS performance measures
Bank of Cyprus Holdings Public Limited Company (the Company) management believes that the non-IFRS
performance measures included in this document provide valuable information to the readers of the Annual
Financial Report as they enable the readers to identify a more consistent basis for comparing the Group’s
performance between financial periods and provide more detail concerning the elements of performance
which management is most directly able to influence or are relevant for an assessment of Bank of Cyprus
Holdings Group. They also reflect an important aspect of the way in which the operating targets are defined
and performance is monitored by the Group’s management. However, any non-IFRS performed measures in
this document are not a substitute for IFRS measures and readers should consider the IFRS measures as
well. Refer to ‘Definitions and explanations on Alternative Performance Measures Disclosures’ on pages 347
to 349 of the Annual Financial Report for 2018 for further information, reconciliations with Consolidated
Financial Statements and calculations of non-IFRS performance measures included throughout this
document and the most directly comparable IFRS measures.
The definitions and explanations on Alternative Performance Measures Disclosures are presented in
‘Definitions and explanations on Alternative Performance Measures Disclosures’ of the Annual Financial
Report 2018.
The Annual Financial Report 2018 is available at the Bank of Cyprus Holdings Public Limited Company
Registered Office (10 Earlsfort Terrace, Dublin 2, D02 T380, Ireland) and on the Group’s website
www.bankofcyprus.com (Investor Relations/Financial Results).
2
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Annual Financial Report 2018
The Board of Directors submits to the shareholders of Bank of Cyprus Holdings Public Limited Company
(the Company) their Directors’ Report together with the audited Consolidated Financial Statements
(Consolidated Financial Statements) and Financial Statements of the Company for the year ended 31
December 2018.
The Annual Financial Report relates to the Company and together with its subsidiaries the Group, which was
listed on the London Stock Exchange (LSE) and the Cyprus Stock Exchange (CSE) as at 31 December 2018.
Activities
The Company is the holding company of the Group and the sole shareholder of Bank of Cyprus Public
Company Ltd (BOC PCL). The principal activities of BOC PCL and its subsidiary companies involve the
provision of banking, financial services, insurance services and management and disposal of property
predominately acquired in exchange of debt.
All Group companies and branches are set out in Note 52 of the Consolidated Financial Statements. The
Group has established branches in Greece. Acquisitions and disposals made during the year 2018 are
detailed in Notes 52, 53 and 54 of the Consolidated Financial Statements.
Operating environment in Cyprus
Economic recovery became more deeply rooted with real Gross Domestic Product (GDP) rising by 3.9% in
2018 following increases of 4.5% and 4.8% in the preceding two years (Cyprus Statistical Service). GDP
growth in 2018 was underpinned by robust expansion in private consumption and services exports
particularly tourism. Fixed investments particularly construction activity also made an important
contribution. On a sectoral basis growth was mainly driven by tourism, trade and transport, construction
and professional and business services. The outlook for 2019-2020 remains positive with real GDP expected
to rise by 3.3% and 2.7% respectively according to the European Commission (European Economic
Forecast, Winter 2019, Interim).
Employment increased by 5.6% in 2018 compared with an increase of 4.6% in 2017 (Cyprus Statistical
Service). As a result, the unemployment rate dropped to an average of 8.4% in 2018 from 11% in 2017
and contributed to strong private consumption growth (Cyprus Statistical Service).
Exports of goods and services continued to grow robustly in 2018 rising by 3.3% in real terms (Cyprus
Statistical Service). Exports are expected to continue to underpin the recovery, but Cyprus might also be
impacted negatively by the exit of the UK from the EU (Brexit). Cyprus has close trade and investment links
with the UK, making its economy vulnerable to the impact of Brexit on the UK economy. Tourist arrivals
from the UK accounted for about 34% of total arrivals in 2017-2018. A possible decline in tourist arrivals
from the UK and a drop in their spending will need to be mitigated by increasing arrivals and revenues from
other countries.
Regarding prices, consumer inflation accelerated modestly in 2018 to 1.4% from 0.5% in 2017 (Cyprus
Statistical Service). This was owed in large to higher global energy prices. Inflation is expected to accelerate
further in the medium term as tighter labour market conditions gradually lead to higher wages, but will
remain relatively modest by historical standards.
The budget turned to a surplus of 1.8% of GDP in 2017. The budget surplus is estimated at 2.8% of GDP in
2018, according to the European Commission (Post-Programme Surveillance Report Cyprus, Autumn 2018),
excluding the impact of banking support measures related to the Cyprus Cooperative Bank (CyCB). The
budget surplus will also remain sizable in 2019-2020 according to the European Commission. The budget
surplus is driven by buoyant revenue growth underpinned by strong economic activity. Expenditure
increases will be driven mainly by public sector pay rises and social transfers, but are expected to lag
revenue growth. The budget cost of the ESTIA Scheme, a State-supported scheme to aid the loan
repayment of vulnerable groups with non-performing exposures (NPEs) backed by primary residences, will
be relatively low and its impact on the budget balance will be marginal.
3
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Operating environment in Cyprus (continued)
Annual Financial Report 2018
Gross Government debt is estimated at 105% of GDP in 2018 according to the European Commission, up
from 96% in 2017. This followed the placement of €3.2 billion Government bonds in the CyCB to facilitate
the sale of the good assets of CyCB. However, its underlying dynamics remain stable and it is expected to
decline significantly in coming years. The debt ratio will decline to 98.4% in 2019 and to 91% in 2020
according to the European Commission (Post-Programme Surveillance Report Cyprus, Autumn 2018).
In the banking sector, the stock of NPEs declined significantly. For the first eleven months of 2018, NPEs
dropped by 46% or by €9.6 billion to €11.2 billion, after the CyCB transaction and the sale of a package of
NPEs by Bank of Cyprus, according to data by the Central Bank of Cyprus (CBC). The ratio of NPEs to gross
loans dropped to 32.1% at the end of November 2018 from 42.5% at the end of December 2017. The ratio
of total impairments to total NPEs was 52.2% at the end of November 2018.
In July 2018, the Cyprus government took additional steps to address regulatory issues relating to NPEs.
Parliament voted on Cyprus government legislative proposals for strengthening the foreclosure and
insolvency framework and facilitating the securitisation of NPEs and the sale of loans. Taken together, these
measures, along with ESTIA, will support further reductions in the remaining stock of NPEs.
The sovereign risk ratings of the Cyprus government improved considerably. In October 2018 Fitch Ratings
upgraded its Long-Term Issuer Default ratings for Cyprus to investment grade (BBB-) with a stable outlook.
In September 2018, S&P Global Ratings also upgraded Cyprus to investment grade (BBB-) with stable
outlook. In July 2018 Moody’s Investors Service upgraded Cyprus’ sovereign rating to Ba2 from Ba3. The
improvement in the ratings since the crisis in 2013 reflects the government’s fiscal consolidation efforts, the
generation of primary fiscal surpluses, a gradual stabilisation in the banking sector and the successful
implementation of the economic adjustment programme.
Financial results
A reconciliation of the Consolidated Income Statement for the year ended 31 December 2018 between
statutory and underlying basis is set out in this section of this Directors' Report.
4
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Financial results (continued)
The main financial highlights for 2018 are set out below:
Consolidated Income Statement underlying basis
€ million
Net interest income
Net fee and commission income
Net foreign exchange gains and net gains on other financial
instruments transactions and disposal/dissolution of subsidiaries and
associates
Insurance income net of insurance claims and commissions
Net gains from revaluation and disposal of investment properties and
on disposal of stock of properties
Other income
Total income
Staff costs
Other operating expenses
Special levy on deposits on credit institutions in Cyprus and
contribution to Single Resolution Fund (SRF)
Total expenses
Operating profit
Provision charge
Impairments of other financial and non-financial assets
Provisions for litigation, regulatory and other matters
Total provisions and impairments
Share of profit from associates
Profit/(loss) before tax and non-recurring items
Tax
(Profit)/loss attributable to non-controlling interests
Profit/(loss) after tax and before non-recurring items
Advisory and other restructuring costs excluding discontinued
operations and NPE sale (Helix)
Profit/(loss) after tax - organic
Profit from discontinued operations (UK)
Restructuring costs relating to NPE sale (Helix)
Loss relating to NPE Sale (Helix)
Impairment of deferred tax assets
Loss after tax
Annual Financial Report 2018
2018
2017
(represented)
452
166
67
53
18
26
782
(217)
(158)
(25)
(400)
382
(168)
(20)
(23)
(211)
9
180
3
(1)
182
(42)
140
3
(18)
(150)
(79)
(104)
544
174
48
50
26
19
861
(205)
(154)
(23)
(382)
479
(780)
(65)
(93)
(938)
9
(450)
(14)
3
(461)
(29)
(490)
-
-
-
(62)
(552)
5
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Annual Financial Report 2018
Financial results (continued)
Key Performance Ratios
Net interest margin*
Cost to income ratio
Cost to income ratio excluding special levy and contribution to Single
Resolution Fund
Operating profit return on average assets
Basic losses per share attributable to the owners of the Company (€
cent)
2018
%2.48
%51
%48
%1.8
2017
(represented)**
%3.10
%44
%42
%2.3
(23.21)
(123.72)
*Including the Helix and Velocity portfolios of €1,148 million (NBV) and €6 million (NBV) respectively which
have been classified as non-current assets and disposal groups held for sale
**Represented for the disposal of the UK subsidiary
Consolidated Balance Sheet
€ million
Cash and balances with central banks
Loans and advances to banks
Debt securities, treasury bills and equity investments
Net loans and advances to customers
Stock of property
Non-current assets and disposal groups classified as held for sale
Other assets
Total assets
Deposits by banks
Funding from central banks
Repurchase agreements
Customer deposits
Subordinated loan stock
Other liabilities
Total liabilities
Shareholders’ equity
Other equity instruments (AT1)
Total equity excluding non-controlling interests
Non-controlling interests
Total equity
Total liabilities and equity
2018
2017
4,610
473
1,515
10,922
1,530
1,470
1,555
22,075
432
830
249
16,844
271
1,082
19,708
2,121
220
2,341
26
2,367
22,075
3,394
1,193
1,121
14,602
1,641
7
1,641
23,599
495
930
257
17,850
302
1,148
20,982
2,586
-
2,586
31
2,617
23,599
6
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Financial results (continued)
Consolidated Balance Sheet (continued)
Key Balance Sheet figures and ratios
Gross loans and advances to customers (€ million)
Accumulated provisions (€ million)
Customer deposits (€ million)
Loans to deposits ratio (net)
NPE ratio
NPE provisioning coverage ratio
Leverage ratio
Capital ratios and risk weighted assets
Common Equity Tier 1 capital ratio (CET 1)
(transitional)
CET1 (allowing for IFRS 9 transitional
arrangements)
Total capital ratio
Risk weighted assets (€ million)
Annual Financial Report 2018
20181
2018
2017
15,900
3,852
16,844
%72
%47
%52
13,148
2,254
16,844
%65
%36
%47
%10.0
%10.0
15.4%2
15.4%2
18.3%2
14,0162
%12.1
%11.9
%14.9
15,373
18,755
4,204
17,850
%82
%47
%48
%10.4
%12.7
%12.2
%14.2
17,260
1Including the Helix and Velocity portfolios of €1,148 million (NBV) and €6 million (NBV) respectively which
have been presented as non-current assets and disposal groups held for sale.
2Pro forma for DTC and Helix.
7
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Financial results (continued)
Annual Financial Report 2018
Reconciliation of the Income Statement for the year ended 31 December 2018 between statutory
and underlying basis
€ million
Net interest income
Net fee and commission income
Net foreign exchange gains and net gains on other
financial instruments transactions and
disposal/dissolution of subsidiaries and associates
Insurance income net of insurance claims and
commissions
Net gains from revaluation and disposal of
investment properties and on disposal of stock of
properties
Other income
Total income
Staff costs
Other operating expenses
Special levy on deposits on credit institutions in
Cyprus and contribution to Single Resolution Fund
Total expenses
Operating profit
Provision charge
Impairments of other financial and non-financial
assets
Provisions for litigation, regulatory and other
matters
Total provisions and impairments
Share of profit from associates
Profit/(loss) before tax and non-recurring
items
Tax
(Profit)/loss attributable to non-controlling interests
Profit/(loss) after tax and before non-
recurring items
Advisory and other restructuring costs excluding
discontinued operations and NPE sale (Helix)
Profit/(loss) after tax - organic*
Profit from discontinued operations (UK)
Restructuring costs relating to NPE sale (Helix)
Loss relating to NPE Sale (Helix)
Impairment of deferred tax assets (DTA)
Loss after tax
Underlying
Basis
Reclassification
Statutory
Basis
452
166
67
53
18
26
782
(217)
(158)
(25)
(400)
382
(168)
(20)
(23)
(211)
9
180
3
(1)
182
(42)
140
3
(18)
(150)
(79)
(104)
(33)
(11)
17
-
-
-
(27)
-
(77)
-
(77)
(104)
(133)
-
23
(110)
-
(214)
(79)
-
(293)
42
(251)
4
18
150
79
-
419
155
84
53
18
26
755
(217)
(235)
(25)
(477)
278
(301)
(20)
-
(321)
9
(34)
(76)
(1)
(111)
-
(111)
7
-
-
-
(104)
*This is the profit after tax, before discontinued operations, restructuring costs and loss relating to the Helix
sale and the impairment of DTA.
8
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Financial results (continued)
Annual Financial Report 2018
Reconciliation of the Income Statement for the year ended 31 December 2018 between statutory
and underlying basis (continued)
The reclassification differences between the underlying basis and the consolidated income statement
(statutory basis) for the year ended 31 December 2018 are set out below:
Net interest income on underlying includes €32.5 million unrecognised interest on previously
credit impaired loans which have cured during the year, which is presented within ‘Credit losses
to cover credit risk on loans and advances to customers’ in the Consolidated Financial Statements
in line with an IFRIC discussion, which has taken place in November 2018 (Presentation of
unrecognised interest following the curing of a credit impaired financial asset (IFRS 9)).
€11.2 million fee and commission expense on the amounts deposited in regards to the AT1 issue
disclosed within ‘Advisory and other restructuring costs-excluding NPE sale (Helix)’ under the
underlying basis.
‘Net foreign exchange gains and net gains on financial instrument transactions and
disposal/dissolution of subsidiaries and associates’ in the Consolidated Financial Statements
include an amount of €16.1 million relating to net gains on loans and advances to customers
measured at fair value through profit or loss (FVPL) disclosed within ‘Provisions charge’ under the
underlying basis. Additionally, it includes €3.8 million relating to the UK disclosed within
discontinued operations in the underlying basis.
‘Restructuring costs relating to NPE sale (Helix)’ of €18.4 million, ‘Provisions for litigation,
regulatory and other matters’ of €22.8 million and ‘Advisory and other restructuring costs-
excluding the NPE sale (Helix)’ of €32.2 million disclosed as expenses in the Consolidated
Financial Statements are shown separately under the underlying basis (from the total of €32.2
million around €1.3 million relates to restructuring costs on the disposal of the UK group
therefore is classified as discontinued operations in the underlying basis).
€3.6 million for UK regulatory matters included within expenses in the Consolidated Financial
Statements, are disclosed within discontinued operations in the underlying basis.
The loss of disposal of Helix of €149.8 million disclosed within 'Credit losses to cover credit risk
on loans and advances to customers' in the Consolidated Financial Statements is separately
disclosed under the underlying basis.
Impairments of other financial instruments relating to UK of €2.7 million is classified as a cost on
discontinued operations per the underlying basis.
The impairment of deferred tax asset of €79 million included within 'Income tax' in the
Consolidated Financial Statements is classified as a non-recurring item and disclosed within
‘Impairment of DTA’ under the underlying basis.
Balance Sheet Analysis
Capital Base
Shareholders’ equity totalled €2,121 million at 31 December 2018, compared to €2,586 million at 31
December 2017 mainly as a result of the initial application of IFRS 9. The Common Equity Tier 1 capital
(CET1) ratio (transitional basis) stood at 12.1% at 31 December 2018, compared to 12.7% at 31 December
2017. Adjusting for Deferred Tax Assets, the CET1 ratio on a fully-loaded basis (IFRS 9 transitional)
totalled 11.9% at 31 December 2018, compared to 12.2% at 31 December 2017.
The Group has elected to apply the EU transitional arrangements for regulatory capital purposes (EU
Regulation 2017/2395) where the impact on the impairment amount from the initial application of IFRS 9
on the capital ratios is phased-in gradually. The amount added each year decreases based on a weighting
factor until the impact of IFRS 9 is fully absorbed back to CET1 at the end of the five years. For the year
2018 the impact on the capital ratios is 5% of the impact on the impairment amounts from the initial
application of IFRS 9, increasing to 15% (cumulative) for the year 2019. The CET1 ratio on a fully-loaded
basis (including the full impact of IFRS 9) amounts to 10.1% at 31 December 2018 (and 13.5% pro forma
for Deferred Tax Credit (DTC) and Helix). On a transitional basis and on a fully phased-in basis after the
five year period of transition is complete, the impact of IFRS 9 is expected to be manageable and within the
Group’s capital plans.
9
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Annual Financial Report 2018
Financial results (continued)
Balance Sheet Analysis (continued)
Capital Base (continued)
As at 31 December 2018, the Total Capital ratio stood at 14.9%, compared to 14.2% at 31 December
2017.
The Group’s capital ratios are above the minimum CET1 regulatory capital ratio of 9.375%, comprising a
4.50% Pillar I requirement, a 3.00% Pillar II requirement and a phased-in CCB of 1.875% and the overall
Total Capital Ratio requirement of 12.875%, comprising a Pillar I requirement of 8.00% (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 3.00% (in the form of CET1), as well as a phased-in CCB of 1.875%.
In accordance with the provisions of the Macroprudential Oversight of Institutions Law of 2015, 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 O-SII buffer currently set by the CBC for the
Group is 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 Annual Supervisory Review and Evaluation Process (SREP) performed by the European Central
Bank (ECB) in 2018 and based on the final 2018 SREP decision received on 27 March 2019, the Group’s
minimum phased in CET1 capital ratio and Total Capital ratio remain unchanged, when ignoring the phasing
in of the Capital Conservations Buffer and the Other Systemically Important Institution Buffer. The Group’s
phased in CET1 capital ratio will be 10.5%, comprising a 4.5% Pillar I requirement, a 3.0% Pillar II
requirement, the Capital Conservation Buffer of 2.5% and the Other Systemically Important Institution
Buffer of 0.5%. The Group’s Total Capital requirement will be 14.0%, comprising an 8.0% Pillar I
requirement, a 3.0% Pillar II requirement, the Capital Conservation Buffer of 2.5% and the Other
Systemically Important Institution Buffer of 0.5%. The final 2018 SREP decision will apply from 1 April
2019. The Group CET1 ratio remains above these requirements.
The European Banking Authority (EBA) final guidelines on SREP and supervisory stress testing in July 2018
and the Single Supervisory Mechanism’s (SSM) 2018 SREP methodology provide that CET1 held for the
purposes of Pillar II add-ons cannot be used to meet any other capital requirements (Pillar 1, P2R or the
combined buffer requirements), and therefore cannot be used twice. Such restrictions are, however, only
expected to apply with effect from the 2019 SREP cycle. Pillar II add-ons derive from the Group’s individual
capital guidance, which is a point in time assessment made in the context of the SREP process and,
accordingly, they may vary over time.
Sale of Bank of Cyprus UK Limited (BOC UK)
In November 2018, the Company completed the sale of its wholly owned subsidiary bank in the UK, Bank of
Cyprus UK Limited (‘BOC UK’) and its subsidiary Bank of Cyprus Financial Services Limited (‘BOC FS’, and
together the ‘UK Group’), following receipt of the necessary regulatory approvals from the Prudential
Regulation Authority and the ECB. The transaction has had an overall positive impact on the Group capital
ratios of c.70 bps.
Additional Tier 1
In December 2018, the Company proceeded with the issuance of €220 million of Additional Tier 1 Capital
Securities (the ‘Capital Securities’), which had been priced in August 2018, after obtaining the consent of
the ECB for the reduction of capital and the approval of the Irish Court for the reclassification of the share
premium to distributable reserves, pursuant to section 85(1) of the Companies Act 2014 of Ireland. This
reclassification had been approved at the Company’s Annual General Meeting in August 2018. The reduction
of capital did not have any impact on regulatory capital or the total equity position of the Company, the
BOC PCL or the Group.
10
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Annual Financial Report 2018
Financial results (continued)
Balance Sheet Analysis (continued)
Additional Tier 1 (continued)
The distributable reserves created, provide the basis for the calculation of distributable items under the
Capital Requirements Regulation (EU) No. 575/2013 (CRR), which provides that coupons on AT1 capital
instruments may only be funded from distributable items. Distributable items for the purposes of the CRR
are determined, in part, by reference to distributable reserves.
The proceeds of the issue have been on-lent by the Company to BOC PCL. The on-loan constitutes
Additional Tier 1 capital for BOC PCL. The issuance has increased the Total Capital Ratio by c.140 bps to
14.9% as at 31 December 2018.
Subsequent to the issuance, the Capital Securities were admitted to the official list of the Luxembourg Stock
Exchange (LuxSE) and to trading on the Euro MTF market of the LuxSE.
Project Helix
In August 2018, the Company reached an agreement for the sale of a portfolio (the ‘Portfolio’) of loans with
a gross book value of €2.8 billion as at 30 June 2018 (of which €2.7 billion related to NPEs) secured by real
estate collateral (known as ‘Project Helix’, or the ‘Transaction’). The gross book value of €2.8 billion
included properties of €39 million as at 30 June 2018 that will also be transferred to the buyer. The Portfolio
will be transferred to a licensed Cypriot Credit Acquiring Company (the CyCAC) by BOC PCL. As at 31
December 2018, the Helix portfolio included loans with gross book value of €2.7 billion (of which €2.6 billion
related to NPEs) secured by real estate collateral, and properties of €74 million (compared to properties of
€60 million as at 30 September 2018).
At completion, BOC PCL will receive gross cash consideration of c.€1.4 billion. BOC PCL’s participation in the
senior debt in relation to such financing has been syndicated down to €50 million, from the initial level of
€450 million, significantly de-risking the BOC PCL's residual exposure to the portfolio sold.
In March 2019, BOC PCL received approval from the ECB for the Significant Risk Transfer (SRT) benefit from
the Transaction. This is an important step towards completion of the Transaction, which remains subject to
various outstanding conditions precedent. Completion is currently expected to occur in early second quarter
of 2019.
The impact from this Transaction on the CET1 ratio is a decrease of c.80 bps relating to the accounting loss
(including transaction costs) of c.€150 million for 2018, declining to c.€105 million as the time value of
money of c.€45 million unwinds to completion. On completion, the derecognition of the Helix portfolio is
expected to have a positive impact on the CET1 ratio of 160 bps, resulting from the release of risk weighted
assets.
All relevant figures and pro forma calculations are based on 31 December 2018 financial results, unless
otherwise stated. Calculations on a pro forma basis assume completion of the Transaction, currently
expected to occur in the early second quarter of 2019.
Legislative amendments for the conversion of deferred tax asset (DTA) to deferred tax credit
(DTC)
A conversion of DTA to DTC was adopted by Parliament on 1 March 2019. The law amendment covers the
losses transferred from Laiki Bank to BOC PCL in March 2013. The introduction of Capital Requirements
Directive IV (CRD IV) in January 2014 and its subsequent phasing-in led to a more capital intensive
treatment of this DTA for BOC PCL.
The law amendment, when it enters into force, will result in improved regulatory capital treatment, under
CRD IV, of the deferred tax asset amounting to €250 million or a CET1 uplift of 170 bps (transitional basis)
as at 31 December 2018.
11
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Financial results (continued)
Balance Sheet Analysis (continued)
Annual Financial Report 2018
Legislative amendments for the conversion of deferred tax asset (DTA) to deferred tax credit
(DTC) (continued)
The CET1 ratio (transitional basis) of 12.1% as at 31 December 2018 improves to 15.4% pro forma for DTC
and Helix. The Total Capital ratio of 14.9% as at 31 December 2018 improves to 18.3% pro forma for DTC
and Helix.
Funding
Funding from Central Banks
At 31 December 2018, BOC PCL funding from central banks amounted to €830 million, comprising solely of
funding through the Targeted Longer-Term Refinancing Operations (TLTRO II), compared to €930 million at
31 December 2017.
Deposits
Group customer deposits totalled €16,844 million at 31 December 2018, compared to €17,850 million at 31
December 2017. Group customer deposits decreased by 6% at 31 December 2018, reflecting the disposal
of the UK subsidiary.
Customer deposits in Cyprus increased by 5% to €16,844 million at 31 December 2018 (compared to
€15,983 million at 31 December 2017). Customer deposits accounted for 76% of total assets at 31
December 2018.
The Loan to Deposit ratio (L/D) stood at 72% at 31 December 2018 when ignoring the classification of the
Helix portfolio as a disposal group held for sale and 82% at 31 December 2017, compared to a high of
151% at 31 March 2014.
Subordinated Loan Stock
At 31 December 2018 BOC PCL’s subordinated loan stock (including accrued interest) amounted to €271
million (compared to €302 million as at 31 December 2017) and relates to unsecured subordinated Tier 2
Capital Notes of nominal value €250 million, issued by BOC PCL in January 2017.
Liquidity
At 31 December 2018 the Group Liquidity Coverage Ratio (LCR) stood at 231% compared to 190% at 31
December 2017 and was in compliance with the minimum regulatory requirement of 100%.
The Net Stable Funding Ratio (NSFR ratio) was not introduced on 1 January 2018, contrary to what was
expected. It will become a regulatory indicator when CRR2 is enforced with the limit set at 100%. At 31
December 2018, the Group’s NSFR, on the basis of Basel ΙΙΙ standards, stood at 119% compared to 111%
at 31 December 2017.
12
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
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Directors’ Report
Annual Financial Report 2018
Financial results (continued)
Balance Sheet Analysis (continued)
Liquidity (continued)
In accordance with the CRR, the local regulatory liquidity requirements set by the Central Bank of Cyprus
(CBC) were abolished on 1 January 2018. The CBC introduced a macro-prudential measure in the form of a
liquidity add-on imposed on top of the LCR requirement of BOC PCL, which became effective on 1 January
2018 until 31 December 2018. The objective of the measure was to ensure that there was going to be a
gradual release of the excess liquidity in the Cyprus market arising from the lower liquidity requirements
under the LCR compared to the ones under the local regulatory liquidity requirements previously in place.
The add-on applied stricter outflow and inflow rates on some of the parameters used in the calculation of
the LCR, as well as additional liquidity requirements in the form of outflow rates on items that are not
subject to outflow rates under the LCR. The measure was implemented in two stages, the first stage was
applicable from 1 January 2018 until 30 June 2018 and the second stage from 1 July 2018 until 31
December 2018, with a reduction of 50% of the add-on rates from 1 July 2018. The LCR add-on was fully
abolished on 1 January 2019. As at 31 December 2018, the Company was in compliance with the LCR
including the add-on, which stood at 171%.
Loans and loan portfolio quality
BOC PCL is the single largest credit provider in Cyprus with a market share of 45.4% at 31 December 2018
(2017: 39.2%).
Group gross loans totalled €15,900 million at 31 December 2018, compared to €18,755 million at 31
December 2017. Gross loans in Cyprus totalled €15,702 million at 31 December 2018 and accounted for
99% of Group gross loans.
The remaining UK operations as at 31 December 2018 included gross loans in the UK amounting to €11
million, compared to €1,621 million at 31 December 2017. The exposures remaining post the sale of BOC
UK are expected to be run down over time and have been categorised as non-core overseas exposures.
New loan originations for the Group reached €2,231 million for 2018, at the same levels as new lending in
2017. New loans granted in Cyprus reached €1,870 million, exceeding new lending in Cyprus for 2017.
At 31 December 2018, the Group net loans and advances to customers totalled €10,922 million (compared
to €14,602 million at 31 December 2017).
In addition, at 31 December 2018, net loans and advances to customers of €1,148 million were classified as
a disposal group held for sale in line with IFRS 5 and relate to Helix (none at 31 December 2017).
Moreover, at 31 December 2018, net loans and advances to customers of €6 million were classified as a
disposal group held for sale in line with IFRS 5 and relate to Project Velocity.
Tackling the Group’s loan portfolio quality remains the top priority for the Group. The Group continues to
make steady progress across all asset quality metrics and the loan restructuring activity continues. The
Group has been successful in engineering restructuring solutions across the spectrum of its loan portfolio.
NPEs were reduced to €7,419 million at 31 December 2018, accounting for 47% of gross loans (ignoring the
classification of the Helix and Velocity portfolio as a disposal group held for sale), compared to 47% at 31
December 2017, on the same basis with respect to Helix and Velocity, but before the disposal of the UK
subsidiary. This included an amount of €99 million which relates to a reclassification between gross loans
and advances to customers and accumulated provisions on loans and advances to customers classified as a
disposal group held for sale.
The provisioning coverage ratio of NPEs stood at 52% at 31 December 2018 compared to 48% at 31
December 2017, on the same basis with respect to Helix and Velocity, but before the disposal of the UK
subsidiary.
13
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Financial results (continued)
Balance Sheet Analysis (continued)
Loans and loan portfolio quality (continued)
Annual Financial Report 2018
When taking into account tangible collateral at fair value, NPEs are fully covered.
NPEs as per EBA definition
Of which:
- NPEs with forbearance measures, no arrears
Project Helix
31 December 2018
31 December 2017
€ million
% of gross
loans
€ million
% of gross
loans
7,419
%46.7
1,211
%7.6
8,804
1,619
%46.9
%8.6
During 2018, the Group accelerated balance sheet de-risking through reaching an agreement in August
2018 for the sale of a portfolio of loans (the ‘Portfolio’) with a gross book value of €2.8 billion (of which €2.7
billion relate to non-performing loans as at 30 June 2018), secured by real estate collateral (‘NPLs’) (known
as ‘Project Helix’, or the ‘Transaction’).
The Transaction is the first NPL disposal by BOC PCL and represents a significant milestone in the delivery of
BOC PCL’s strategy of improving asset quality through the reduction of NPEs.
Project Helix reduces the NPE ratio by c.11 p.p. to 36% as at 31 December 2018. Ignoring the classification
of the Helix and Velocity portfolios as disposal group held for sale, the NPE ratio is 47%, including the
impact from the UK sale (+5 p.p.).
In March 2019, BOC PCL received approval from the ECB for the Significant Risk Transfer (SRT) benefit from
the Transaction. This is an important step towards completion of the Transaction, which remains subject to
various outstanding conditions precedent. Completion is currently expected to occur in early in the second
quarter 2019.
All relevant figures and pro forma calculations are based on 31 December 2018 financial results, unless
otherwise stated.
ESTIA
In July 2018, the Government announced a scheme aimed at addressing NPEs backed by primary residence,
known as ESTIA. This Scheme is expected to positively impact c.€0.9 billion of retail core NPEs, subject to
eligibility criteria and participation rate. This Estia eligible portfolio refers to the potentially eligible portfolio
based on BOC PCL’s available data. Eligibility criteria relate primarily to the Open Market Value (OMV) of the
residence, total income and net wealth of the household. These will act as a clear definition of socially
protected borrowers, acting as an enabler against strategic defaulters. In accordance with the Scheme, the
eligible loans are to be restructured to the lower of contractual and OMV, and the Government to subsidise
one third of the instalment. The terms of the Scheme are subject to finalisation and the Scheme is expected
to be launched in the second quarter 2019.
Project Velocity
In December 2018, the BOC PCL entered into an agreement with APS Delta s.r.o, to sell a non-performing
loan portfolio of primarily retail unsecured exposures, with a contractual balance of €245 million and a gross
book value of €34 million as at 30 September 2018 (known as Project Velocity or the Sale). The gross book
value of this portfolio as at 31 December 2018 was €33 million.
The Sale is expected to be neutral to both the profit and loss account and to capital. The Sale is subject to
the necessary approvals and is expected to be completed within the second quarter of 2019.
14
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
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Directors’ Report
Annual Financial Report 2018
Financial results (continued)
Balance Sheet Analysis (continued)
Real Estate Management Unit (REMU)
The Real Estate Management Unit (REMU) on-boarded €428 million of assets in 2018, via the execution of
debt for asset swaps and repossessed properties. The focus for REMU is increasingly shifting from on-
boarding of assets resulting from debt for asset swaps towards the disposal of these assets. The Group
completed disposals of €196 million in 2018, resulting in a profit on disposal of €33 million for the year.
Following the incorporation of Cyreit Variable Capital Investment Company PLC, properties of carrying value
€166 million were reclassified from the stock of properties to investment properties. In November 2018,
BOC PCL signed an agreement for the disposal of its entire holding in the investment shares of the Cyreit
Fund, resulting in a valuation loss of €14 million recorded in 2018, relating to both properties and other
receivables. The completion of the disposal is subject to regulatory approvals and expected in early second
quarter of 2019.
As at 31 December 2018, assets held by REMU had a carrying value of €1.5 billion, in addition to assets
reclassified to investment properties of €166 million, which were subsequently classified as a disposal group
held for sale. As at 31 December 2018, properties with carrying value of €74 million were included in the
portfolio for the NPE sale (Helix).
Overseas exposure
Further to the disposal of the UK subsidiary, residual exposures of €11 million remain in the UK at 31
December 2018. These exposures are expected to be run down over time and are now categorised as non-
core overseas exposures.
At 31 December 2018 there were overseas exposures of €144 million in Greece (compared to €168 million
as at 31 December 2017), not identified as non-core exposures, since they are considered by management
as exposures arising in the normal course of business.
In accordance with the Group’s strategy to exit from overseas non-core operations, the operations of the
branch in Romania were terminated in January 2019, following the completion of deregistration formalities
with respective authorities.
Income Statement Analysis
Net interest income (NII) and net interest margin (NIM) for 2018 amounted to €452 million and 2.48%
respectively, when ignoring the classification of the Helix portfolio as a disposal group held for sale. NII was
down by 17% compared to €544 million for 2017.
The NII presented under the Underlying Basis includes unrecognised interest on previously credit impaired
loans which have cured during 2018, amounting to €33 million. For statutory reporting purposes, for the
year ended 31 December 2018, this amount is presented within “Credit losses to cover credit risk on loans
and advances to customers” in line with an IFRIC discussion, which has taken place in November 2018
(Presentation of unrecognised interest following the curing of a credit-impaired financial asset (IFRS 9)).
Accordingly, the ratios calculated based on the Underlying Basis, are disclosed without taking into account
this reclassification.
Average interest earning assets for 2018 amounted to €18,190 million, ignoring the classification of the
Helix portfolio as a disposal group held for sale, up by 4% a year earlier.
Non-interest income for 2018 amounted to €330 million, up 4% compared to 2017, mainly comprising net
fee and commission income of €166 million, net foreign exchange gains and net gains on financial
instrument transactions and disposal/dissolution of subsidiaries and associates of €67 million, net insurance
income of €53 million, net gains from revaluation and disposal of investment properties and on disposal of
stock of properties of €18 million and other income of €26 million.
15
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
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Directors’ Report
Financial results (continued)
Income Statement Analysis (continued)
Annual Financial Report 2018
Net fee and commission income for 2018 amounted to €166 million, compared to €174 million for 2017, on
the same basis, down by 4% a year earlier, mainly due to the implementation of IFRS 9 under which certain
commission income types are not recognised on Stage 3 loans.
Net foreign exchange gains and net gains on financial instrument transactions and disposal/dissolution of
subsidiaries and associates of €67 million for 2018, increased by 40% a year earlier, mainly due to the
gains on disposal of bonds of €19 million.
Net gains from revaluation and disposal of investment properties and on disposal of stock of properties for
2018 amounted to €18 million, which included a net profit from the disposal of stock of properties of €33
million (REMU gains) and a valuation loss of the Cyreit assets of €14 million.
Total income for 2018 amounted to €782 million, compared to €861 million for 2017, down by 9%
compared to 2017, with the reduction reflecting the yoy reduction in NII.
Total operating expenses for 2018 were €375 million compared to €359 million for 2017.
Staff costs of €217 million for 2018 increased by 6% (compared to €205 million in 2017), mainly due to the
effect of the renewal of the 2017 annual collective agreement with the employees’ union.
Other operating expenses for 2018 were €158 million.
Operating profit for 2018 was €382 million, compared to €479 million for 2017, down by 20% a year
earlier, mainly due to the lower volume on loans and pressure on lending rates.
The provision charge for 2018 totalled €168 million, compared to €780 million for 2017.
Expected credit losses (cost of risk) for 2018, other than the classification of the Helix portfolio as a disposal
group held for sale, accounted for 1.0% of gross loans, compared to 4.3% for 2017.
Impairments of other financial and non-financial assets for 2018 totalled €20 million, compared to €65
million for 2017.
The tax credit for 2018 totalled €3 million, compared to a tax charge of €14 million for 2017.
Profit after tax and before non-recurring items for 2018 was €182 million, compared to a loss of €461
million for 2017.
Advisory and other restructuring costs-excluding discontinued operations and NPE sale (Helix) for 2018
amounted to €42 million compared to €29 million for 2017.
Profit after tax arising from the organic operations of the Group for 2018 amounted to €140 million,
compared to a loss of €490 million in 2017.
Profit from discontinued operations for 2018 amounted to €3 million and relate to the sale of UK subsidiary
during the year.
Restructuring costs relating to NPE sale (Helix) for 2018 amounted to €18 million.
Loss relating to NPE sale (Helix) including transactions costs for 2018 amounted to €150 million.
The impairment of DTA for 2018 was €79 million (compared to €62 million for 2017), resulting from the on-
going review of the recoverability of the deferred tax asset.
16
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
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Directors’ Report
Financial results (continued)
Income Statement Analysis (continued)
Annual Financial Report 2018
Loss after tax attributable to the owners of the Company for 2018 was €104 million, compared to €552
million for 2017. This does not take into account the post balance sheet event allowing the conversion of
DTA into DTC.
Business Overview
As the Cypriot operations account for 99% of gross loans and 100% of customer deposits, after the disposal
of the UK subsidiary, 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. Most recently, in March 2019
Fitch Ratings affirmed their long-term issuer default rating of B- (positive outlook). In January 2019,
Moody’s Investors Service upgraded the Company’s long-term deposit rating to B3 from Caa1, with a
positive outlook. The positive outlook reflects expectations of further improvements in the banks’ financial
fundamentals, mainly asset quality over the next 12-18 months, in the context of an improved operating
environment in Cyprus. At the end of August 2018, Standard and Poor’s upgraded their long-term issuer
credit rating on the Company to ‘B+’ from ‘B’ and changed the outlook to stable from positive. The key
drivers for the ratings were the improvement in the Company’s financial fundamentals, mainly in asset
quality, and its funding position.
Tackling the Company’s loan portfolio quality is of utmost importance for the Group. The Group has been
successful in Company engineering restructuring solutions across the spectrum of its loan portfolio, and
expects the reduction of residual NPEs (post the NPE sale (Helix)) to continue at a revised pace of c.€200
million per quarter, as portfolio size and business line mix is expected to change radically post execution of
Helix. In parallel, the Group continues to actively explore a number of alternatives to accelerate the de-
risking of its balance sheet, including further disposals of NPEs and other non-core assets.
Project Helix
In August 2018, the Company reached an agreement for the sale of a Portfolio of loans (the Portfolio) with a
gross book value of €2.8 billion as at 30 June 2018 (of which €2.7 bn relate to non-performing loans)
secured by real estate collateral. The Portfolio will be transferred to a licensed Cypriot Credit Acquiring
Company (the 'CyCAC') by BOC PCL. The shares of the CyCAC will then be acquired by certain funds
affiliated with Apollo Global Management LLC (NYSE:APO) (together with its consolidated subsidiaries
'Apollo'), the purchaser of the Portfolio. Funds managed by Apollo will provide equity capital in relation to
the financing of the purchase of the Portfolio. The purchaser was selected following a competitive sale
process. Following a transitional period where servicing is retained by BOC PCL, it is intended that the
servicing of the Portfolio will be carried out by a long-term servicer. Arrangements in relation to the
migration of servicing from BOC PCL to the long-term servicer, including the timing of the migration, remain
under discussion between the parties.
In March 2019, BOC PCL received approval from the ECB for the Significant Risk Transfer (SRT) benefit from
the Transaction. This is an important step towards completion of the Transaction, which remains subject to
various outstanding conditions precedent. Completion is currently expected to occur in early in the second
quarter 2019.
Project Velocity
In December 2018, BOC PCL entered into an agreement with APS Delta s.r.o, to sell a non-performing loan
portfolio of primarily retail unsecured exposures, with a contractual balance of €245 million and gross book
value of €34 million as at 30 September 2018 (known as “Project Velocity” or the “Sale”). This portfolio
comprises of 9,700 heavily delinquent borrowers, including 8,800 private individuals and 900 small-to-
medium-sized enterprises. The gross book value of this portfolio as at 31 December 2018 was €33 million.
APS Delta s.r.o is a wholly owned subsidiary of APS Capital Group s.r.o., a company registered in Czech
Republic which specialises in the investment, management and recovery of loan portfolios across Central
and South-Eastern Europe.
17
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Annual Financial Report 2018
Business Overview (continued)
Project Velocity (continued)
The Sale is part of the strategy of BOC PCL to reduce its stock of non-performing loans and has been
conducted at arm’s length. Furthermore, the Sale is consistent with ECB guidelines regarding the
management of non-performing loans.
The Sale is expected to be neutral to both the profit and loss account and to capital. The Sale is subject to
the necessary approvals and is expected to be completed within the second quarter of 2019.
ESTIA
In July 2018, the Government announced ESTIA, a scheme aimed at addressing NPEs backed by primary
residence. This Scheme is expected to positively impact c.€0.9 billion of retail core NPEs, subject to
eligibility criteria and participation rate. This Estia-eligible portfolio refers to the potentially eligible portfolio
based on available data from BOC PCL. Eligibility criteria relate primarily to the open market value (OMV) of
the residence, total income and net wealth of the household. These will act as a clear definition of socially
protected borrowers, acting as an enabler against strategic defaulters. In accordance with the Scheme, the
eligible loans are to be restructured to the lower of contractual and open market value, and the Government
to subsidise one third of the instalment. The terms of the Scheme are subject to finalisation and the
Scheme is expected to be launched in the second quarter of 2019.
Sale of Bank of Cyprus UK Limited (BOC UK)
In November 2018, BOC PCL completed the sale of its wholly owned subsidiary bank in the UK, Bank of
Cyprus UK Limited (‘BOC UK’) and its subsidiary Bank of Cyprus Financial Services Ltd (‘BOC FS’, and
together the ‘UK Group’), to Cynergy Capital Limited (‘Cynergy’), following receipt of the necessary
regulatory approvals from the Prudential Regulation Authority (PRA) and the ECB.
The sale consideration amounted to £107 million (c.€120 million) comprising of £103 million base
consideration plus a purchase price adjustment of £4 million. Half of the base consideration together with
the purchase price adjustment was received upon completion and the remaining half is deferred over 24
months, without any performance conditions attached.
The Group lost control over the UK Group and as a result, it did not consolidate it on and as from 30
September 2018. The sale of the UK Group was completed on 23 November 2018. Comparatives have been
represented for the results of the UK Group, from continuing operations to discontinued operations. The
representation did not have an impact on the financial performance of the Group.
The sale has an overall positive impact on the Group capital ratios of c.70 bps and the transaction did not
materially impact the profit and loss account, including the recycling to the Income Statement of a foreign
currency gain of €18 million previously recorded in the foreign currency translation reserve.
The decision to sell the UK Group was in line with the Group’s strategy of delivering value for shareholders
and focusing principally on supporting the growing Cypriot economy. In addition, the Group and BOC UK
signed an agreement for cooperation in a number of key areas going forward, including continuity of
servicing for existing customers. Following completion, BOC UK has been rebranded to ‘Cynergy Bank’, a
name chosen to reflect the bank’s Cypriot heritage, combined with a modern and energetic focus.
Other
The strategic focus of the Group is to reshape its business model to grow in the core Cypriot market through
prudent new lending. The Group expects to continue to be able to support the recovery of the Cyprus
economy through the provision of new lending. Growth in new lending in Cyprus is focused on selected
industries that are more in line with the Company's target risk profile, such as tourism, trade, professional
services, information/communication technologies, energy, education and green projects.
18
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Annual Financial Report 2018
Business Overview (continued)
Other (continued)
Aiming at supporting investments by SMEs and mid-caps to boost the Cypriot economy, and create new
jobs for young people, BOC PCL continues to provide joint financed schemes. To this end, BOC PCL
continues its partnership with the European Investment Bank (EIB), the European Investment Fund (EIF),
the European Bank for Reconstruction and Development (EBRD) and the Cyprus Government.
Management is also placing emphasis on diversifying income streams by optimising fee income from
international transaction services, wealth management and insurance. The Group’s insurance companies,
EuroLife Ltd and General Insurance of Cyprus Ltd operating in the sectors of life and general insurance
respectively, are leading players 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 2018 amounted to €53 million, compared to €50 million for 2017 contributing 16% of non-
interest income.
In order to further optimise its funding structure, BOC PCL continues to focus on the shape and cost of
deposit franchise, taking advantage of the increased customer confidence towards BOC PCL, as well as
improving macroeconomic conditions.
Post further NPE reduction, the Group will focus on the need to manage costs.
BOC PCL continues its Digital Transformation Programme in collaboration with IBM. BOC PCL's Strategic
Digital Transformation Partner, which focuses on three strategic pillars: developing digital services and
products that enhance customer experience, streamlining internal processes and introducing new ways of
working to improve the workplace environment. BOC PCL has spent the last year establishing the
foundations to support the delivery of change. Various new products and features were introduced such as
the launch of the new mobile app, the introduction of the 1Bank B2B (business to business) APIs
(Application Programming Interface) which are interfaces that enable businesses to enjoy access to 1Bank
functionality directly through their own systems without the need to access the 1Bank website. Moreover,
BOC PCL is leading the way in Cyprus in establishing an open banking ecosystem, by being the first bank in
Cyprus to launch its PSD2 APIs (Payment Service Directive 2, Application Programming Interface) and also
by integrating with eight UK banks allowing customers to view their account balances and transactions from
the integrated banks together with their Bank of Cyprus accounts through 1Bank. Furthermore, several
initiatives are in progress, including enhancing digital channels to improve customer experience, automating
internal end to end processes using a BPM (Business Process Management) platform and introducing
collaboration and knowledge sharing tools across the organisation.
Strategy and Outlook
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
Achieve a lean operating model
Deliver value to shareholders and other stakeholders
19
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
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Directors’ Report
Strategy and Outlook (continued)
Annual Financial Report 2018
KEY PILLARS
PLAN OF ACTION
1. Materially reduce the level of delinquent loans
2. Further improve the funding structure
3. Maintain an appropriate capital position
4. Focus on core Cyprus markets
5. Achieve a lean operating model
6. Deliver returns
Going concern
Sustain momentum in restructuring and
continue reduction of NPEs
Focus on terminated portfolios (in Recovery
Unit) – accelerated consensual foreclosures
Real estate management via REMU
Continue to explore alternative accelerating
NPE reduction measures such as NPE sales,
securitisations etc.
Focus on shape and cost of deposit franchise
Internally generate capital
Targeted lending in Cyprus into promising
sectors to fund recovery
New
lending yields
Revenue diversification via fee income from
international business, wealth, and insurance
Implementation of digital transformation
program underway, aimed at enhancing
productivity
and
reducing operating costs over time
Post further NPE reduction, BOC PCL will
focus on the need to manage costs
Deliver appropriate medium
adjusted returns
loan origination, while maintaining
distribution
term risk-
channels
The Directors have made an assessment of the Group’s ability to continue as a going concern for a period of
12 months from the date of approval of these financial statements. The Directors believe that the Group is
taking all necessary measures to maintain its viability and the development of its business in the current
economic environment.
In making this assessment, the Directors considered the significant transactions during 2018 which have
had a positive impact on the capital position of the Group, including the disposal of Bank of Cyprus UK Ltd,
the agreement for the sale of non-performing loans and the issuance of €220 million Additional Tier 1
Capital Securities. The Directors have also considered the legislative amendments on the Income Tax Law
Amendment 28 (I) of 2019, enacted on 1 March 2019, which allow for the conversion of specific deferred
tax assets (DTA) into deferred tax credits (DTC), the Group’s Financial and Capital Plan and the
developments in the operating environment in Cyprus (Note 4 of the Consolidated Financial Statements).
The Group has developed a Financial and Capital Plan (the ‘Plan’), which has been approved by the Board in
February 2019. One of the most important objectives of the Plan was to ensure that the Group has sufficient
resources and capital in order to continue the balance sheet de-risking and further deal with the residual
NPEs. The IFRS 9 impact on a fully phased-in basis has been considered within the Group’s Plan. Despite the
implementation risk associated with the outcome of future events outlined in the Plan at the reporting date,
the Directors believe that there is sufficient capital throughout the period of assessment to meet regulatory
capital requirements. The Group will continue its de-risking strategy and remains focused to implement the
actions contemplated in the Plan.
The Directors, in making their assessment, have given particular attention to the regulatory requirements
relating to capital and liquidity as follows:
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BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
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Directors’ Report
Annual Financial Report 2018
Going concern (continued)
Non-Performing Exposures
The continued organic reduction (now achieved for fifteen consecutive quarters) of the Group’s
NPEs which have decreased from €8,804 million in December 2017 to €7,518 million at 31
December 2018 and are further reduced to €4,768 million pro forma for Project Helix (Note 4.2.2
of the Consolidated Financial Statements); and
The reduction of NPEs has been a regulatory focus for a number of years and will continue to be
so. The Group is currently preparing an updated NPE strategy plan for the years 2019-2021
which will be submitted to the ECB by end of June 2019. The Directors believe that the reduction
of NPEs is a significant factor with regard to the future viability of the Group as a pillar bank in
Cyprus.
Capital
The Common Equity Tier 1 (CET1) ratio and the total capital ratio on a transitional basis stood at 12.1% and
14.9% respectively at 31 December 2018, higher than the minimum required ratios (Note 4.2.1 of the
Consolidated Financial Statements).
Following the Annual Supervisory Review and Evaluation Process (SREP) performed by the ECB in 2018 and
based on the final 2018 SREP decision received on 27 March 2019, the Group’s minimum phased in CET1
ratio and Total Capital ratio remain unchanged, when ignoring the phasing in of the Capital Conservations
Buffer and the Other Systemically Important Institution Buffer. The final 2018 SREP decision will apply from
1 April 2019.
The projected capital ratios of the Group indicate that there will be sufficient capital throughout the period
of assessment when considered in conjunction with the following items:
The phase-in of IFRS 9. The Group has elected to apply the EU transitional arrangements for
regulatory capital purposes (EU Regulation 2017/2395) where the total impact on adoption of
IFRS 9 of €308,511 thousand, on 1 January 2018 and any subsequent increase allowed by the
regulation for phasing-in (i.e. increase in Stage 1 and Stage 2 allowance), will impact the capital
ratios over a period of five years. The impact on the regulatory capital is being phased-in based
on a weighting factor until is fully absorbed at the end of the five years. The initial impact of IFRS
9 was phased in by 5% on 1 January 2018 regulatory capital and increases to 15% (cumulative)
on 1 January 2019;
The enactment of the Income Tax Amendment Law 28 (1) of 2019 by the Cypriot parliament in
March 2019, allowing for the conversion of the Group’s deferred tax assets into deferred tax
credits. This result in a more capital efficient tax asset. The law will result in improved regulatory
capital treatment under CRR and will increase CET1 by c. 170 bps on a transitional basis as at 31
December 2018. This improvement includes the impact from a reversal of impairment of the
related deferred tax asset of approximately €108 million recognised during 2017 and 2018, which
will be reversed in 2019 Income Statement of the Group; and
The regulatory capital position of the Group will strengthen further, upon completion of the sale
of loans and advances to customers (the ‘Helix Portfolio’ or the ‘Transaction’), largely NPEs,
classified as held for sale (Note 30 of the Consolidated Financial Statements). A significant step
towards completion of the Transaction was the ECB approval of the Significant Risk Transfer (the
‘SRT’) for regulatory capital purposes. BOC PCL has received the SRT approval in March 2019.
The completion of the Transaction remains subject to various other conditions precedent. On
completion, the derecognition of the Helix portfolio will have a positive impact on the Group's
CET1 ratio, of 160 basis points, resulting from the release of risk weighted assets. Completion is
currently expected to occur in early second quarter of 2019.
Funding and liquidity
The Group has made a significant improvement in its liquidity position and ratios; and
The Group is in compliance with the Liquidity Coverage Ratio (LCR) and is significantly above the
minimum requirements (Notes 4.2.3 and 48 of the Consolidated Financial Statements).
Based on the projections of management of the Group, it is expected that the Group will maintain
compliance with these liquidity requirements for the period of the going concern assessment.
21
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Viability statement
Annual Financial Report 2018
In accordance with the requirements of the UK Corporate Governance Code 2016 (UK Code), the Directors
have assessed the viability of the Group, taking account of the Group’s current position and the potential
impact of the main risks that the Group is facing.
The Directors have selected a three-year period for this assessment in arriving at the viability statement,
which is also within the usual planning process of the Group.
The Directors have assessed the prospects of the Group through a number of sources, including the latest
three year plan of the Group, the NPE strategy, the Internal Capital Adequacy Assessment Process (ICAAP)
and the Internal Liquidity Assessment Process (ILAAP) reports.
The Group prepared a detailed NPE Strategy Plan for the 3 year period 2018-2020 as requested by the
Single Supervisory Mechanism (SSM). The plan was approved by the Board of Directors of the Company and
submitted to the SSM in March 2018. The Group is currently preparing an updated strategy for the years
2019-2021 to be submitted to the ECB by the end of June 2019.
The ICAAP is an annual process that demonstrates whether the Group has all the necessary procedures in
place in adequately identifying, measuring and monitoring the Group’s risks and ensures that the Group
holds adequate capital to support its risk profile, under both a base case and a stress case. The Group also
undertakes a quarterly review of its ICAAP results considering the latest actual and forecasted information.
During the quarterly review, the Group’s risk profile and risk management policies and processes are
reviewed and any changes since the annual ICAAP exercise are taken into consideration.
The ICAAP process demonstrates that the Group has sufficient capital, under both the base and stress case
scenarios, to support its business and achieve its objectives having regard to its Board approved Risk
Appetite and Strategy, and to meet its regulatory capital, leverage and liquidity requirements.
The Group’s ILAAP analysis demonstrates that the volume and capacity of liquidity resources available to
the Group are adequate to support its business model, to achieve its strategic objectives under both the
business as usual and severe stress scenarios and to meet regulatory requirements including the LCR and
NSFR.
The Group prepares the ICAAP and ILAAP reports annually. Both reports for year 2017 were approved by
the Board of Directors and submitted to the SSM in April 2018. The current year ICAAP and ILAAP reports
are in progress and are expected to be finalised and submitted to the SSM by the end of April 2019. The
base case of the ICAAP report is the latest Plan of the Group approved by the Board in February 2019,
updated if necessary, for any developments.
The Directors confirm that based on their assessment of the principal risks to which the Group is exposed,
the most significant of which are credit risk, liquidity risk, litigation risk, market risk (arising from adverse
movements in exchange rates, interest rates and security prices) and risk on changes in the fair value of
property, those risks are monitored, managed and mitigated through various control mechanisms and
processes set out in the Principal risks and uncertainties-Risk management and mitigation section below.
Based on this assessment of the principal risks and the assessment of the Group’s current position and
prospects, the Directors have a reasonable expectation that the Group will be able to continue in operation
and meet its liabilities as they fall due over the period to 31 December 2021.
Capital base
Equity totalled €2,121 million at 31 December 2018. The CET1 ratio (transitional) totalled 12.1% at 31
December 2018 (2017: 12.7%). Adjusting for DTA, the CET1 ratio on a fully-loaded basis (IFRS 9
transitional) totalled 11.9% at 31 December 2018 (2017: 12.2%). The Total Capital ratio (transitional) at
31 December 2018, stood at 14.9% (2017: 14.2%).
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, which is available
on the Group’s website www.bankofcyprus.com (Investor Relations).
22
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Share capital
Annual Financial Report 2018
As at 31 December 2018, there were 446,199,933 issued ordinary shares with a nominal value of €0.10
each. Information about the changes on the authorised and issued share capital during 2018 and 2017 is
disclosed in Note 36 of the Consolidated Financial Statements.
Share-based payments - share options
Following the incorporation of the Company and its introduction as the new holding company of the Group in
January 2017, the Long Term Incentive Plan (as approved on 24 November 2015 by the Annual General
Meeting of BOC PCL) was replaced by the Share Option Plan which operates at the level of the Company.
The Share Option Plan is identical to the Long Term Incentive Plan except that the number of shares in the
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 term of the options was also extended to between 4-10 years after the grant date.
No share options were granted since the date of replacement of the Long Term Incentive Plan by the Share
Option Plan at the level of the Company. Any shares related to the Share Option Plan carry rights with
regards to control of the Company that are only exercisable directly by the employee.
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.
The life insurance subsidiary of the Group, as at 31 December 2018, held a total of 142 thousand ordinary
shares of the Company of a nominal value of €0.10 each (2017: 142 thousand ordinary shares of a nominal
value of €0.10 each), as part of its financial assets which are invested for the benefit of insurance
policyholders (Note 25 of the Consolidated Financial Statements). The cost of acquisition of these shares
was €21,463 thousand (2017: €21,463 thousand).
For additional disclosures refer to Note 36 of the Consolidated Financial Statements, which is incorporated
by reference in this Directors' Report.
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. These agreements 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.
Other information
During 2018 and 2017 there were no restrictions on the transfer of the Company’s ordinary shares or
securities and no restrictions on voting rights other than the provisions of the Banking Law of Cyprus which
requires the CBC approval prior to acquiring shares of the Company in excess of certain thresholds and the
requirements of the Market Abuse Regulation, 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.
There are no agreements between shareholders, known to the Company, which may result in restrictions on
the transfer of securities or voting rights.
23
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Rights and obligations of ordinary shares
Annual Financial Report 2018
In accordance with the Company’s Constitution, the rights and restrictions attaching to the ordinary shares
are as follows:
subject to the right of the Company to set the record dates for the purposes of determining the
identity of members entitled to notice of and/or to vote at a general meeting, the right to attend
and speak at any general meeting of the Company and to exercise one vote per ordinary share at
any general meeting of the Company;
the right to participate pro rata in all dividends declared by the Company; and
the right, in the event of the Company’s winding up, to participate pro rata in the total assets of
the Company.
Shareholders holding more than 3% of the share capital of the Company
As at 31 December 2018 and 15 March 2019 the following shareholders held more than 3% of the share
capital of the Company:
31 December 2018
15 March 2019
Number of ordinary
or Depositary
Interests
representing
Company ordinary
shares
% held
Number of ordinary
or Depositary
Interests
representing
Company ordinary
shares
% held
41,383,699
%9.27
41,383,699
%9.27
22,401,744
21,467,719
17,893,015
17,064,261
16,383,514
13,527,898
%5.02
%4.81
%4.01
%3.82
%3.67
%3.03
22,401,744
21,467,719
17,889,706
16,383,514
15,583,680
13,527,898
%5.02
%4.81
%4.01
%3.67
%3.49
%3.03
Lamesa Holdings S.A.
European Bank for Reconstruction and
Development
Cyprus Popular Bank Public Co Ltd
TD Asset Management
Eaton Vance
Senvest Management LLC
Osome Investments Ltd
Dividends
Based on the SREP decisions of prior years, the Company and BOC PCL were under a regulatory prohibition
for equity dividend distribution and therefore no dividends were declared or paid during years 2018 and
2017.
Following the 2018 SREP decision, the Company and BOC PCL are still under equity dividend distribution
prohibition. This prohibition does not apply if the distributions are made via the issuance of new ordinary
shares to the shareholders which are eligible as Common Equity Tier 1 capital.
No prohibition applies to the payment of coupons on any AT1 capital instruments issued by the Company
and BOC PCL.
Events after the reporting date
Legislative amendments for conversion of deferred tax assets (DTA) to deferred tax credits
(DTC)
On 1 March 2019 the Cyprus Parliament adopted legislative amendments on Income Tax Law ('the Law')
published on the Official Gazette of the Republic on 15 March 2019 ('the amendments').
24
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Events after the reporting date (continued)
Annual Financial Report 2018
Legislative amendments for the conversion of deferred tax asset (DTA) to deferred tax credit
(DTC) (continued)
The amendments allow for the conversion of specific deferred tax assets (DTA) into deferred tax credits
(DTC). To the extent that the DTC are not utilised they are converted into a receivable amount by the credit
institution that falls within the scope of these amendments. The law amendments cover the income tax
losses transferred from Laiki Bank to BOC PCL in March 2013 within the framework of ‘The Resolution of
Credit and Other Institutions Law’ of 2013.
Under the Law BOC PCL may, potentially and gradually, convert up to an amount of €3.3 billion tax losses
to DTC (which led to the creation of DTA amounting to €417 million), with the conversion being based on
the tax rate applicable at the time of conversion. The tax losses in excess of the €3.3 billion transferred
from Laiki Bank to BOC PCL in March 2013 cannot be utilised by the BOC PCL except in cases where there
are transfers arising due to reorganisations made prior to 1 October 2019 (subject to the prior approval of
the Minister of Finance). BOC PCL paid a consideration for the DTA as part of the consideration paid for the
acquisition of certain assets and liabilities of Laiki Bank in 2013.
The law amendment will result in improved regulatory capital treatment of the DTA, under CRR and will
increase CET1 by c. 170 bps on a transitional basis, as at 31 December 2018. This improvement includes
the impact from the reversal of impairment of the related DTA of €108 million recognised in previous year,
which will be reversed in 2019 Income statement.
Resignation of the Group's CEO
On 3 March 2019 the Group's CEO Mr John Patrick Hourican informed the Board of his decision to leave the
Group in September 2019.
Principal risks and uncertainties - Risk management and mitigation
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, manages and mitigates these risks through
various control mechanisms. Detailed information relating to Group risk management is set out in Notes 46
to 49 of the Consolidated Financial Statements and in the Additional Risk and Capital Management
Disclosures which form part of the 2018 Annual Financial Report.
The Group is also exposed to litigation risk, arising from claims, investigations, regulatory and other
matters. Further information is disclosed in Note 40 of the Consolidated Financial Statements.
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 predominately acquired
in exchange of debt and is intended to be disposed of in line with the Group’s strategy. Further information
is disclosed in Notes 23, 26 and 28 of the Consolidated Financial Statements.
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.
Details of the financial instruments and hedging activities of the Group are set out in Notes 22 and 46 to 48
of the Consolidated financial statements.
The Pillar 3 Disclosures Report (unaudited) of the Group, required with respect to the requirements of the
Capital Requirement Regulation
the Group’s website
www.bankofcyprus.com (Investor Relations).
(EU) No 575/2013,
is published on
25
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Books and significant records
Annual Financial Report 2018
The measures that the Directors have taken to secure compliance with the requirements of sections 281 to
285 of the Companies Act 2014 of Ireland (Companies Act 2014), with regard to the keeping of accounting
records, include the provision of appropriate resources to maintain adequate accounting records throughout
the Company and the Group, including the appointment of personnel with appropriate qualifications,
experience and expertise.
The accounting records are maintained at the Company’s registered office at 10 Earlsfort Terrace, Dublin 2,
D02 T380, Ireland and at 51 Stassinos Street, Ayia Paraskevi, Strovolos, P.O.Box 24884, 1398 Nicosia,
Cyprus.
Research and development
The Group did not incur any expenditure in research and development for the year ended 31 December
2018.
Political donations
Political donations are required to be disclosed under the Electoral Act 1997 of Ireland (as amended). The
Directors, on enquiry, have satisfied themselves that there were no political donations made during the year
ended 31 December 2018.
Relevant audit information
In the case of persons who are Directors at the time this report is approved in accordance with section 330
of the Companies Act 2014:
the Directors hereby individually and collectively acknowledge, that so far as each Director is
aware, there is no relevant audit information of which the Company’s statutory auditors are
unaware; and
that he/she has taken all the steps that he/she ought to have taken as a Director in order to make
himself/herself aware of any relevant audit information and to establish that the Company’s
statutory auditors are aware of that information.
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.
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 controls and information 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 inter alia to ensure the financial integrity and
accuracy of the Company’s financial reporting.
26
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Preparation of periodic reporting (continued)
Annual Financial Report 2018
The Group’s financial reporting process is controlled using documented accounting policies and procedures
supported by instructions and guidance on reporting requirements, issued to all reporting entities within the
Group in advance of each reporting period. The submission of financial information from each reporting
entity is subject to sign off by the responsible financial officer. Further analytical review procedures are
performed at Group level. The 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
regulatory requirements and relevant standards, is adequate.
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.
The Annual Report in advance of its submission to the Board, is reviewed and approved by the Executive
Committee. The Board, through the Audit Committee scrutinises and approves the financial statements,
results announcements and the Annual Report and ensures that appropriate disclosures have been made.
This governance process ensures that both management and the Board are given sufficient opportunity to
challenge the Group’s financial statements and other significant disclosures before their publication.
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 2016 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.
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 2018 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 2018. The powers of the Board
of Directors and committees of the Board with administrative, management and supervisory functions,
including any powers of the Directors in relation to the issuing or buying back by the Company of its shares,
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.
A description of the operation of the shareholder meeting, the key powers of the shareholder meeting,
shareholders’ rights and the exercise of such right is contained in Section 7 of the Corporate Governance
Report.
Details of restrictions in voting rights and special control rights in relation to the shares of the Company are
set out in the section ‘Other information’ above. Other information required to be disclosed for the
purposes of the European Communities (Takeover Bids (Directive 2004/25/EC)) Regulations 2006 is
contained on pages 23 to 24.
27
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Corporate Governance Statement (continued)
Annual Financial Report 2018
In accordance with section 167 of the Companies Act 2014, the Directors confirm that a Board Audit
Committee is established. Details of the Board Audit Committee’s membership and activities are included in
Corporate Governance Report for 2018.
The Corporate Governance Report for 2018 is included within this Annual Financial Report on pages 287 to
329 and contains the information required for the purposes of section 1373 of the Companies Act 2014.
The statements and information referred in this Corporate Governance Statement are deemed to be
incorporated herein.
Directors’ Compliance Statement
As required by section 225 of the Companies Act 2014, the Directors acknowledge that they are responsible
for securing the Company’s compliance with its relevant obligations (as defined in section 225(1)). The
Directors further confirm that a compliance policy statement has been drawn up setting out the Company’s
policies and that appropriate arrangements and structures have been put in place that are, in the Directors’
opinion, designed to secure material compliance with the relevant obligations. A review of those
arrangements and structures has been conducted in the financial year to which this report relates.
Service termination agreements
The service contract of one of the executive directors in office as at 31 December 2018 includes a clause for
termination, by service of six months’ notice to that effect by either the executive director or BOC PCL,
without cause and the BOC PCL also maintains the right to pay to the executive director six months’ salary
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 by the BOC PCL based on years of service and for a four month prior written notice by the
executive director in the event of a voluntary resignation.
Board of Directors
The members of the Board of Directors of the Company as at the date of this Directors' Report are listed on
page 1. All Directors were members of the Board throughout the year and up to the date of this Directors’
Report except as disclosed below.
On 23 January 2018, the Board of Directors decided to appoint Ms Maria Philippou and Ms Paula
Hadjisotiriou as members of the Board of Directors. Their appointments were approved on 23 July and 13
August 2018 respectively. On 27 August 2018 the Chairman of the Board of Directors informed the Board
about his intention to step down from his position at the Board at the next Annual General Meeting on 14
May 2019. Mr Michael Spanos who was a member of the Board throughout the year resigned on 21 January
2019. On 26 February 2019 the Board of Directors decided to appoint Mr Efstratios-Georgios (Takis)
Arapoglou as member of the Board of Directors and his appointment is subject to approval by the ECB.
After the Annual General Meeting of Shareholders on 14 May 2019, the Board intends also to consider Mr
Arapoglou as a candidate to succeed Dr Josef Ackermann as Chairman, once the relevant process
commences, consistent with the provisions of the Bank’s Corporate Governance Code. If selected, Mr
Arapoglou would take up his duties after his board membership is approved by the ECB.
On 3 March 2019, Mr John Patrick Hourican informed the Board of his decision to leave the Group in
September 2019.
In accordance with the Articles of Association at each annual general meeting of the Company every
Director who has been in office at the completion of the most recent annual general meeting since they
were last appointed or reappointed, shall retire from office and offer themselves for re-election if they wish.
The remuneration of the Board of Directors is disclosed in Note 51 of the Consolidated financial statements.
28
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Directors’ and Secretary’s interests
Annual Financial Report 2018
The interest in the share capital of the Company held by each member of the Board of Directors and the
Company Secretary at 31 December 2018 is presented in the table below:
Non-executive directors
Prof. Dr. Josef Ackermann
Maksim Goldman
Arne Berggren
Michael Spanos (resigned on 21 January
2019)
Ioannis Zographakis
Paula Hadjisotiriou
Executive directors
Dr. Christodoulos Patsalides
Company Secretary
Katia Santis
Ordinary shares or
Depositary Interests
representing Company
ordinary shares of €0.10
each at 31 December 2018
Ordinary shares or
Depositary Interests
representing Company
ordinary shares of €0.10
each at 1 January 2018 or
at the date of appointment
150,000
7,192
25,000
-
3,012
7
170
4
150,000
7,192
25,000
61,430
3,012
7
170
4
185,385
246,815
Apart from the interests set out above, the Board of Directors and the Company Secretary had no other
interests in the shares of the Company or its subsidiaries at 31 December 2018.
Auditors
The Auditors, Ernst & Young Chartered Accountants were re-appointed as auditors at the last Annual
General Meeting held on 28 August 2018 in accordance with section 383(2) of the Companies Act 2014.
During 2017 the Company undertook a competitive audit tender process in accordance with the EU
Regulation on audit reform of public interest entities and its implications relating to the mandatory rotation
of external auditors. On recommendation from the Audit Committee, the Board of Directors of the Company
approved the appointment of PricewaterhouseCoopers (PwC) as the external auditors of the Group for
accounting periods commencing on 1 January 2019. Shareholders of the Company will be asked to consider
the continuation in office of PwC on an advisory non-binding basis at the 2019 Annual General Meeting.
Non-financial information statement
New regulations on non-financial information, which were transposed into Irish law by the European Union
(disclosure of non-financial and diversity information by certain large undertakings and groups) Regulations
2017, require reporting on specific topics such as environmental matters, social and employee matters,
respect for human rights, bribery and corruption, the principal risks related to these matters and
management of these risks.
The Group’s Code of Conduct outlines the high standards set in the relationships with customers, employees
and the community. The Group undertakes sustainable support actions within the two pillars of Health and
Education. The core of the Health pillar actions is the Bank of Cyprus Oncology Centre founded in Nicosia in
partnership with the Republic of Cyprus and started offering services in 1998. The Centre has become the
flagship in cancer treatment in Cyprus and is the first hospital in Cyprus to receive quality accreditation
from CHKS, Europe’s leading hospital accreditation organisation, and ranks amongst the most distinguished
hospitals in terms of its operating and quality standards, a mark that it still holds.
29
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED
COMPANY
Directors’ Report
Non-financial information statement (continued)
Annual Financial Report 2018
Within the Education pillar, the Bank of Cyprus Cultural Foundation has developed a series of multi-faceted
activities over the years, to become the centre of culture, art and creativity of Cyprus. The Foundation
keeps six Cyprological collections, manages two museums and runs educational programmes for children
and adults.
Additionally, the Group supports various NGOs within the two pillars where a compelling societal need
exists.
Information on the Group’s business model, the Group's policies on environmental matters, social and
employee matters, bribery and corruption, the principal risks related to these matters and how the Group
manages these risks, and an analysis of the non-financial key performance indicators relevant to the Group
is available at www.bankofcyprus.com (Responsibility, CSR Reports), which is deemed to be incorporated in
this part of the Directors' Report. The Group is committed to creating a diverse place to work and invests in
developing the capabilities of its workforce through development programmes and training. Additionally, the
Group offers equal opportunities for career progression to all employees through the implementation of
related policies and practices that promote fairness, equality and transparency. Matters relating to diversity
are set out in further detail in the Diversity section of the Corporate Governance Report for 2018 included
within this Annual Financial Report.
The Group has an Anti-bribery and Corruption Policy in place and expects all employees to act with integrity
and honesty. Employees are trained in order to be in a position to understand their obligations.
The Group primarily operates in one country where the European Union's legislation for human rights is
applied and does not import or export goods or non-financial-services to other jurisdictions.
The Group has appropriate policies on anti-money laundering sanctions and countering the financing of
terrorism, therefore is in a position to meets its regulatory requirements relating to these risks. The non-
financial key performance indicators are included in the CSR report available on the Group's website.
Statement of Directors’ Responsibilities
The Directors are responsible for preparing the Annual Financial Report and the financial statements in
accordance with International Financial Reporting Standards (IFRS) adopted by the EU and with those parts
of the Companies Act 2014 applicable to companies reporting under IFRSs and, in respect of the
consolidated financial statements, Article 4 of the International Accounting Standards (IAS) Regulation.
Under Irish law the Directors shall not approve the financial statements unless they are satisfied that they
give a true and fair view of the Group’s and Company’s assets, liabilities and financial position as at the end
of the financial year and of the profit or loss of the Group and the Company for the financial year.
In preparing these financial statements, the Directors are required to:
select suitable accounting policies and apply them consistently;
make judgements and estimates that are reasonable and prudent;
state whether the financial statements have been prepared in accordance with IFRSs as adopted by
the EU and ensure that they contain the additional information required by the Companies Act
2014; and
prepare the financial statements on a going concern basis unless it is inappropriate to presume that
the Company will continue in business.
30
Consolidated Financial Statements
BANK OF CYPRUS HOLDINGS GROUP
Consolidated Financial Statements - Contents
for the year ended 31 December 2018
Annual Financial Report 2018
Contents
Page
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.
2.
Corporate information
Summary of significant accounting policies
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
2.12
2.13
2.14
2.15
Basis of preparation
Accounting policies and changes in accounting
policies and disclosures
Standards and Interpretations that are issued but
not yet effective
Basis of consolidation
Business combinations
Investments in associates and joint ventures
Foreign currency translation
Segment reporting
Turnover
Revenue from contracts with customers
Recognition of interest income/expense and
income/expense similar to interest
Retirement benefits
Tax
Financial instruments - initial recognition
Classification and measurement of financial assets
and liabilities
Reclassification of financial assets and liabilities
2.16
2.17 Derecognition of financial assets and financial
2.18
2.19
2.20
2.21
liabilities
Forborne and modified loans
Impairment of financial assets
Classification, measurement and derecognition
(policy applicable before 1 January 2018)
Impairment of financial assets (policy applicable
before 1 January 2018)
2.22 Write-offs
2.23
Financial guarantees, letters of credits and
undrawn loan commitments
Hedge accounting
Cash and cash equivalents
Insurance business
Repurchase and reverse repurchase agreements
Finance leases - The Group as lessor
2.24 Offsetting financial instruments
2.25
2.26
2.27
2.28
2.29
2.30 Operating leases
2.31
2.32
2.33
2.34
Property and equipment
Investment properties
Stock of property
Non-current assets held for sale and discontinued
operations
Intangible assets
Share capital
2.35
2.36
2.37 Other equity instruments
Treasury shares
2.38
Provisions
2.39
2.40
Financial guarantees
2.41. Comparative information
Going concern
Operating environment
Significant and other judgements, estimates and
assumptions
Transition disclosures
Segmental analysis
Interest income and income similar to interest income
Interest expense and expense similar to interest expense
Fee and commission income and expense
6.
7.
8.
9.
10.
11. Net foreign exchange gains
12. Net gains on financial instrument transactions and
disposal/dissolution of subsidiaries and associates
Insurance income net of claims and commissions
13.
14. Other income
15. Staff costs
16. Other operating expenses
17. Credit losses of financial instruments and impairment of
3.
4.
5.
non-financial instruments
Income tax
18.
19. Earnings per share
20. Cash, balances with central banks and loans and advances
to banks
Investments
21.
22. Derivative financial instruments
23.
24.
25.
Fair value measurement
Loans and advances to customers
Life insurance business assets attributable to
policyholders
Fiduciary transactions
Funding from central banks
26. Property and equipment
Intangible assets
27.
28. Stock of property
29. Prepayments, accrued income and other assets
30. Non-current assets and disposal groups held for sale
31.
32. Customer deposits
33.
Insurance liabilities
34. Subordinated loan stock
35. Accruals, deferred income and other liabilities
36. Share capital
37. Dividends
38. Retained earnings/(accumulated losses)
39.
40. Pending litigation, claims, regulatory and other matters
41. Contingent liabilities and commitments
42. Net cash flow from operating activities
43. Cash and cash equivalents
44. Operating leases - The Group as lessee
45. Analysis of assets and liabilities by expected maturity
46. Risk management - Credit risk
47. Risk management - Market risk
48. Risk management - Liquidity risk and funding
49. Risk management - Insurance risk
50. Capital management
51. Related party transactions
52. Group companies
53. Acquisitions and disposals
54.
55. Country by country reporting
56. Events after the reporting period
Investments in associates and joint venture
129
129
130
136
140
153
153
154
156
157
159
160
161
162
163
165
166
166
169
169
169
170
174
176
178
179
180
181
224
230
238
240
241
248
251
253
256
257
34
35
36
37
39
40
40
40
41
42
45
46
46
47
48
48
48
50
51
51
52
53
57
57
57
58
65
68
70
70
70
70
72
72
73
73
73
74
74
75
75
76
76
76
76
77
77
77
78
79
82
95
101
110
110
111
111
112
112
114
114
121
123
123
33
BANK OF CYPRUS HOLDINGS GROUP
Consolidated Income Statement
for the year ended 31 December 2018
Continuing operations
Turnover
Interest income
Income similar to interest income
Interest expense
Expense similar to interest expense
Net interest income
Fee and commission income
Fee and commission expense
Net foreign exchange gains
Net gains on financial instrument transactions and disposal/dissolution of subsidiaries and
associates
Insurance income net of claims and commissions
Net losses from revaluation and disposal of investment properties
Net gains on disposal of stock of property
Other income
Staff costs
Special levy on deposits on credit institutions in Cyprus and contribution to Single
Resolution Fund
Other operating expenses
Net gains on derecognition of financial assets measured at amortised cost
Credit losses to cover credit risk on loans and advances to customers
Credit losses of other financial instruments
Impairment of non-financial instruments
Loss before share of profit from associates
Share of profit from associates
Loss before tax from continuing operations
Income tax
Loss after tax from continuing operations
Discontinued operations
Profit after tax from discontinued operations
Loss for the year
Attributable to:
Owners of the Company-continuing operations (loss)
Owners of the Company-discontinued operations (profit)
Total loss attributable to the owners of the Company
Non-controlling interests-continuing operations
Total profit/(loss) attributable to non-controlling interests
Loss for the year
Basic and diluted losses per share attributable to the owners of the Company
(€ cent)-continuing operations
Basic and diluted losses per share attributable to the owners of the Company
(€ cent)
* For comparative represented information refer to Note 2.41.
34
Annual Financial Report 2018
2018
€000
2017
(represented)*
€000
984,698
557,065
52,054
1,102,049
723,268
31,878
(144,024)
(167,223)
(46,042)
419,053
178,907
(23,636)
37,688
46,670
52,912
(13,275)
31,867
25,604
755,790
(216,740)
(25,095)
(234,891)
279,064
27,825
(329,083)
(1,610)
(18,651)
(42,455)
9,095
(33,360)
(75,916)
(109,276)
(44,014)
543,909
183,752
(10,211)
45,062
3,008
50,401
(4,061)
30,447
19,042
861,349
(205,888)
(22,846)
(275,318)
357,297
173,443
(953,498)
(6,459)
(58,972)
(488,189)
8,957
(479,232)
(75,573)
(554,805)
7,243
480
(102,033)
(554,325)
(110,764)
(552,332)
7,243
480
(103,521)
(551,852)
1,488
1,488
(2,473)
(2,473)
(102,033)
(554,325)
(24.8)
(123.8)
(23.2)
(123.7)
Notes
2.9
8
8
9
9
10
10
11
12
13
28
14
15
16
16
17
17
17
54
18
7
19
19
BANK OF CYPRUS HOLDINGS GROUP
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2018
Annual Financial Report 2018
Notes
2018
€000
(102,033)
2017
€000
(554,325)
Loss for the year
Other comprehensive income (OCI)
OCI that may be reclassified in the consolidated income statement in
subsequent periods
Fair value reserve (debt instruments)
Net losses on investments in debt instruments measured at fair value
through OCI (FVOCI)
Transfer to the consolidated income statement on disposal
Foreign currency translation reserve
Profit on translation of net investments in foreign branches and subsidiaries
Loss on hedging of net investments in foreign branches and subsidiaries
22
Transfer to the consolidated income statement on dissolution/disposal of
foreign branches and subsidiaries
Available-for-sale investments
Net gains from fair value changes before tax
Share of net gains from fair value changes of associates
Transfer to the consolidated income statement on impairment
Transfer to the consolidated income statement on disposal
Total OCI that may be reclassified in the consolidated income
statement in subsequent periods
OCI not to be reclassified in the consolidated income statement in
subsequent periods
Fair value reserve (equity instruments)
Share of net losses from fair value changes of associates
Net gains on investments in equity instruments designated at FVOCI
Property revaluation
Fair value gain before tax
Share of net gain from fair value changes of associates
Tax
Actuarial (losses)/gains on the defined benefit plans
Remeasurement (losses)/gains on defined benefit plans
Total OCI not to be reclassified in the consolidated income statement
in subsequent periods
Other comprehensive (loss)/income for the year net of taxation
Total comprehensive loss for the year
26
18
15
Attributable to:
Owners of the Company
Non-controlling interests
Total comprehensive loss for the year
35
(9,968)
(19,484)
(29,452)
9,938
(9,760)
(20,125)
(19,947)
-
-
-
-
-
-
-
-
742
(1,166)
(104)
(528)
46,506
1,709
(37)
(606)
47,572
(49,399)
47,044
(3,835)
2,720
(1,115)
-
70
579
649
-
-
-
9,319
11
(522)
8,808
(912)
10,819
(1,378)
(50,777)
19,627
66,671
(152,810)
(487,654)
(154,284)
(485,595)
1,474
(2,059)
(152,810)
(487,654)
BANK OF CYPRUS HOLDINGS GROUP
Consolidated Statement of Changes in Equity
for the year ended 31 December 2018
Annual Financial Report 2018
Share capital
(Note 36)
Share
premium
(Note 36)
Treasury
shares
(Note 36)
Attributable to shareholders of the Company
Retained
earnings /
(accumulated
losses)
(Note 38)
Property
revaluation
reserve
Financial
instruments fair
value reserve
Other
reserves
Life insurance
in-force
business
reserve
Foreign
currency
translation
reserve
Other equity
instruments
Non-
controlling
interests
Total
Total equity
€000
€000
44,620
2,794,358
€000
(21,463)
€000
(527,128)
€000
92,878
€000
€000
54,485
6,059
€000
105,651
36,098
2,585,558
€000
€000
€000
€000
€000
-
-
-
(299,150)
-
(8,470)
-
-
-
(307,620)
44,620
2,794,358
(21,463)
(826,278)
92,878
46,015
6,059
105,651
36,098
2,277,938
1 January 2018
Impact of adopting IFRS 9 at 1
January 2018 (Note 6)
Restated balance at 1 January
2018
(Loss)/profit for the year
Other comprehensive (loss)/income
after tax for the year
Total comprehensive (loss)/income
after tax for the year
Decrease in value of in-force life
insurance business
Tax on decrease in value of in-force
life insurance business
Transfer of realised profits on
disposal of properties
Transfer of property revaluation
reserve and other reserve of
subsidiary to retained earnings (Note
52)
Disposal of subsidiary (Note 53.2.1)
Change of legal status of subsidiary
to Undertakings for Collective
Investments in Transferable
Securities (UCITS) Fund
Decrease in non-controlling interests
due to change in the shareholding of
subsidiary
Issue of other equity instruments
(Note 36)
Elimination of share premium (Note
36)
Transfer of gain on disposal of FVOCI
equity investments to retained
earnings
Dividends paid to non-controlling
interests
31 December 2018
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1,500,000)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(103,521)
(912)
(104,433)
5,314
(664)
-
649
649
-
-
4,143
(4,143)
14,014
1,996
(7,955)
(1,996)
298
(164)
(2,458)
1,500,000
173
-
-
-
-
-
-
-
-
(30,553)
(30,553)
-
-
-
-
-
-
-
-
-
(173)
-
44,620
1,294,358
(21,463)
591,941
79,433
15,289
-
-
-
-
-
-
(6,059)
-
-
-
-
-
-
-
-
37
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
298
(164)
(2,458)
220,000
-
-
-
-
-
-
31,150
2,616,708
-
(307,620)
31,150
2,309,088
1,488
(102,033)
(14)
(50,777)
1,474
(152,810)
-
-
-
-
-
-
-
-
-
-
(5,540)
(5,242)
164
-
-
-
-
217,542
-
-
(1,250)
(1,250)
-
-
-
-
(103,521)
(19,947)
(50,763)
(19,947)
(154,284)
(5,314)
664
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
101,001
16,151
2,121,330
220,000
25,998
2,367,328
BANK OF CYPRUS HOLDINGS GROUP
Consolidated Statement of Changes in Equity
for the year ended 31 December 2018
Annual Financial Report 2018
1 January 2017
Loss for the year
Other comprehensive
income/(loss) after tax
for the year
Total comprehensive
(loss)/income 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
Cancellation of shares
due to reorganisation
Change of parent
company to Bank of
Cyprus Holdings Public
Limited Company and
issue of new shares
Disposals of treasury
shares
Dividends paid to non-
controlling interests
31 December 2017
Attributable to shareholders of the Company
Share
capital
(Note 36)
Share
premium
(Note 36)
Capital
reduction
reserve
(Note 36)
Treasury
shares
(Note 36)
Accumulated
losses
(Note 38)
Property
revaluation
reserve
Financial
instruments
fair value
reserve
Other
reserves
Life
insurance in-
force
business
reserve
Foreign
currency
translation
reserve
Non-
controlling
interests
Total
Total equity
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
€000
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
(551,852)
-
-
10,819
8,620
47,346
(541,033)
8,620
47,346
-
-
-
-
-
-
(892,294)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(2,743)
343
-
-
6,678
(6,678)
21,463
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,743
(343)
-
-
-
-
-
-
(551,852)
(2,473)
(554,325)
(528)
66,257
414
66,671
(528)
(485,595)
(2,059)
(487,654)
-
-
-
-
-
-
-
-
-
-
(870,831)
870,831
7
-
-
-
-
-
-
-
-
-
-
(870,831)
870,831
7
(1,750)
(1,750)
-
-
-
-
-
-
-
-
-
-
-
44,620
2,241,740 (1,952,486)
(21,463)
558,420
-
-
-
-
44,620
2,794,358
-
-
-
3,870
(3,863)
-
-
(21,463)
(527,128)
92,878
54,485
6,059
105,651
36,098
2,585,558
31,150
2,616,708
38
BANK OF CYPRUS HOLDINGS GROUP
Consolidated Statement of Cash Flows
for the year ended 31 December 2018
Annual Financial Report 2018
Net cash flow from operating activities
Cash flows from investing activities
Purchases of debt securities and equity securities
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 associates
Net proceeds from disposal of UCITS Fund and investment fund
units
Purchases of property and equipment
Purchases of intangible assets
Proceeds on disposals of property and equipment and intangible
assets
Proceeds on disposals of investment properties and investment
properties held for sale
Net cash used in investing activities
Cash flow from financing activities
Net (repayment)/proceeds of funding from central banks
Net proceeds from the issue of other equity instruments
Net proceeds from the issue of subordinated loan stock
Interest on subordinated loan stock
Interest on funding from central banks
Proceeds from disposal of treasury shares
Dividend paid by subsidiaries to non-controlling interests
Net cash from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents
1 January
Foreign exchange adjustments
Net increase in cash and cash equivalents
31 December
Details on the non-cash transactions are presented in Note 42.
Notes
42
2018
€000
790,203
2017
€000
1,993,266
(709,101)
(402,977)
26
27
294,494
5,458
27,279
547
774
64,606
16,359
(13,592)
(27,006)
1,922
6,500
91,738
1,549
19,546
683
6,621
1,580
-
(10,299)
(25,723)
91
14,568
(331,760)
(302,623)
(100,000)
217,542
79,986
-
-
280,983
(24,476)
(3)
-
(1,250)
91,813
-
(28)
7
(1,750)
359,198
550,256
2,049,841
4,280,231
2,231,028
(25,643)
(638)
550,256
2,049,841
4,804,844
4,280,231
43
39
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
1.
Corporate information
Bank of Cyprus Holdings Public Limited Company (the Company) was incorporated in the Republic of Ireland
on 11 July 2016, as a public limited company under company number 545903 in accordance with the
provisions of the Companies Act 2014 of Ireland (Companies Act 2014). Its registered office is 10 Earlsfort
Terrace, Dublin 2, D02 T380, Ireland.
The Company is the holding company of the Bank of Cyprus Public Company Limited (BOC PCL). The Bank
of Cyprus Holdings Group (the Group) comprises the Company, its subsidiary BOC PCL and the subsidiaries
of BOC PCL.
The Company is tax resident in Cyprus. The principal activities of BOC PCL and its subsidiary companies (the
BOC Group) involve the provision of banking, financial services, insurance services and management and
disposal of property predominately acquired in exchange of debt.
The shares of the Company are listed and trading on the London Stock Exchange (LSE) and the Cyprus
Stock Exchange (CSE).
The Consolidated Financial Statements are available at the registered office of Bank of Cyprus Holdings
Public Limited Company and on the Group’s website www.bankofcyprus.com (Investor Relations).
Consolidated Financial Statements
The Consolidated Financial Statements of the Company for the year ended 31 December 2018 (the
Consolidated Financial Statements) were authorised for issue by a resolution of the Board of Directors on 28
March 2019.
The Consolidated Financial Statements have been prepared in both, the English and the Greek language. In
case of a difference or inconsistency between the two, the English version prevails.
2.
2.1
Summary of significant accounting policies
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, investments at fair value through other comprehensive income,
financial assets (including loans and advances to customers and investments) at fair value through profit or
loss and derivative financial assets 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.
The Group elected as a policy choice permitted under IFRS 9 to continue to apply hedge accounting in
accordance with IAS 39.
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 comma is used to separate thousands and a dot 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 45.
Statement of compliance
The Consolidated Financial Statements have been prepared in accordance with the International Financial
Reporting Standards (IFRSs) as adopted by the European Union (EU) and with those parts of the Companies
Act 2014 applicable to companies reporting under IFRSs.
40
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
2.2
Summary of significant accounting policies (continued)
Accounting policies and changes in accounting policies and disclosures
The Consolidated Financial Statements contain a summary of the accounting policies adopted in the
preparation of the Consolidated Financial Statements in Notes 2.4 to 2.41. As described in Note 2.2, 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.
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 2018. The Group has not early adopted any other standard,
interpretation or amendment that has been issued but is not yet effective.
IFRS 9 Financial Instruments
The final version of IFRS 9 Financial Instruments reflects all phases of the financial instruments project and
replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9.
The standard introduces new requirements for classification and measurement, impairment, and hedge
accounting. The impact on adoption on the Consolidated Financial Statements is disclosed in Note 6. The
new accounting policies are disclosed in Notes 2.14 to 2.19.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 establishes a five-step model that applies 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 applies to the recognition and measurement of gains and losses on the sale of some non-
financial assets that are not an output of the Group’s ordinary activities (e.g., sales of property, plant and
equipment or intangibles). The new standard did not have a material impact on the Consolidated Financial
Statements. The relevant accounting policy is disclosed in Note 2.10.
IFRS 15 Revenue from Contracts with Customers (clarifications)
The objective of the clarifications is to clarify the International Accounting Standards Board's (IASB)
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. These clarifications did not have a material impact on the Consolidated
Financial Statements.
IFRS 2: Classification and Measurement of Share based Payment Transactions (amendments)
These 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. These amendments did not have a material impact on the Consolidated Financial
Statements.
IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (amendments)
These amendments address concerns arising from implementing the new financial instruments Standard,
IFRS 9, before implementing the new insurance contracts standard that the IASB is developing to replace
IFRS 4. The amendments introduce two options for entities issuing insurance contracts: a temporary
exemption from applying IFRS 9 and an overlay approach, which would permit entities that issue contracts
within the scope of IFRS 4 to reclassify, from profit or loss to other comprehensive income, some of the
income or expenses arising from designated financial assets. Since the insurance subsidiaries of the Group
have adopted IFRS 9 on 1 January 2018, these amendments do not have any impact on the results and
financial position of the Group.
41
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
2.2
Summary of significant accounting policies (continued)
Accounting policies and changes in accounting policies and disclosures (continued)
2.2.1
New and amended standards and interpretations (continued)
IAS 40: Transfers to Investment Property (amendments)
These amendments clarify when an entity should transfer property, including property under construction or
development into, or out of investment property. They 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. These amendments did not have a material impact on the Consolidated Financial Statements.
IFRIC Interpretation 22: Foreign Currency Transactions and Advance Consideration
This interpretation clarifies the accounting for transactions that include the receipt or payment of advance
consideration in a foreign currency. It 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. This 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. This interpretation did not have a material impact on the Consolidated Financial Statements.
Annual Improvements to IFRSs 2014-2016 Cycle
The IASB has issued the Annual Improvement to IFRSs 2014-2016 Cycle which is a collection of
amendments to IFRSs. They did not have a material impact on the Group’s results and financial position.
IFRS 1 First-time Adoption of International Financial Reporting Standards: 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.
2.3
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 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’). IFRS 16 replaces existing leases guidance,
including IAS 17 Leases, IFRIC 4 Determining whether an Agreement contains a Lease, SIC-15 Operating
Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal From of a
Lease.
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. IFRS 16 introduces a single, on-balance sheet lease accounting model for leases. A lessee
recognises a right-of-use asset representing its right to use the underlying asset and a lease liability
representing its obligation to make lease payments. There are recognition exemptions for short-term leases
and leases of low-value items. Lessor accounting remains similar to the current standard – i.e. lessors
continue to classify leases as finance or operating leases. The standard will affect primarily the accounting
for the Group’s operating leases.
42
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
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)
As permitted by the standard, the Group intends to apply IFRS 16 on a retrospective basis but to take
advantage of the option not to restate comparative periods by applying the modified retrospective
approach. The Group intends to take advantage of the following transition options available under the
modified retrospective approach:
To calculate the right of use asset equal to the lease liability, adjusted for prepaid or accrued
payments.
Apply the recognition exception for leases with a term not exceeding 12 months and lease
contracts for which the underlying asset is of low value
Use hindsight in determining the lease term if the contract contains options to extend or
terminate the lease.
Exclude initial direct costs from the measurement of the right of use asset
Finally the Group decided to apply a single discount rate to a portfolio of leases with reasonably similar
characteristics (such as leases with similar remaining lease term for similar class of underlying assets in a
similar economic environment).
The Group will recognise new assets and liabilities for its operating leases of commercial properties such
office buildings and branches. Subsequent to initial recognition, the Group will a) measure the right-of-use
asset by applying the cost model and depreciate it on a straight line basis up to the end of the lease term
and b) measure the lease liability by increasing and reducing the carrying amount to reflect interest on the
lease liability and lease payments made, respectively.
The Group is in the process of finalising the assessment of the impact that the application of IFRS 16 will
have on its financial statements in the period of initial application. The implementation is expected to
increase the assets and financial liabilities by the same amount with no effect on equity or retained earnings
of the Group.
IFRS 9: Prepayment features with negative compensation (amendment)
The amendment is effective for annual reporting periods beginning on or after 1 January 2019 with earlier
application permitted. The amendment allows financial assets with prepayment features that permit or
require a party to a contract either to pay or receive reasonable compensation for the early termination of
the contract (so that, from the perspective of the holder of the asset there may be ‘negative
compensation’), to be measured at amortised cost or at fair value through other comprehensive income.
The Group does not expect this amendment to have a material impact on its results and financial position.
IAS 28: Long-term Interests in Associates and Joint Ventures (amendments)
These amendments are effective for annual reporting periods beginning on or after 1 January 2019 with
earlier application permitted. They relate to whether the measurement, in particular impairment
requirements, of long term interests in associates and joint ventures that, in substance, form part of the
‘net investment’ in the associate or joint venture should be governed by IFRS 9, IAS 28 or a combination of
both. The amendments clarify that an entity applies IFRS 9 Financial Instruments, before it applies IAS 28,
to such long-term interests for which the equity method is not applied. In applying IFRS 9, the entity does
not take account of any adjustments to the carrying amount of long- term interests that arise from applying
IAS 28. The Group is in the process of assessing the impact of these amendments on its results and
financial position.
IFRIC Interpretation 23: Uncertainty over Income Tax Treatments
This interpretation is effective for annual periods beginning on or after 1 January 2019 with earlier
application permitted. This interpretation addresses the accounting for income taxes when tax treatments
involve uncertainty that affects the application of IAS 12. It provides guidance on considering uncertain tax
treatments separately or together, examination by tax authorities, the appropriate method to reflect
uncertainty and accounting for changes in facts and circumstances. The Group is in the process of assessing
the impact of this interpretation on its results and financial position.
43
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
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
IFRS 17: Insurance Contracts
The standard is effective for annual periods beginning on or after 1 January 2021 with earlier application
permitted if both IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments have
also been applied. IFRS 17 Insurance Contracts establishes principles for the recognition, measurement,
presentation and disclosure of insurance contracts issued. It also requires similar principles to be applied to
reinsurance contracts held and investment contracts with discretionary participation features issued. The
objective is to ensure that entities provide relevant information in a way that faithfully represents those
contracts. This information gives a basis for users of financial statements to assess the effect that contracts
within the scope of IFRS 17 have on the financial position, financial performance and cash flows of an entity.
The Group is in the process of assessing the impact of the standard on its results and financial position.
IFRS 3: Business Combinations (amendments)
The IASB issued amendments in Definition of a Business (amendments to IFRS 3) aimed at resolving the
difficulties that arise when an entity determines whether it has acquired a business or a group of assets.
These amendments are effective for business combinations for which the acquisition date is in the first
annual reporting period beginning on or after 1 January 2020 and to asset acquisitions that occur on or
after the beginning of that period, with earlier application permitted. The Group does not expect these
amendments to have a material impact on its results and financial position.
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 (whether it is housed in a subsidiary or not). A partial gain or loss is
recognised when a transaction involves assets that do not constitute a business, even if these assets are
housed in a subsidiary. 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 this amendment to have a material impact on its results and financial position.
IAS 19: Plan Amendment, Curtailment or Settlement (amendments)
The amendments are effective for annual periods beginning on or after 1 January 2019 with earlier
application permitted. They require entities to use updated actuarial assumptions to determine current
service cost and net interest for the remainder of the annual reporting period after a plan amendment,
curtailment or settlement has occurred. The amendments also clarify how the accounting for a plan
amendment, curtailment or settlement affects applying the asset ceiling requirements. The Group does not
expect these amendments to have a material impact on its results and financial position.
IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates
and Errors: Definition of ‘material’ (amendments)
The amendments are effective for annual periods beginning on or after 1 January 2020 with earlier
application permitted. They clarify the definition of material and how it should be applied. The new definition
states that, ’Information is material if omitting, misstating or obscuring it could reasonably be expected to
influence decisions that the primary users of general purpose financial statements make on the basis of
those financial statements, which provide financial information about a specific reporting entity’. In addition,
the explanations accompanying the definition have been improved. The amendments also ensure that the
definition of material is consistent across all IFRS Standards. The Group does not expect these amendments
to have a material impact on its results and financial position.
44
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
2.3
Summary of significant accounting policies (continued)
Standards and Interpretations that are issued but not yet effective (continued)
2.3.2
(continued)
Standards and Interpretations issued by the IASB but not yet adopted by the EU
Conceptual Framework in IFRS standards
The IASB issued the revised Conceptual Framework for Financial Reporting on 29 March 2018. The
Conceptual Framework sets out a comprehensive set of concepts for financial reporting, standard setting,
guidance for preparers in developing consistent accounting policies and assistance to others in their efforts
to understand and interpret the standards. IASB also issued a separate accompanying document,
Amendments to References to the Conceptual Framework in IFRS Standards, which sets out the
amendments to affected standards in order to update references to the revised Conceptual Framework. Its
objective is to support transition to the revised Conceptual Framework for companies that develop
accounting policies using the Conceptual Framework when no IFRS Standard applies to a particular
transaction. For preparers who develop accounting policies based on the Conceptual Framework, it is
effective for annual periods beginning on or after 1 January 2020. The Group does not expect this
framework to have a material impact on its results and financial position.
Annual Improvements to IFRSs 2015-2017 Cycle
The IASB has issued the Annual Improvements to IFRSs 2015-2017 Cycle, which is a collection of
amendments to IFRSs. The amendments are effective for annual periods beginning on or after 1 January
2019 with earlier application permitted. The Group does not expect these to have a material impact on its
results and financial position.
IFRS 3 Business Combinations and IFRS 11 Joint Arrangements: the amendments to IFRS 3 clarify
that when an entity obtains control of a business that is a joint operation, it remeasures previously
held interests in that business. The amendments to IFRS 11 clarify that when an entity obtains joint
control of a business that is a joint operation, the entity does not remeasure previously held
interests in that business.
IAS 12 Income Taxes: the amendments clarify that the income tax consequences of payments on
financial instruments classified as equity should be recognised according to where the past
transactions or events that generated distributable profits has been recognised.
IAS 23 Borrowing Costs: the amendments clarify paragraph 14 of the standard that, when a
qualifying asset is ready for its intended use or sale, and some of the specific borrowing related to
that qualifying asset remains outstanding at that point, that borrowing is to be included in the funds
that an entity borrows generally.
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 2018. 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.
45
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
2.4
Summary of significant accounting policies (continued)
Basis of consolidation (continued)
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 other comprehensive income (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.
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 consolidated 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 acquisition method. The cost of an acquisition is
measured as the aggregate of the consideration transferred, measured at the 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.
46
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
2.6
Summary of significant accounting policies (continued)
Investments in associates and joint ventures (continued)
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 represents profit or loss before
tax. The associated tax charge is disclosed in income tax.
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 on disposal
of a foreign operation, the gain or loss that is reclassified to profit or loss reflects the amount 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’ 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.
47
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
2.7
Summary of significant accounting policies (continued)
Foreign currency translation (continued)
2.7.1
Transactions and balances (continued)
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
Segment 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 and golf business and other income.
2.10
Revenue from contracts with customers
The Group recognises revenue when control of the promised goods or services are transferred to customers
in an amount that reflects the consideration to which the Group expects to be entitled in exchange for those
goods or services. The new revenue recognition model introduced, applies the following five steps:
Step 1: Identify the contract(s) with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations in the contract
Step 5: Recognise revenue when (or as) the Group satisfies a performance obligation.
The performance obligation notion is new and in effect represents a promise in a contract with a customer
to transfer to the customer either: (a) a good or service (or a bundle of goods or services) that is distinct;
or (b) a series of distinct goods or services that are substantially the same and that have the same pattern
of transfer to the customer.
Contract balances
A contract asset is the right to consideration in exchange for services transferred to the customer. If the
Group performs by transferring services to a customer before the customer pays consideration or before
payment is due, a contract asset is recognised for the earned consideration that is conditional.
48
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.10
Revenue from contracts with customers (continued)
Receivables are recorded where the Group provides services to clients, consideration is due immediately
upon satisfaction of a point in time service or at the end of a prespecified period for an over time service. It
is the Group’s right to an amount of consideration that is unconditional (i.e., only the passage of time is
required before payment of the consideration is due). The initial recognition and subsequent measurement
of such receivables is disclosed in Notes 2.14 to 2.19.
Contract liabilities relate to payments received from customers where the Group is yet to satisfy its
performance obligation. Contract liabilities are recognised as revenue when the Group performs under the
contract.
Contract assets and receivables are recorded within ‘Prepayments, accrued income and other assets’ and
contract liabilities within ‘Accruals, deferred income and other liabilities’ in the consolidated balance sheet.
2.10.1 Fee and commission income
The Group earns fee income from a diverse range of services it provides to its clients. Fee income can be
divided into two broad categories:
fees earned from services that are provided over a certain period of time, such as asset or
portfolio management, custody services and certain advisory services and
fees earned from point in time services such as executing transactions and brokerage fees (e.g.,
securities and derivative execution and clearing).
Over time services
Fees earned from services that are provided over a certain period of time are recognised pro-rata over the
service period provided the fees are not contingent on successfully meeting specified performance criteria
that are beyond the control of the Group. Costs to fulfill over time services are recorded in the income
statement immediately because such services are considered to be a series of services that are substantially
the same from day to day and have the same pattern of transfer.
Point in time services
Fees earned from providing transaction-type services are recognised when the service has been completed
provided such fees are not subject to refund or another contingency beyond the control of the Group.
Incremental costs to fulfill services provided at a point in time are typically incurred and recorded at the
same time as the performance obligation is satisfied and revenue is earned, and are therefore not
recognised as an asset, e.g., brokerage commissions.
Fee and commission income is measured based on consideration specified in a legally enforceable contract
with a customer, excluding amounts such as taxes collected on behalf of third parties. Consideration can
include both fixed and variable amounts. Variable consideration includes refunds, discounts and other
amounts that are contingent on the occurrence or non-occurrence of a future event. Variable consideration
that is contingent on an uncertain event can only be recognised to the extent that it is highly probable that
a significant reversal in the amount of cumulative revenue for a contract will not occur.
2.10.2 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’.
2.10.3 Gains from the disposal of investment property
Gains on disposal of investment property are recognised in the consolidated income statement in ‘Net
(losses)/gains from revaluation and disposal of investment properties’ when the buyer accepts delivery and
the control of the property is transferred to the buyer.
49
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.10
Revenue from contracts with customers (continued)
2.10.4 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 control of the property is transferred to the buyer.
2.11
Recognition of interest income/expense and income/expense similar to interest
The Group calculates interest income by applying the effective interest rate (EIR) to the gross carrying
amount of financial assets, unless the asset is credit-impaired.
When a financial asset becomes credit-impaired and is therefore classified as Stage 3, interest income is
calculated by applying the EIR to the amortised cost of the financial asset, being the gross carrying amount
of the financial asset less any loss allowance. If the financial asset cures and is no longer credit-impaired,
the Group reverts to calculating interest income on the gross carrying amount. In such cases, the Group
reverses the unwinding of the discount on the expected credit losses (ECL) through the 'Credit losses to
cover credit risk on loans and advances to customers' line in the Consolidated Income Statement.
Interest income on purchased or originated credit-impaired (POCI) financial assets is recognised using the
Credit Adjusted Effective Interest Rate (CAEIR) calculated at initial recognition. The CAEIR is applied on the
amortised cost of the financial asset, being the gross carrying amount of the financial asset less any loss
allowance.
Interest income from financial assets at amortised cost and financial assets at fair value through other
comprehensive income (FVOCI) are presented within the caption ‘Interest income’, with interest income on
financial instruments at FVTPL presented within the caption ‘Income similar to interest income’ in the
consolidated income statement. Interest expense on financial liabilities at amortised cost is presented within
the caption ‘Interest expense’, with interest expense on financial instruments at FVTPL presented within the
caption ‘Expense similar to interest expense’ in the consolidated income statement. All form part of the ‘Net
Interest Income’.
The Group holds loans and advances to banks and central banks with negative interest rates. The Group
classifies the interest on these assets within interest expense. Negative interest is disclosed in Note 9.
The effective interest rate method
Interest income and expense are recognised in the consolidated income statement by applying the effective
interest rate (EIR) for all financial instruments measured at amortised cost and debt instruments at fair
value through other comprehensive income.
The EIR is the rate that exactly discounts estimated future cash payments or receipts through the expected
life of the financial instrument to the gross carrying amount of the financial asset or the amortised cost of
the financial liability.
The EIR, and therefore the amortised cost of the asset, is calculated by taking into account any discount or
premium on acquisition, fees and costs that are an integral part of the EIR. Fees and incremental costs that
are directly attributable to loans and advances to customers are also deferred and amortised as part of
interest income using the effective interest method.
For floating-rate financial instruments, periodic re-estimation of cash flows to reflect the movements in the
market rates of interest also alters the EIR, but when instruments were initially recognised at an amount
equal to the principal, re-estimating the future interest payments does not significantly affect the carrying
amount of the asset or the liability.
50
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.12
Retirement benefits
The Group operates both 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.
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.
2.13
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.
51
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.13
Tax (continued)
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.
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.
2.14
Financial instruments - initial recognition
2.14.1 Date of recognition
‘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. All other 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.
2.14.2 Initial recognition and measurement of financial instruments
The classification of financial assets on initial recognition depends on their contractual terms and the
business model for managing the instruments, as described in Note 2.15.
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.
When the fair value of financial instruments at initial recognition differs from the transaction price, the
Group accounts for the Day 1 profit or loss, as described in Note 2.14.3 below.
2.14.3 Day 1 profit or loss
When the transaction price of the instrument differs from the fair value at origination and the fair value is
based on a valuation technique using only inputs observable in market transactions, the Group recognises
the difference between the transaction price and fair value in 'Net gains on financial instrument transactions
and disposal/dissolution of subsidiaries and associates' caption. In the cases, where the fair value is based
on models for which some of the inputs are not observable, the difference between the transaction price
and the fair value is deferred and is only recognised in profit or loss when the inputs become observable, or
when the instrument is derecognised.
2.14.4 Measurement categories of financial assets and liabilities
Financial assets are measured either at amortised cost, fair value through other comprehensive income
(FVOCI) or fair value through profit or loss (FVTPL).
52
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.14
Financial instruments - initial recognition (continued)
2.14.4 Measurement categories of financial assets and liabilities (continued)
The Group classifies and measures its derivatives and trading portfolios at FVTPL. The Group may designate
financial instruments at FVTPL, if doing so eliminates or significantly reduces measurement or recognition
inconsistencies.
Financial liabilities, other than loan commitments and financial guarantees are measured at amortised cost
or at FVTPL when they are held for trading or relate to derivative instruments.
2.15
Classification and measurement of financial assets and liabilities
The classification and measurement of financial assets depends on how these are managed as part of the
Business Models the Group operates under and their contractual cash flow characteristics (whether the cash
flows represent solely payments of principle and interest (SPPI)).
Business model assessment
The Group assesses the business model at a portfolio level. The portfolio level is determined at the
aggregation level that reflects how the Group manages its financial assets and the business model is based
on observable factors which include:
How the performance of the business model and the financial assets held within that business
model are evaluated and reported to the Group's key management personnel;
The risks that affect the performance of the business model (and the financial assets held within
that business model) and, in particular, the way in which those risks are managed;
How managers of the business are compensated (for example, whether the compensation is
based on the fair value of the assets managed or on the contractual cash flows collected);
The expected frequency, value and timing of sales are also important aspects of the Group’s
assessment.
If cash flows after initial recognition are realised in a way that is different from the Group’s original
expectations, the Group does not change the classification of the remaining financial assets held in that
business model, but incorporates such information when assessing newly originated or newly purchased
financial assets going forward.
On transition to IFRS 9, business models were determined on the date of initial application based on facts
and circumstances that existed on 1 January 2018 and are re-assessed at each reporting date.
Contractual cash flows characteristics test (SPPI assessment)
The Group assesses whether the individual financial assets’ cash flows represent solely payments of
principal and interest on the principal amount outstanding at origination (SPPI test).
For the purposes of this assessment, principal is defined as the fair value of the financial asset on initial
recognition and may change over the life of the financial asset (for example, if there are repayments of
principal or amortisation of the premium/discount).
Interest is defined as consideration for the time value of money, for the credit risk associated with the
principal amount outstanding during a particular period of time and for other basic lending risks and costs
(e.g. liquidity risk and administrative costs), as well as a profit margin.
In assessing whether contractual cash flows are SPPI, the Group applies judgment and considers the terms
that could change the contractual cash flows so that they would not meet the condition for SPPI, and be
inconsistent to a basic lending arrangement, including: (i) contingent and leverage features, (ii) interest
rates which are beyond the control of the Group or variable interest rate consideration, (iii) features that
could modify the time value of money, (iv) prepayment and extension options, (v) non-recourse
arrangements and (vi) convertible features.
53
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.15
Classification and measurement of financial assets and liabilities (continued)
Where the contractual terms of a financial asset introduce a more than de minimis exposure to risk or
volatility that are inconsistent with a basic lending arrangement, the related financial asset will be measured
at FVTPL.
2.15.1 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
and disposal/dissolution of subsidiaries and associates’ in the case of all other derivatives. Interest income
and expense are included in the ‘Income similar to interest income’ and ‘Expense similar to interest
expense’ captions respectively in the consolidated income statement.
An embedded derivative is a component of a hybrid instrument that also includes a non-derivative host
contract with the effect that some of the cash flows of the combined instrument vary in a way similar to a
stand-alone derivative.
For hybrid contracts where the host contract is a financial asset within the scope of IFRS 9, the classification
and measurement criteria are based on the business model and SPPI assessment as described in the
Classification of financial assets section of Note 2.15 and applied to the entire hybrid instrument.
Derivatives embedded in financial liabilities and non-financial host contracts, 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 and
disposal/dissolution of subsidiaries and associates’ in the consolidated income statement. The host contract
is accounted for in accordance with the relevant standards.
2.15.2 Financial assets measured at amortised cost
Financial assets are measured at amortised cost if they meet both of the following conditions:
The financial asset is held within a business model with the objective to hold financial assets in
order to collect contractual cash flows;
The contractual terms of the financial asset give rise on specified dates to cash flows that are
SPPI on the principal amount outstanding.
This classification relates to cash and balances with central banks, loans and advances to banks, loans and
advances to customers that pass the SPPI test, debt securities held under the ‘Hold to collect’ business
model and other financial assets. These financial assets are measured at amortised cost using the EIR less
allowances for expected credit losses (ECL).
After their initial recognition, financial instruments measured at amortised cost are measured at amortised
cost using the effective interest method, less any provision for impairment. 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. The losses arising from impairment are recognised in the consolidated income statement in
‘Credit losses to cover credit risk on loans and advances to customers’ in the case of loans and advances to
customers and in ‘Credit losses of other financial instruments’ for all other financial instruments.
54
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.15
Classification and measurement of financial assets and liabilities (continued)
2.15.3 Debt instruments measured at FVOCI
Financial assets are measured at FVOCI if they meet both of the following conditions:
The financial asset is held within a business model the objective of which is achieved by both
collecting contractual cash flows and selling financial assets;
The contractual terms of the financial asset give rise on specified dates to cash flows that are
SPPI on the principal amount outstanding.
This classification relates to debt securities held under the ‘Hold to collect and sell’ business model that pass
the SPPI test.
FVOCI instruments are subsequently measured at fair value with gains and losses due to changes in fair
value recognised directly in other comprehensive income in the ‘Net gains/(losses) on investments in debt
instruments measured at FVOCI’ caption. Upon derecognition of debt instruments, any accumulated
balances in other comprehensive income are reclassified to the consolidated income statement and reported
within ‘Net gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates’
caption. The interest income, foreign exchange differences and ECL are recognised in the consolidated
income statement in the respective lines.
2.15.4 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 and disposal/dissolution of subsidiaries and associates’ in the consolidated income
statement. Interest income and expense are included in the captions ‘Income similar to interest income’
and ‘Expense similar to interest expense’ respectively 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.
This classification relates to debt and equity instruments that have been acquired principally for the
purposes of selling or repurchase in the near term.
2.15.5 Financial assets or financial liabilities at fair value through profit or loss
Financial assets and financial liabilities, other than those held for trading, classified in this category are
those that are designated by management on initial recognition or are mandatorily required to be measured
at fair value under IFRS 9.
Management only designates an instrument at FVTPL at initial recognition when one of 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
the liabilities are part of a group of financial liabilities or financial assets and financial liabilities
which are managed and their performance is evaluated on a fair value basis, in accordance with a
documented risk management or investment strategy, or
the liabilities contain 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.
(b)
(c)
Such designation is determined on an instrument-by-instrument basis.
55
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.15
Classification and measurement of financial assets and liabilities (continued)
2.15.5 Financial assets or financial liabilities at fair value through profit or loss (continued)
Financial assets and financial liabilities at FVTPL are recorded in the consolidated balance sheet at fair value.
Changes in the fair value are recognised in ‘Net gains on financial instrument transactions and loss on
disposal/dissolution of subsidiaries and associates’ in the consolidated income statement. Interest income
and expense are included in the captions ‘Income similar to interest income’ and ‘Expense similar to interest
expense’ respectively in the consolidated income statement according to the terms of the relevant contract.
Dividend income is recognised in ‘Other income’ in the consolidated income statement when the right to
receive payment has been established.
The main instruments designated at FVTPL relate to debt that 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.
In addition assets held under unit-linked insurance contracts and certain non-linked insurance contracts
issued by insurance subsidiaries are designated at fair value through profit or loss.
Financial assets mandatorily classified at FVTPL include certain loans and advances to customers, certain
investment fund holdings and other securities for which the contractual cash flows do not meet the SPPI
test, or the financial assets are part of a portfolio under a business model that is to manage and whose
performance is evaluated on a fair value basis.
2.15.6 Equity instruments measured at FVOCI
At initial recognition, the Group can make an irrevocable election to classify an investment in equity
instrument at FVOCI, when that meets the definition of Equity under IAS 32 Financial Instruments:
'Presentation', and is not held for trading. Such classification is determined on an instrument-by-instrument
basis.
Fair value gains and losses on these equity instruments are recognised in OCI and are not recycled to profit
or loss upon derecognition, but are transferred directly to retained earnings. Dividends on equity
investments are recognised in the consolidated income statement and reported within ‘Other Income’ when
the right to receive payment has been established. Equity instruments measured at FVOCI are not subject
to an impairment assessment.
2.15.7 Subordinated loan stock
Subordinated loan stock is initially measured at the fair value of the consideration received, net of any issue
costs. It is subsequently measured at amortised cost using the effective interest method, in order to
amortise the difference between the cost at inception and the redemption value, over the period to the
earliest date that the Group has the right to redeem the subordinated loan stock.
Interest on subordinated loan stock is included in ‘Interest expense’ in the consolidated income statement.
2.15.8 Other financial liabilities
Other financial liabilities include ‘Customer deposits’, ‘Deposits by banks’, ‘Funding from central banks’ and
other financial liabilities.
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 deposits by banks is at
amortised cost, using the effective interest method.
56
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.16
Reclassification of financial assets and liabilities
The Group does not reclassify its financial assets subsequent to their initial recognition apart from
exceptional circumstances in which the Group changes its business model for managing financial assets and
acquires, disposes of, or terminates a business line. Reclassification is applied prospectively from the
reclassification date, which is the first day of the first reporting period following the change in business
model that results in the reclassification. Any previously recognised gains, losses or interest are not
restated.
Financial liabilities are never reclassified.
2.17
Derecognition of financial assets and financial liabilities
2.17.1 Financial assets
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial
assets) is derecognised when the contractual rights to the cash flows from the financial asset have expired.
The Group also derecognises the financial asset if it has both transferred the financial asset and the transfer
qualifies for derecognition.
The Group transfers a financial asset if, and only if, either:
The Group transfers its contractual rights to receive cash flows from the financial asset; or
The Group retains the rights to the cash flows, but assumes an obligation to pay the received
cash flows in full without material delay to a third party under a ‘pass-through’ arrangement.
A transfer only qualifies for derecognition if either:
The Group transfers substantially all the risks and rewards of the asset; or
The Group neither transfers nor retains substantially all the risks and rewards of the asset,
but it transfers control of the asset.
2.17.2 Financial liabilities
A financial liability is derecognised when the obligation under the liability is discharged, cancelled or
expired. Modifications to, and exchanges of, financial liabilities are treated as extinguishments and
derecognised, when the revised terms are substantially different to the original term. The difference
between the carrying amount of the original financial liability and the consideration paid is recognised in
profit or loss.
2.18
Forborne and modified loans
The contractual terms of a financial asset may be modified due to various reasons, either due to commercial
renegotiations or due to distressed restructurings with a view to maximise recovery.
In the event that the terms and conditions of a financial asset are renegotiated or otherwise modified, the
Group considers whether the modification results in derecognition of the existing financial asset and the
recognition of a new financial asset. A derecognition of a financial asset (or part of a financial asset) and a
recognition of a new financial asset would occur where there has been a substantial modification on the
revised terms to the original cash flows.
Judgement is required to assess whether a change in the contractual terms is substantial enough to lead to
derecognition. The Group considers a series of factors of both qualitative and quantitative nature when
making such judgements on a modification in the contractual cash flows, including change in the currency,
change in counterparty, introduction of substantial terms such as addition of equity conversion features,
changes in the legal framework and other.
57
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.18
Forborne and modified loans (continued)
Where the modification does not result in derecognition, the Group recognises a modification gain or loss,
based on the modified cash flows discounted at the original EIR and the existing gross carrying value of the
financial asset. The financial asset continues to be subject to the same assessments for significant increase
in credit risk relative to initial recognition and credit-impairment. A modified financial asset will transfer out
of Stage 3 if the conditions that led to it being identified as credit-impaired as defined in Note 2.19.2, are
no longer present. A modified financial asset will transfer out of Stage 2 when it no longer satisfies relative
thresholds set to identify significant increases in credit risk, which are based on changes in its lifetime PD,
days past due and other considerations. The financial asset continues to be monitored for significant
increases in credit risk and credit-impairment.
In the case of a new financial asset classified at amortised cost or FVOCI, an assessment is performed on
whether it should be classified as Stage 1 or POCI for ECL measurement. For the purposes of assessing for
significant increases in credit risk, the date of initial recognition for the new financial asset is the date of the
modification.
2.19
Impairment of financial assets
2.19.1 Overview of ECL principle
The Group uses a forward looking ECL model, requiring judgement, estimates and assumptions in
determining the level of ECLs. ECLs are recorded for all financial assets measured at amortised cost and
FVOCI, lease receivables, loan commitments and financial guarantee contracts. Equity instruments are not
subject to impairment under IFRS 9.
At initial recognition, impairment allowance (or provision in the case of commitments and guarantees) is
required for ECL resulting from default events that are possible within the next 12 months (12-month ECL),
unless assets are deemed as POCI. In the event of a significant increase in credit risk since initial
recognition, impairment allowance is required resulting from all possible default events over the expected
life of the financial instrument (lifetime ECL). The Group’s policies for determining if there has been a
significant increase in credit risk are set out in Note 2.19.3.
The Group groups its financial assets into Stage 1, Stage 2, Stage 3 and POCI for ECL measurement as
described below:
Stage 1: Financial assets which have not had a significant increase in credit risk since initial recognition are
considered to be Stage 1 and 12-month ECL is recognised.
Stage 2: Financial assets that are considered to have experienced a significant increase in credit risk since
initial recognition are considered to be Stage 2 and lifetime losses are recognised.
Stage 3: Financial assets which are considered to be credit-impaired (refer to following section of the note
on how the Group defines credit-impaired and default) and lifetime losses are recognised.
POCI: Purchased or originated financial assets are financial assets that are credit-impaired on initial
recognition. POCI assets include loans purchased or originated at a deep discount that reflect incurred credit
losses. Changes in lifetime ECLs since initial recognition are recognised.
58
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.19
Impairment of financial assets (continued)
2.19.1 Overview of ECL principle (continued)
ECL is recognised in profit or loss with a corresponding ECL allowance reported as a decrease in the carrying
value of financial assets measured at amortised cost on the balance sheet. For financial assets measured at
FVOCI the carrying value is not reduced, but the accumulated amount of impairment allowance is
recognised in OCI. For off-balance sheet instruments, accumulated provisions for ECL are reported in
‘Accruals, deferred income and other liabilities’, except in the case of loan commitments where ECL on the
loan commitment is recognised together with the loss allowance of the relevant on balance-sheet exposure,
as the Group cannot separately identify the ECL on the loan commitment from those on the on-balance
sheet exposure component. ECL for the period is recognised within the consolidated income statement in
‘Credit losses to cover credit risk on loans and advances to customers’ for loans and advances to customers
and loan commitments and financial guarantees and in ‘Credit losses of other financial instruments’ for all
other financial instruments.
2.19.2 Credit impaired and definition of default
Loans and advances to customers, loan commitments and financial guarantees
The Group considers loans and advances to customers that meet the non-performing exposure (NPE)
definition as per the European Banking Authority (EBA) standards to be in default and hence Stage 3
(credit-impaired). Therefore such loans have ECL calculated on a lifetime basis and are considered to be in
default for credit risk management purposes.
As per the EBA standards and European Central Bank’s (ECB) Guidance to Banks on Non-Performing Loans
(which was published in March 2017), NPEs are defined as those exposures that satisfy one of the following
conditions:
(i) The borrower 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 the Capital Requirement
Regulation (CRR), which would also trigger a default under specific credit adjustment, distress
restructuring and obligor bankruptcy.
(iii) Material exposures as set by the Central Bank of Cyprus (CBC), which are more than 90 days past
due.
(iv) Performing forborne exposures under probation for which additional forbearance measures are
extended.
(v) Performing forborne exposures under probation that present more than 30 days past due within the
probation period.
When a specific part of the exposures of a customer that fulfils the NPE criteria set out above is 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 specific part of the exposure is
classified as non-performing.
If unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days
past due, even where regulatory rules permit default to be defined based on 180 days past due.
The definitions of credit-impaired and default are aligned so that stage 3 represents all loans which are
considered defaulted or otherwise credit-impaired.
When a financial asset has been identified as credit-impaired, expected credit losses are measured as the
difference between the asset’s gross carrying amount and the present value of estimated future cash flows
discounted at the instrument’s original effective interest rate.
59
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.19
Impairment of financial assets (continued)
2.19.2 Credit impaired and definition of default (continued)
Exposures cease to be considered as NPEs and in such case are transferred out of Stage 3, 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.
iv. No Unlikely-to-Pay criteria exist for the debtor.
v.
The debtor has made post-forbearance payments of a not-insignificant amount of capital (different
capital thresholds exist according to the facility type).
At the time an account exits Stage 3, the rating at origination is compared to the rating at the reporting
date. If the rating at the reporting date is higher than or equal to the rating at the origination date then the
loan is transferred to Stage 1, otherwise it is transferred to Stage 2. The reversal of the unwinding of the
discount on loans and advances to customers that no longer meet Stage 3 criteria is presented in 'Credit
losses to cover credit risk on loans and advances to customers'.
Debt securities, loans and advances to banks and balances with central banks
Debt securities, loans and advances to banks and balances with central banks are considered defaulted and
transferred to Stage 3 if the issuers have failed to pay either interest or principal. Moody’s ratings indicate
these exposures with a grade C which is the lowest Moody’s rating category. In addition, a number of other
criteria are considered such as adverse changes in business, financial and economic conditions as well as
external market indicators (credit spreads, credit default swap (CDS) prices) in determining whether there
has been a significant deterioration in the financial position that could lead to unlikeliness to pay.
2.19.3 Significant increase in credit risk
IFRS 9 requires that in the event of a significant increase in credit risk since initial recognition, the
calculation basis of the loss allowance would change from 12 month ECLs to lifetime ECLs.
The assessment of whether credit risk has increased significantly since initial recognition, is performed at
each reporting period, by considering the change in the risk of default occurring over the remaining life of
the financial instrument since initial recognition.
Significant credit risk increase for loans and advances to customers
Primarily, the Group uses the lifetime probability of default (PDs) as the quantitative metric in order to
assess transition from Stage 1 to Stage 2 for all portfolios, by considering whether the lifetime PD at the
reporting date exceeds the lifetime PD at origination by using an established relative threshold. The Group
considers an exposure to have significant increase in credit risk (SICR) by comparing the PD at the
reporting date with the PD at initial recognition to compute the increase in regards to the corresponding
threshold. The threshold has been determined by using statistical analysis on historic information of credit
migration exposures on the basis of days past due, for the different segments. The Group applies the
thresholds presented in the table below to each portfolio/segment, based on the following characteristics:
customer type, product type and rating at origination. The threshold is then assigned to each facility
according to the facilities portfolio/segment.
For Retail and SME portfolios, the threshold applied varies depending on the original credit quality of the
borrower. For instruments with lower default probabilities at inception due to good credit quality of the
counterparty, the SICR threshold is set at a higher level than for instruments with higher default
probabilities at inception. For the Corporate portfolio one threshold applies for all corporate exposures.
60
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.19
Impairment of financial assets (continued)
2.19.3 Significant increase in credit risk (continued)
The SICR trigger, is activated based on the comparison of the ratio of Current Lifetime PD to the remaining
Lifetime PD at origination (PD@O) to the pre-established threshold. If the resulting ratio is higher than the
pre-established threshold then deterioration is assumed to have occurred and the exposure is transferred to
Stage 2.
The table below summarises the quantitative measure of the SICR trigger which varies depending on the
credit quality at origination as follows, applied on 1 January 2018 and 31 December 2018:
Segment
Rating at
origination
Retail
SME
Corporate
1-3
4-5
6-7
1-3
4-5
6-7
1-7
PD Deterioration
thresholds applied at
1 January 2018
1-6 X PD@O
1-5 X PD@O
1-5 X PD@O
4 X PD@O
4 X PD@O
4 X PD@O
2 X PD@O
PD Deterioration
threshold applied at
31 December 2018
1-29 X PD@O
1-5 X PD@O
1-5 X PD@O
3-8 X PD@O
4 X PD@O
4 X PD@O
2 X PD@O
At 1 January 2018 the threshold was determined by reference to the definition of default applied which was
as per the Capital Requirements Regulation definition. The definition of default changed to that of the Non-
Performing Exposures (NPEs) to be in line with the definition for the credit impaired loans and therefore the
relevant thresholds were changed.
Exposures originated during the period but for which no rating exists at the reporting date are considered to
have suffered a significant increase in credit risk and transition to Stage 2.
For exposures which are subject to individual impairment assessment, the following qualitative factors in
addition to the ones incorporated in the PD calculation, are considered:
in collateral value or guarantee or
significant change
shareholders/directors,
significant adverse changes in business, financial and/or economic conditions in which the
borrower operates.
financial support provided by
The Group also considers, as a backstop criterion, that a significant increase in the credit risk occurs when
contractual payments are more than 30 days past due (past due materiality is applied). Loans that meet
this condition are classified in Stage 2. In cases where certain exposures are past due for more than 30
days if certain materiality limits are not met (such as arrears less than €500 or one instalment in arrears in
the case of retail exposures and arrears less than €1,000 or greater than 10% of the funded balances on all
exposures other than retail), then the transfer to Stage 2 does not take place. The materiality levels are
set in accordance with the CBC Directives.
The thresholds for movement between Stage 1 and Stage 2 are symmetrical. After a financial asset has
transferred to Stage 2, if its credit risk is no longer considered to have significantly increased relative to its
initial recognition, the financial asset will move back to Stage 1.
Significant credit risk increase for financial instruments other than loans and advances to customers
Low credit risk simplification is adopted for debt security instruments, loans and advances to banks and
balances with central banks with external credit ratings that are rated as investment grade. The assessment
of low credit risk is based on both the external credit rating and the internal scoring (which considers latest
available information on the instrument and issuer). The combination of the two provides an adjusted credit
rating. An adjusted rating which remains investment grade is considered as having low credit risk.
61
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.19
Impairment of financial assets (continued)
2.19.3 Significant increase in credit risk (continued)
For debt securities, loans and advances to banks and balances with central banks which are below
investment grade, the low credit risk exemption does not apply and therefore an assessment of significant
credit deterioration takes place, by comparing their credit rating at origination with the credit rating on the
reporting date. Significant deterioration in credit risk is considered to have occurred when the adjusted
rating of the exposures drops to such an extent that the new rating relates to a riskier category (i.e. from a
non-investments grade to speculative and then to highly speculative).
2.19.4 Measurement of ECLs
IFRS 9 ECL reflects an unbiased, probability-weighted estimate based on either loss expectations resulting
from default events over a maximum 12-month period from the reporting date or over the remaining life of
a financial instrument. The Group calculates lifetime ECLs and 12-month ECLs either on an individual basis
or a collective basis, depending on the nature of the underlying portfolio of financial instruments.
The Group calculates ECLs based on three-weighted scenarios to measure the expected cash flows
shortfalls, discounted at an approximation to the EIR as calculated at initial recognition. A cash shortfall is
the difference between the cash flows that are due in accordance with the contract and the cash flows
expected to be received.
The Group calculates ECL using the following three components:
exposure at default (EAD),
probability of default (PD), and
loss given default (LGD).
EAD
EAD represents the expected exposure in the event of a default during the life of a financial instrument,
considering expected repayments, interest payments and accruals. EAD methodology is differentiated for
the following categories: revolving and non-revolving exposures.
For non-revolving exposures the term is based on the contractual term of the exposure and both on-balance
sheet and off-balance sheet exposures are amortised in accordance with the principal contractual payment
schedule of each exposure. In case of revolving exposures, the projected EAD is the carrying value plus the
credit conversion factor applied on the undrawn amount. The credit conversion factor model is derived
based on empirical data from the last 5 years.
In regards to the credit-impaired exposures, the EAD is equal to the on balance sheet amount as at the
reporting date.
Probability of default (PD)
PD represents the probability an exposure defaults and is calculated based on statistical rating models,
calculated per segment level and taking into consideration each individual’s exposure rating as well as
forward looking information based on macroeconomic inputs.
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BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.19
Impairment of financial assets (continued)
2.19.4 Measurement of ECLs (continued)
For each exposure, lifetime PD represents the probability of default within the lifetime horizon and is based
on the underlying models of marginal probability of default through the cycle (MPD TTC), MPD individual,
MPD point in time and Marginal Probability of Paid-off (MPP). In particular, the first element, MPD TTC is
constructed per segment, illustrating the probability of default status depending on number of months since
the origination date. The PD for each month since the originated date is calculated under the condition that
exposures survived until the prior month. The MPD individual is allocated to linked individual exposures
through a scaling factor constructed based on the current individual risk assessment, which is represented
by the Group’s PD per rating grade. MPD is adjusted to reflect the current and forward looking information
based on the macroeconomic inputs. Finally, the MPP Component is the curve that shows the probability of
full payment of a particular exposure based on specific period in months since the open date of the
exposure. MPP is estimated for each particular segment and depends on the contractual terms of the
exposure. For revolving facilities where there is no contractual survival maturity, one curve per segment is
developed. The combination of these four models gives rise to a PD value for each month for the lifetime of
the exposure.
BOC PCL's internal rating process is summarised in Note 46.
Loss given default (LGD)
LGD represents an estimate of the loss if default occurs at a given time. It is usually expressed as a
percentage of the EAD. It takes into account parameters such as historical loss and/or recovery rates as
well as the collateral value which is discounted to the present value determining the amount of the expected
shortfall.
The structure of the LGD model considers the following:
Curing where the probability of cure model was derived based on historical observations.
Non-curing including cash recovery or realisation of collaterals either voluntarily i.e. debt for
asset swap or through forced sale, auctions and foreclosure and receivership.
LGD rates are estimated for the Stage 1, Stage 2, Stage 3 and POCI segment of each asset class. The
inputs for these LGD rates are estimated and, where possible, calibrated annually through backtesting
against recent recoveries. These are repeated for each economic scenario as appropriate.
Individually assessed loans
The individual assessment is performed not only for individually significant assets but also for other
exposures meeting specific criteria determined by Credit Risk Management. A risk based approach is used
on the selection criteria of the individually assessed population such as NPE or forborne exposures above a
certain amount, decrease of a certain percentage on the yearly credit turnover and decrease of a certain
percentage on assigned collaterals.
The ECL is calculated on an individually assessed basis and all relevant considerations of 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).
Collectively assessed loans
All customer exposures that are not individually assessed, are assessed on a collective basis. For the
purposes of calculating ECL, exposures are grouped into granular portfolios/segments with shared risk
characteristics. The granularity is based on different levels of segmentation which, among other factors
include customer type, exposure class and portfolio type.
63
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.19
Impairment of financial assets (continued)
2.19.5 Scenarios and scenarios weights
The Group uses reasonable and supportable information, including forward-looking information, in the
calculation of ECLs. ECLs are the unbiased probability-weighted credit losses determined by evaluating a
range of possible outcomes and considering future economic conditions. ECLs are calculated for three
macroeconomic scenarios, baseline, downside and upside and the output is the weighted average ECL based
on the assigned probability of each scenario (Note 46).
Macroeconomic scenarios impact both the probability of default (PD) and the loss given default (LGD).
Specifically, forward looking information is embedded in the PDs based on regression equations derived on
the basis of historical data. Using statistical analysis, the most significant macro-variables have been
selected in order to predict accurately the expected default rates. In regards to the LGD, the forward
looking information is incorporated via the property indices for the types of properties (housing,
commercial, industrial). In particular, for each collateral a forward looking projection of the realisable value
is calculated before discounting back to reporting date to quantify the expected cash shortfall.
Each macroeconomic scenario used in the expected credit loss calculation includes a projection of all
relevant macroeconomic variables used in the models for a five year period, subsequently reverting to long-
run averages. As the forecast horizon increases, the availability of information decreases and judgment
increases.
In regards to the weights, these are determined/computed for each scenario by using the Cumulative
Density Function (CDF) derived from past historical data (1980-2018) and severity analysis. All possible
scenarios are depicted on the CDF with the 0th percentile scenario being the worst case and the 100th
percentile scenario being the best case. The favourable scenario is defined as the 80th percentile and 20%
probability. The baseline scenario is defined as the 50th percentile and 60% probability. The adverse
scenario is defined as the 20th percentile and 20% probability. The final weights constitute the probabilities
that the respective set of macroeconomic conditions will occur and represent best estimate of the relative
likelihood of the range of outcomes that each scenario represents. Scenario weights are determined by the
Economic Research Department of BOC PCL and take into account historical frequency, are updated on a
quarterly basis, are proposed by the CRO and are endorsed by the Provisions Committee.
This process involves consideration of a variety of external actual and forecast information (International
Monetary Fund (IMF), European Commission, Economist Intelligence Unit (EIU), Moody’s Analytics) which is
complemented by economic expert judgement.
Predicted relationships between the key indicators and default and loss rates on the portfolios of financial
assets have been developed based on an analysis of historical data over the past 5 years.
Qualitative adjustments or overlays are occasionally made when inputs calculated do not capture all the
characteristics of the market at the reporting date. Overlays performed are set out in Note 5.2 'Significant
judgements, estimates and assumptions/calculation of expected credit losses'.
2.19.6 ECL measurement period
The period for which expected credit losses are determined (either for 12-month or lifetime ECL) is based
on the contractual life of a financial instrument. For non-revolving exposures the expected lifetime is the
period from the reporting date to the termination date of the facility. For irrevocable loan commitments and
financial guarantee contracts, the measurement period is determined similar to the period of the revolving
facilities.
64
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.19
Impairment of financial assets (continued)
2.19.6 ECL measurement period (continued)
For revolving facilities, credit cards and corporate and retail overdrafts BOC PCL has the right to cancel
and/or reduce the facilities with two months’ notice. BOC PCL does not limit its exposure to credit losses to
the contractual notice period, but instead the next review date is used for determining the measurement
period over which to calculate ECLs which is annual for corporate exposures and every two to three years
for retail exposures.
2.19.7 Purchased or originated credit impaired financial assets (POCI)
POCI financial assets are recorded at fair value on initial recognition. ECLs are only recognised or released
to the extent that there is a subsequent change in the expected credit losses. For POCI financial assets, the
Group only recognises the cumulative changes in lifetime ECL since initial recognition in the loss allowance.
POCI remain a separate category until derecognition.
2.20
Classification, measurement and derecognition (policy applicable before 1 January 2018)
2.20.1 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
and disposal/dissolution of subsidiaries’ 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 and disposal/dissolution of subsidiaries’ in the consolidated
income statement.
2.20.2 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 and disposal/dissolution of subsidiaries’ in the consolidated income statement.
Interest income and expense are included in the captions 'Income similar to interest income' and 'Expense
similar to interest expense' 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.
65
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.20
(continued)
Classification, measurement and derecognition (policy applicable before 1 January 2018)
2.20.3 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 and disposal/dissolution of subsidiaries and associates’ 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.
2.20.4 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 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.
2.20.5 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 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.
66
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.20
(continued)
Classification, measurement and derecognition (policy applicable before 1 January 2018)
2.20.6 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 and disposal/dissolution of subsidiaries’.
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 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.
2.20.7 Subordinated loan stock
Subordinated loan stock is initially measured at the fair value of the consideration received, net of any issue
costs. It is subsequently measured at amortised cost using the effective interest method, in order to
amortise the difference between the cost at inception and the redemption value, over the period to the
earliest date that the Group has the right to redeem the subordinated loan stock.
Interest on subordinated loan stock is included in ‘Interest expense’ in the consolidated income statement.
2.20.8 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 deposits by banks is at
amortised cost, using the effective interest method.
2.20.9 Derecognition of financial assets and financial liabilities
2.20.9.1 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 (i)
transferred substantially all the risks and rewards of the asset, or (ii) has neither transferred nor retained
substantially all the risks and rewards of the asset, but has transferred control of the asset.
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.
67
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.20
(continued)
Classification, measurement and derecognition (policy applicable before 1 January 2018)
2.20.9 Derecognition of financial assets and financial liabilities (continued)
2.20.9.2 Financial liabilities
A financial liability is derecognised when the obligation under the liability is discharged, cancelled or
expired.
2.21
Impairment of financial assets (policy applicable before 1 January 2018)
2.21.1 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 IFRSs,
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.
68
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.21
Impairment of financial assets (policy applicable before 1 January 2018) (continued)
2.21.1 Loans and receivables (continued)
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.
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.
2.21.2 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.
2.21.3 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.
69
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.22 Write-offs
The Group reduces the gross carrying amount of a financial asset when there is no reasonable expectation
of recovering it. In such case, financial assets are written off either partially or in full. Write off refers to
both contractual and non-contractual write offs. Write-offs and partial write-offs
represent
derecognition/partial derecognition events.
If the amount of write-offs is greater than the amount of accumulated loss allowance, the difference is first
treated as an addition to the allowance that is then applied against the gross carrying amount. Recoveries,
in part or in full, of amounts previously written-off are credited to the consolidated income statement in
‘Credit losses to cover credit risk on loans and advances to customers’.
2.23
Financial guarantees, letters of credits and undrawn loan commitments
The Group issues financial guarantees to its customers, consisting of letters of credit, letters of guarantee
and acceptances. Financial guarantees are initially recognised at fair value, and presented on the
consolidated balance sheet within ‘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
amount of ECL provision.
ECL resulting from financial guarantees is recorded in ‘Credit losses to cover credit risk on loans and
advances to customers’. 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.
Undrawn loan commitments and letters of credits are commitments under which, over the duration of the
commitment the Group is required to provide a loan with pre-specified terms to the customer. From 1
January 2018 these contracts are in scope of the ECL requirements. Corresponding ECL are presented
within ‘Accruals, deferred income and other liabilities’ on the Group’s balance sheet except in the case of
loan commitments where ECL on the loan commitment is recognised together with the loss allowance of the
relevant on balance-sheet exposure as the Group cannot separately identify the ECL on the loan
commitment from those on the on-balance sheet exposure component. ECL relating to these other loan
commitments is recorded in ‘Credit losses to cover credit risk on loans and advances to customers’ in the
consolidated income statement.
When a customer draws on a commitment, the resulting loan is presented within (i) financial assets at fair
value held for trading, consistent with the associated derivative loan commitment, (ii) financial assets at fair
value not held for trading, following loan commitments designated at fair value through profit or loss or (iii)
loans and advances to customers, when the associated loan commitment is not fair valued through profit or
loss.
2.24
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. The legally
enforceable right must not be contingent on future events and must be enforceable in the normal course of
business and in the event of default, insolvency or bankruptcy of either party.
2.25
Hedge accounting
The Group elected, as a policy choice permitted by IFRS 9, to continue to apply hedge accounting in
accordance with IAS 39. The Group implements the amended IFRS 7 hedge disclosure requirements.
70
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.25
Hedge accounting (continued)
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.
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.
2.25.1 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 and disposal/dissolution of subsidiaries and associates’. 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
and disposal/dissolution of subsidiaries and associates’.
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.
2.25.2 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 and disposal/dissolution of subsidiaries and associates’ 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.
2.25.3 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.
71
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.26
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 and are repayable within three months of the date of their
acquisition.
2.27
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.
2.27.1 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.
2.27.2 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.
2.27.3 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.
72
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.27
Insurance business (continued)
2.27.4 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.
2.27.5 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.
2.28
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 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 method.
2.29
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.
2.30
Operating leases
2.30.1 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’.
2.30.2 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.
73
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.31
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.
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.
2.32
Investment properties
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.
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 ‘Net 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 2.31 ‘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.
74
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.33
Stock of property
The Group in its normal course of business acquires properties in exchange of debt, 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 Consolidated Financial
Statements as ‘Stock of property’, reflecting the substance of these transactions.
Stock of property is initially measured at cost and subsequently 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.
2.34
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.
75
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.34
Non-current assets held for sale and discontinued operations (continued)
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.
2.35
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.
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
2.27.2.
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.
2.36
Share capital
Ordinary shares are classified as equity.
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.
2.37
Other equity instruments
An instrument is an equity instrument if the instrument includes no contractual obligation to deliver cash or
another financial asset to another entity, or to exchange financial assets or financial liabilities with another
entity under conditions that are potentially unfavourable to the issuer.
Other equity instruments are recorded at their residual amount and are not subject to any re-measurement
after initial recognition. The cost incurred attributable to the issue of other equity instruments is deducted
from retained earnings. Any subsequent write-down or write-up results to a credit or debit in retained
earnings respectively. Coupon payments are recorded directly in retained earnings.
2.38
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.
76
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.39
Provisions
2.39.1 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.
2.39.2 Provisions for undrawn loan commitments (policy applicable before 1 January 2018)
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.
2.40
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 ‘Credit losses to cover credit risk on loans and advances to customers’. 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.
2.41
Comparative information
Reclassifications to comparative information were made to conform to current year presentation as follows:
Provisions for pending litigation, claims, regulatory and other matters were reclassified from
other 'Accruals, deferred income and other liabilities' to the face of the Consolidated balance
sheet.
Investments previously classified in ‘Life insurance business assets attributable to policyholders’
totalling €91,190 thousand were reclassified to ‘Investments’ and an amount of €2,402 thousand
was reclassified from ‘Prepayments, accrued income and other assets’ to ‘Life insurance assets
attributable to policyholders’.
The results of the discontinued operations in the UK were represented as discontinued
operations. For the amounts involved refer to Note 7.
Interest income and interest expense relating to financial instruments classified at FVPL have
been reclassified to 'Income similar to interest income' and 'Expense similar to interest expense'
respectively in order to be consistent with the presentation requirements for the interest income
calculated using the effective interest rate method, on financial instruments measured at
amortised cost and financial assets measured at FVOCI following the adoption of IFRS 9 (Note
2.11).
The above reclassifications and representations did not have an impact on the results for the year or the
equity of the Group.
77
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
2.
Summary of significant accounting policies (continued)
2.41
Comparative information (continued)
The Group has not restated comparative information for 2017 for financial instruments within the scope of
IFRS 9. Additionally, the recognition and measurement of credit losses under IFRS 9 differs from that under
IAS 39. Therefore, the comparative information for 2017, which is reported under IAS 39 is not comparable
to the information presented for 2018, which is reported under IFRS 9. New or amended disclosures are
presented for the current period according to IFRS 9, where applicable, whereas comparative period
disclosures are consistent with those made in the prior periods. Adjustments arising from the adoption of
IFRS 9 have been recognised directly in equity as at 1 January 2018, as disclosed in Note 6.
3.
Going concern
The Directors have made an assessment of the Group’s ability to continue as a going concern for a period of
12 months from the date of approval of these financial statements. The Directors believe that the Group is
taking all necessary measures to maintain its viability and the development of its business in the current
economic environment.
In making this assessment, the Directors considered the significant transactions during 2018 which have
had a positive impact on the capital position of the Group, including the disposal of Bank of Cyprus UK Ltd,
the agreement for the sale of non-performing loans and the issuance of €220 million Additional Tier 1
Capital Securities. The Directors have also considered the legislative amendments on the Income Tax Law
Amendment 28 (I) of 2019, enacted on 1 March 2019, which allow for the conversion of specific deferred
tax assets (DTA) into deferred tax credits (DTC), the Group’s Financial and Capital Plan and the
developments in the operating environment in Cyprus (Note 4).
The Group has developed a Financial and Capital Plan (the ‘Plan’), which has been approved by the Board in
February 2019. One of the most important objectives of the Plan was to ensure that the Group has sufficient
resources and capital in order to continue the balance sheet de-risking and further deal with the residual
NPEs. The IFRS 9 impact on a fully phased-in basis has been considered within the Group’s Plan. Despite the
implementation risk associated with the outcome of future events outlined in the Plan at the reporting date,
the Directors believe that there is sufficient capital throughout the period of assessment to meet regulatory
capital requirements. The Group will continue its de-risking strategy and remains focused to implement the
actions contemplated in the Plan.
The Directors, in making their assessment, have given particular attention to the regulatory requirements
relating to capital and liquidity as follows:
Non-Performing Exposures
The continued organic reduction (now achieved for fifteen consecutive quarters) of the Group’s
NPEs which have decreased from €8,804 million in December 2017 to €7,518 million at 31
December 2018 and are further reduced to €4,768 million pro forma for Project Helix (Note
4.2.2);and
The reduction of NPEs has been a regulatory focus for a number of years and will continue to be
so. The Group is currently preparing an updated NPE strategy plan for the years 2019-2021
which will be submitted to the ECB by end of June 2019. The Directors believe that the reduction
of NPEs is a significant factor with regard to the future viability of the Group as a pillar bank in
Cyprus.
Capital
The Common Equity Tier 1 (CET1) ratio and the total capital ratio on a transitional basis stood at 12.1%
(unaudited) and 14.9% (unaudited) respectively at 31 December 2018, higher than the minimum required
ratios (Note 4.2.1).
78
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
3.
Going concern (continued)
Following the Annual Supervisory Review and Evaluation Process (SREP) performed by the ECB in 2018 and
based on the final 2018 SREP decision received on 27 March 2019, the Group’s minimum phased in CET1
ratio and Total Capital ratio remain unchanged, when ignoring the phasing-in of the Capital Conservations
Buffer and the Other Systemically Important Institution Buffer. The final 2018 SREP decision will apply from
1 April 2019.
The projected capital ratios of the Group indicate that there will be sufficient capital throughout the period
of assessment when considered in conjunction with the following items:
The phase-in of IFRS 9. The Group has elected to apply the EU transitional arrangements for
regulatory capital purposes (EU Regulation 2017/2395) where the total impact on adoption of
IFRS 9 of €308,511 thousand, on 1 January 2018 and any subsequent increase allowed by the
regulation for phasing-in (i.e. increase in Stage 1 and Stage 2 allowance), will impact the capital
ratios over a period of five years. The impact on the regulatory capital is being phased-in based
on a weighting factor until it is fully absorbed at the end of the five years. The initial impact of
IFRS 9 was phased in by 5% on 1 January 2018 regulatory capital and increases to 15%
(cumulative) on 1 January 2019;
The enactment of the Income Tax Amendment Law 28 (1) of 2019 by the Cypriot parliament in
March 2019, allowing for the conversion of the Group’s deferred tax assets into deferred tax
credits. This result in a more capital efficient tax asset. The law will result in improved regulatory
capital treatment under CRR and will increase CET1 by c. 170 bps (unaudited) on a transitional
basis as at 31 December 2018. This improvement includes the impact from a reversal of
impairment of the related deferred tax asset of approximately €108 million recognised during
2017 and 2018, which will be reversed in 2019 Income Statement of the Group; and
The regulatory capital position of the Group will strengthen further, upon completion of the sale
of loans and advances to customers (the ‘Helix Portfolio’ or the ‘Transaction’), largely NPEs,
classified as held for sale (Note 30). A significant step towards completion of the Transaction was
the ECB approval of the Significant Risk Transfer (the ‘SRT’) for regulatory capital purposes. BOC
PCL has received the SRT approval in March 2019. The completion of the Transaction remains
subject to various other conditions precedent. On completion, the derecognition of the Helix
portfolio will have a positive impact on the Group's CET1 ratio, of c. 160 bps (unaudited),
resulting from the release of risk weighted assets. Completion is currently expected to occur in
early second quarter of 2019.
Funding and liquidity
The Group has made a significant improvement in its liquidity position and ratios; and
The Group is in compliance with the Liquidity Coverage Ratio (LCR) and is significantly above the
minimum requirements (Notes 4.2.3 and 48).
Based on the projections of management of the Group, it is expected that the Group will maintain
compliance with these liquidity requirements for the period of the going concern assessment.
4.
4.1
Operating environment
Cyprus
Economic recovery became more deeply rooted with real Gross Domestic Product (GDP) rising by 3.9% in
2018 following increases of 4.5% and 4.8% in the preceding two years (Cyprus Statistical Service). GDP
growth in 2018 was underpinned by robust expansion in private consumption and services exports
particularly tourism. Fixed investments particularly construction activity also made an important
contribution. On a sectoral basis growth was mainly driven by tourism, trade and transport, construction
and professional and business services. The outlook for 2019-2020 remains positive with real GDP expected
to rise by 3.3% and 2.7% respectively according to the European Commission (European Economic
Forecast, Winter 2019, Interim).
Employment increased by 5.6% in 2018 compared with an increase of 4.6% in 2017 (Cyprus Statistical
Service). As a result the unemployment rate dropped to an average of 8.4% in 2018 from 11% in 2017 and
contributed to strong private consumption growth (Cyprus Statistical Service).
79
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
4.
4.1
Operating environment (continued)
Cyprus (continued)
Exports of goods and services continued to grow robustly in 2018 rising by 3.3% in real terms (Cyprus
Statistical Service). Exports are expected to continue to underpin the recovery, but Cyprus might also be
impacted negatively by the exit of the UK from the EU (Brexit). Cyprus has close trade and investment links
with the UK, making its economy vulnerable to the impact of Brexit on the UK economy. Tourist arrivals
from the UK accounted for about 34% of total arrivals in 2017-2018. A possible decline in tourist arrivals
from the UK and a drop in their spending will need to be mitigated by increasing arrivals and revenues from
other countries.
Regarding prices, consumer inflation accelerated modestly in 2018 to 1.4% from 0.5% in 2017 (Cyprus
Statistical Service). This was owed in large to higher global energy prices. Inflation is expected to accelerate
further in the medium term as tighter labour market conditions gradually lead to higher wages, but will
remain relatively modest by historical standards.
The budget turned to a surplus of 1.8% of GDP in 2017. The budget surplus is estimated at 2.8% of GDP in
2018, according to the European Commission (Post-Programme Surveillance Report Cyprus, Autumn 2018),
excluding the impact of banking support measures related to the Cyprus Cooperative Bank (CyCB). The
budget surplus will also remain sizable in 2019-2020 according to the European Commission. The budget
surplus is driven by buoyant revenue growth underpinned by strong economic activity. Expenditure
increases will be driven mainly by public sector pay rises and social transfers, but are expected to lag
revenue growth. The budget cost of the ESTIA Scheme, a State-supported scheme to aid the loan
repayment of vulnerable groups with non-performing exposures (NPEs) backed by primary residences, will
be relatively low and its impact on the budget balance will be marginal.
Gross Government debt is estimated at 105% of GDP in 2018 according to the European Commission, up
from 96% in 2017. This followed the placement of €3.2 billion Government bonds in the CyCB to facilitate
the sale of the good assets of CyCB. However, its underlying dynamics remain stable and it is expected to
decline significantly in coming years. The debt ratio will decline to 98.4% in 2019 and to 91% in 2020
according to the European Commission (Post-Programme Surveillance Report Cyprus, Autumn 2018).
In the banking sector, the stock of NPEs declined significantly. For the first eleven months of 2018, NPEs
dropped by 46% or by €9.6 billion to €11.2 billion, after the CyCB transaction and the sale of a package of
NPEs by Bank of Cyprus, according to data by the Central Bank of Cyprus (CBC). The ratio of NPEs to gross
loans dropped to 32.1% at the end of November 2018 from 42.5% at the end of December 2017. The ratio
of total impairments to total NPEs was 52.2% at the end of November 2018.
In July 2018, the Cyprus government took additional steps to address regulatory issues relating to NPEs.
Parliament voted on Cyprus government legislative proposals for strengthening the foreclosure and
insolvency framework and facilitating the securitisation of NPEs and the sale of loans. Taken together, these
measures, along with ESTIA, will support further reductions in the remaining stock of NPEs.
The sovereign risk ratings of the Cyprus government improved considerably. In October 2018 Fitch Ratings
upgraded its Long-Term Issuer Default ratings for Cyprus to investment grade (BBB-) with a stable outlook.
In September 2018, S&P Global Ratings also upgraded Cyprus to investment grade (BBB-) with stable
outlook. In July 2018 Moody’s Investors Service upgraded Cyprus’ sovereign rating to Ba2 from Ba3. The
improvement in the ratings since the crisis in 2013 reflects the government’s fiscal consolidation efforts, the
generation of primary fiscal surpluses, a gradual stabilisation in the banking sector, and the successful
implementation of the economic adjustment programme.
4.2
The Group
4.2.1
Regulatory capital ratios (unaudited)
The CET1 ratio of the Group at 31 December 2018 stands at 12.1% and the total capital at 14.9% on a
transitional basis.
80
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
4.
4.2
Operating environment (continued)
The Group (continued)
4.2.1
Regulatory capital ratios (unaudited) (continued)
The minimum Pillar I total capital ratio requirement is 8.0% and may be met, in addition to the 4.5% CET1
requirement, with up to 1.5% of Additional Tier 1 capital and with up to 2.0% of 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 annual Supervisory Review and Evaluation Process (SREP) performed by the ECB in 2018 and
based on the final 2018 SREP decision received on 27 March 2019, the Group’s minimum phased-in CET1
capital ratio and Total capital ratio remain unchanged when ignoring the phasing-in of the Capital
Conservation Buffer and the Other Systemically Important Institution Buffer. The final 2018 SREP decision
will apply from 1 April 2019.
The Group’s phased-in CET1 capital ratio requirement will be 10.5% (2018: 9.375%), comprising a 4.5%
Pillar I requirement, a 3.0% Pillar II requirement, the Capital Conservation Buffer of 2.5% (2018: 1.875%)
and the Other Systemically Important Institution Buffer of 0.5% (2018: Nil).
The Group’s Total capital ratio requirement will be 14.0% (2018: 12.875%), comprising an 8.0% Pillar I
requirement, a 3.0% Pillar II requirement, the Capital Conservation Buffer of 2.5% (2018: 1.875%) and the
Other Systemically Important Institution Buffer of 0.5% (2018: Nil).
The above minimum ratios apply for both, BOC PCL and the Group. BOC PCL is 100% subsidiary of the
Company and its principal activities are the provision of banking, financial services and management and
disposal of property predominately acquired in exchange of debt.
The capital position of the Group and BOC PCL at 31 December 2018 exceeds both their Pillar I and their
Pillar II add-on capital requirements. However, the Pillar II add-on capital requirements are a point-in-time
assessment and therefore are subject to change over time.
The Group has developed a Plan, which has been approved by the Board in February 2019 (Note 3).
4.2.2
Asset quality
The Group NPEs, as defined by EBA, including loans and advances to customers which have been classified
as non-current assets held for sale totalled €7,518 million at 31 December 2018 and accounted for 47% of
gross loans before fair value adjustment on initial recognition. The provisioning coverage ratio of NPEs
totalled 47% at 31 December 2018 compared to 48% at 31 December 2017.
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. At 31
December 2018 NPEs have decreased by 50% since their peak of €15,175 million at 31 March 2015.
The Group has prepared a detailed NPE Strategy Plan for the three year period 2018-2020 as requested by
the ECB. The Group is currently preparing an updated NPE strategy plan for the years 2019-2021 which will
be submitted to the ECB by end of June 2019.
4.2.3
Liquidity (unaudited)
Group customer deposits totalled €16,844 million at 31 December 2018 compared to €17,850 million at 31
December 2017. At 31 December 2018 all deposits were in Cyprus (2017: €15,983 million). Group
customer deposits accounted for 76% of total assets as at 31 December 2018 (2017: 76% and a low of
48% at 31 March 2014).
81
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
4.
4.2
Operating environment (continued)
The Group (continued)
4.2.3
Liquidity (unaudited) (continued)
The Group focused on measures to improve its liquidity position in order to comply with the regulatory
liquidity requirements. As at 31 December 2018, the Group was in compliance with all regulatory liquidity
requirements. As at 31 December 2018 the LCR stood at 231% for the Group (compared to 190% at 31
December 2017) and was in compliance with the minimum regulatory requirement of 100% applicable as
from 1 January 2018. As at 31 December 2018 the Group’s NSFR, on the basis of the Basel ΙΙΙ standards,
was 119% (compared to 111% at 31 December 2017).
On 1 January 2018, the local regulatory requirements, set by the CBC, were abolished as per Article 412(5)
of EU Regulation No 575/2013.
In December 2017, the CBC introduced a macroprudential measure in the form of a liquidity add-on that
was imposed on top of the LCR of BOC PCL and which became effective on 1 January 2018. The objective of
the measure was to ensure that there would be a gradual release of the excess liquidity in the Cyprus
banking system arising from the lower liquidity requirements under the LCR compared to the ones under
the local regulatory liquidity requirements previously in place. The add-on applied stricter outflow and inflow
rates on some of the parameters used in the calculation of the LCR, as well as additional liquidity
requirements in the form of outflow rates on items that are not subject to any outflow rates under the LCR.
The measure was implemented in two stages. The first stage required stricter outflow and inflow rates
which were applicable from 1 January 2018 until 30 June 2018.
The second stage required more relaxed outflow and inflow rates compared to the initial ones, and were
applicable from 1 July 2018 until 31 December 2018. Specifically, there was a reduction of 50% of the LCR
add-on rates as from 1 July 2018.
The additional liquidity requirement was applicable up to 31 December 2018 and was abolished from 1
January 2019. As at 31 December 2018, the Group and BOC PCL were in compliance with both the LCR and
the LCR add-on.
4.2.4
Pending litigation, claims, regulatory and other matters
The management has considered the potential impact of pending litigation and claims, investigations,
regulatory and other matters against the Group which include the bail-in of depositors and the absorption of
losses by the holders of equity and debt instrument of BOC PCL. The Group has obtained legal advice in
respect of these claims.
Despite the novelty of many of the said claims based on the information available at present and on the
basis of the law as it currently stands, management considers that the said claims are considered unlikely to
have a material adverse impact on the financial position and capital adequacy of the Group. Additional
information on pending litigation, claims, regulatory and other matters is provided in Note 40.
5.
Significant and other 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.
82
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
5.
Significant and other judgements, estimates and assumptions (continued)
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.
The most significant judgements, estimates and assumptions relate to classification of financial instruments
and calculation of expected credit losses, tax, estimation of the net realisable value of stock of property and
provisions which are presented in Notes 5.1 to 5.5 below. Other significant judgements, estimates and
assumptions are disclosed further below in Notes 5.6 to 5.14.
5.1
Classification of financial assets
The Group exercises judgement upon determining the classification of its financial assets, which relate to
business models and future cash flows.
Judgement is also required to determine the appropriate level at which the assessment of business models
needs to be performed. In general, the assessment is performed at the level of each business line. Further,
the Group exercises judgement in determining the effect of sales of financial instruments on its business
model assessment.
The Group also applies judgement upon considering whether contractual features including interest rate
could significantly affect future cash flows. Furthermore, judgment is required when assessing whether
compensation paid or received on early termination of lending arrangements results in cash flows that are
not SPPI.
5.2
Calculation of expected credit losses
The calculation of ECL requires management to apply significant judgement and make estimates and
assumptions, involving significant uncertainty at the time these are made. Changes to these estimates and
assumptions can result in significant changes to the timing and amount of ECL to be recognised. The
Group’s calculations are outputs of models, of underlying assumptions on the choice of variable inputs and
their interdependencies.
Elements of ECL models that are considered accounting judgements and estimates include:
Assessment of significant increase of credit risk
IFRS 9 does not include a definition of significant increase in credit risk. The Group assesses whether
significant increase in credit risk has occurred since initial recognition using predominantly quantitative and
in certain cases qualitative information. The determination of the relevant thresholds to determine whether
the significant increase in credit risk has occurred, involves management judgement. The relevant
thresholds are set, monitored and updated on a yearly basis by the Risk Management division and endorsed
by the Group Provisions Committee.
Determining the PD at initial recognition requires management estimates. In the case of exposures existing
prior to the adoption of IFRS 9, a retrospective calculation of the PD is made in order to quantify the risk of
each exposure at the time of the initial recognition. In certain cases estimates about the date of initial
recognition might be required.
For the retail portfolio, the Group uses a PD at origination driven by behavioural information (score cards)
whereas, for the corporate portfolio, the Group uses the internal credit rating information. In determining
the relevant PDs, management estimates are required with respect to the life-time of revolving facilities.
For revolving facilities, the origination date is the date when a credit review has taken place instead of the
contractual date.
83
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
5.
5.2
Significant and other judgements, estimates and assumptions (continued)
Calculation of expected credit losses (continued)
Scenarios and macroeconomic factors
The Group determines the ECL, which is a probability-weighted amount by evaluating a range of possible
outcomes. Management uses forward-looking scenarios and assesses the suitability of weights used. These
are based on management’s assumptions taking into account macroeconomic, market and other factors.
Changes in these assumptions and in the external factors could significantly impact ECL. Macroeconomic
inputs and weights per scenario are monitored by the Economic Research Unit and are based on external
market data supplemented by expert judgement.
Qualitative adjustments or overlays are occasionally made when inputs calculated do not capture all the
characteristics of the market. These are reviewed and adjusted if considered necessary by the Risk
Management Division and endorsed by the Group Provisions Committee. Qualitative adjustments or
overlays made as at the reporting date relate to the positive future property value cap to 0% for all
scenarios.
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 ECL 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 Group uses three different economic scenarios.
The table below indicates the most significant macroeconomic variables as well as the scenarios used by the
Group as at 31 December 2018 and 1 January 2018 respectively. The Group has used the 30-50-20
probability structure for the adverse, base and favourable scenarios respectively compared to the 20-60-20
structure derived using the method described in Note 2.19.5. The pace of expansion of the economy is
expected to decline towards 2%, in the medium and longer terms. Additionally the heightened uncertainties
of the economy in 2019 and beyond relating to Brexit, trade disputes between the US and the China and
between the US and the EU, and economic fragility in southern Europe amidst a slowing global economy,
increase the risk of a financial crisis. These factors display a relatively high volatility, which the
management considered that may not be fully captured in the weights as calculated using the method
described in Note 2.19.5 and hence the management has decided to increase the weight of the adverse
scenario.
31 December 2018
Year
Scenario
Weight
%
Real GDP
(% change)
Unemployment
rate (% of
labour force)
2019
2020
2021
2022
2023
Adverse
Baseline
Favourable
Adverse
Baseline
Favourable
Adverse
Baseline
Favourable
Adverse
Baseline
Favourable
Adverse
Baseline
Favourable
30.0
50.0
20.0
30.0
50.0
20.0
30.0
50.0
20.0
30.0
50.0
20.0
30.0
50.0
20.0
10.0
7.6
7.2
12.2
7.3
6.8
12.4
6.9
6.5
11.1
6.5
6.1
10.0
6.3
5.8
-1.3
3.1
4.3
-1.3
2.6
3.4
3.0
2.4
2.6
4.1
2.5
2.6
3.9
2.3
2.3
84
Consumer
Price Index
(average
% change)
-0.2
1.7
2.5
0.3
1.7
2.6
2.1
2.0
2.4
2.4
2.0
2.6
2.5
2.1
2.6
RICS House
Price Index
(average
% change)
1.4
4.4
5.5
-1.7
2.7
4.1
0.7
2.9
3.6
3.1
3.1
3.7
4.7
3.8
4.0
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
5.
5.2
Significant and other judgements, estimates and assumptions (continued)
Calculation of expected credit losses (continued)
1 January 2018
Year
Scenario
Weight
%
Real GDP
(% change)
Unemployment
rate (% of
labour force)
2018
2019
2020
2021
2022
Adverse
Baseline
Favourable
Adverse
Baseline
Favourable
Adverse
Baseline
Favourable
Adverse
Baseline
Favourable
Adverse
Baseline
Favourable
30.0
50.0
20.0
30.0
50.0
20.0
30.0
50.0
20.0
30.0
50.0
20.0
30.0
50.0
20.0
-1.6
2.8
3.9
-1.5
2.4
2.7
2.8
2.4
2.2
3.8
2.2
2.2
3.8
2.2
2.2
12.4
9.9
9.5
14.0
9.0
8.5
14.1
8.5
8.1
12.8
8.2
7.8
11.6
7.9
7.4
Consumer
Price Index
(average
% change)
-1.2
0.7
1.8
0.2
1.6
2.3
1.9
1.7
1.7
2.0
1.6
1.5
2.1
1.7
1.6
RICS House
Price Index
(average
% change)
-0.8
3.0
4.2
0.7
4.5
5.3
2.2
3.6
4.0
2.2
1.7
2.7
3.6
2.2
2.8
The adverse scenarios may outpace the base and favourable scenarios after the initial shock has been
adjusted to and the economy starts to expand from a lower base. Thus in the adverse scenario GDP will
follow a growth trajectory that will ultimately equal and surpass the baseline before converging. Property
prices are primarily determined by GDP growth but with a lag. Thus property prices will initially adjust less
steeply than GDP, and will start to accelerate after the recovery in GDP has been entrenched. After this
point, properly prices will accelerate and will match and surpass the pace in the baseline scenario, before
finally converging.
Since 1 January 2018, the Group has reassessed the key economic indicators used in the ECL models and
using actual performance ratios of the economy as revised by the Cyprus statistical service for 2016 and
2017 and the forecast upgrades by the IMF and the European Commission. The favourable and adverse
scenarios were adjusted to reflect tourist sector performance, construction activity, unemployment rates,
consumer price index and house prices.
The RICS indices, which are considered for the purposes of determining the real estate collateral value on
realisation date are capped at the reporting date value, in case of any projected increase, whereas any
projected decrease is taken into account. As a result the indexed value for all collaterals is less or equal to
their corresponding open market value as of the reporting date.
For Stage 3 customers, the calculation of individually assessed provisions is the weighted average of three
scenarios: base, adverse and favourable. The base scenario focuses on the following variables, which are
based on the specific facts and circumstances of each customer: the operational cash flows, the timing of
recovery of collaterals and the haircuts from the realisation of collateral. The base scenario is used to derive
additional scenarios for either better or worse cases. Under the adverse scenario operational cash flows are
decreased by 50%, applied haircuts on real estate collateral are increased by 50% and the timing of
recovery of collaterals is increased by 1 year with reference to the baseline scenario, whereas under the
favourable scenario applied haircuts are decreased by 5%, with no change in the recovery period with
reference to the baseline scenario. Assumptions used in estimating expected future cash flows (including
cash flows that may result from the realisation of collateral) reflect current and expected future economic
conditions and are generally consistent with those used in the Stage 3 collectively assessed exposures.
85
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
5.
5.2
Significant and other judgements, estimates and assumptions (continued)
Calculation of expected credit losses (continued)
For collectively assessed customers the calculation is the weighted average of three scenarios: base,
adverse and favourable.
Expected lifetime of revolving facilities
Judgement is exercised on the measurement period of expected lifetime for revolving facilities. The
determination of the expected life for the revolving portfolio is sensitive to changes in contractual maturities
resulting from business decisions. The Group exercises judgement in determining the period over which
ECL should be computed.
Assessment of loss given default
A factor for the estimation of LGD 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 collateral, taxes and expenses on the repossession and subsequent sale of the collateral as
well as any other applicable haircuts. 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.
At 31 December 2018 the weighted average haircut (including liquidity haircut and selling expenses) used in
the collectively assessed provisions calculation for loans and advances to customers excluding those
classified as held for sale is c.32% under the baseline scenario.
The timing of recovery from real estate collaterals used in the collectively assessed provisions calculation for
loans and advances to customers other than those classified as held for sale has been estimated to be on
average seven years under the baseline scenario.
For the calculation of individually assessed provisions, the timing of recovery of collaterals as well as the
haircuts used are based on the specific facts and circumstances of each case. Judgement may also be
exercised over staging during the individual assessment.
Any positive cumulative average future change in property values forecasted was capped to zero for the
year ended 31 December 2018. This applies to all scenarios.
The above assumptions are also influenced by the ongoing regulatory dialogue the Group 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 the 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 credit losses of loans and advances.
Modelling adjustments
Forward looking models have been developed for ECL parameters (PD, EAD, LGD) for all portfolios and
segments sharing similar characteristics. Model validation is performed by the independent validation unit
within the Risk Management Division on an annual basis and involves monitoring of model performance and
stability, review of model relationships and back testing. In certain cases, judgment may be exercised in the
form of management overlay by applying adjustments on the modelled parameters. Governance of these
models lies with the Risk Management Division. Any management overlays are approved by the Risk
Management Division and endorsed by the Provisions Committee.
86
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
5.
5.2
Significant and other judgements, estimates and assumptions (continued)
Calculation of expected credit losses (continued)
ECL allowances also include 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. For the collectively
assessed off-balance sheet credit exposures, the allowance for provisions is calculated based on the
relevant ECL model.
Portfolio segmentation
The individual assessment is performed not only for individually significant assets but also for other
exposures meeting specific criteria determined by management. The selection criteria for the individually
assessed exposures are based on management judgement and are reviewed on a quarterly basis by the
Risk Management Division and are adjusted or enhanced, if deemed necessary.
In addition to individually assessed assets the Group also assesses assets collectively. The collectively
assessed portfolio includes all loans which are not individually assessed. The Group categorises the
exposures into sufficiently granular portfolios segments with shared risk characteristics. The granularity is
based on different levels of segmentation. In determining the level of granularity of such portfolios, as well
as assessing that these share similar risk characteristics, management's judgment is required.
Further details on impairment allowances and related credit information are set out in Note 46.
5.3
Tax
The Group operates in 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 18.
5.4
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 through valuation techniques, requiring significant judgement, which take into account all
available reference points such as, expert valuation reports, current market conditions, the holding period of
the asset applying an appropriate illiquidity discount and any other relevant parameters. Selling expenses
are always considered and deducted from the realisable value. 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 uncertainty due to the relatively low level of market activity.
More details on the stock of property are presented in Note 28.
87
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
5.
5.5
Significant and other judgements, estimates and assumptions (continued)
Provisions
The accounting policy for provisions is described in Note 2.39. 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, regulatory and other 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, regulatory and other matters refer to Note 40.
5.6
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 23.
88
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
5.
5.7
Significant and other judgements, estimates and assumptions (continued)
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 15.
5.8
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 13.
5.9
Life insurance business
The Group is engaged in the provision of life insurance services. Whole life insurance plans (life plans) are
unit-linked contracts 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 13.
89
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
5.
5.9
Significant and other judgements, estimates and assumptions (continued)
Life insurance business (continued)
5.9.1
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 2018, are set out in Note 25.
5.9.2
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 international 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 expected 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.
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 33.
90
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
5.
Significant and other judgements, estimates and assumptions (continued)
5.10
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.
5.11
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.
5.12
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 23.
5.13
January 2018)
Provision for impairment of loans and advances to customers (applicable before 1
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.
91
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
5.
Significant and other judgements, estimates and assumptions (continued)
5.13
January 2018) (continued)
Provision for impairment of loans and advances to customers (applicable before 1
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, taxes and expenses on the repossession and subsequent sale of the collateral as
well as any other applicable haircuts. 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. During 2017, the Group, following a reconsideration of its strategy to more actively explore
other innovative strategic solutions to further accelerate balance sheet de-risking, has modified certain of
its provisioning assumptions and estimates.
At 31 December 2017 the weighted average haircut (including liquidity haircut and selling expenses) used in
the collective provisions calculation is c.34%.
The timing of recovery from real estate collaterals used in the collective provision calculation has been
estimated to be on average six years.
For the calculation of specific provisions, the timing of recovery of collaterals as well as the haircuts used
were based on the specific facts and circumstances of each case.
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 above assumptions are also influenced by the ongoing regulatory dialogue BOC PCL 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 (e.g
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.
92
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
5.
Significant and other judgements, estimates and assumptions (continued)
5.13
January 2018) (continued)
Provision for impairment of loans and advances to customers (applicable before 1
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.
Loans subject to collective impairment assessment whose terms have been renegotiated are no longer
considered past due and 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 relevant EBA technical standard.
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 46.
93
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
5.
Significant and other judgements, estimates and assumptions (continued)
5.14
Impairment of available-for-sale investments (applicable before 1 January 2018)
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 17 and 21.
94
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
6.
6.1
Transition disclosures
Transitional Consolidated Balance Sheet on adoption of IFRS 9
31 December
2017
(IAS 39
presentation)
€000
Reclassifications
and
remeasurements
€000
1 January 2018
(revised for
IFRS 9
adoption)
€000
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
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 venture
Deferred tax assets
Non-current assets held for sale
3,393,934
1,192,633
18,027
830,483
290,129
14,602,454
429,890
226,105
1,641,422
19,646
279,814
165,952
118,113
383,498
6,500
(5,872)
(20)
-
(1,861)
-
3,388,062
1,192,613
18,027
828,622
290,129
(318,211)
14,284,243
-
(576)
-
-
-
-
-
-
-
429,890
225,529
1,641,422
19,646
279,814
165,952
118,113
383,498
6,500
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
Pending litigation, claims, regulatory and other matters
Subordinated loan stock
Deferred tax liabilities
Total liabilities
Equity
Share capital
Share premium
Revaluation and other reserves
Accumulated losses
Equity attributable to the owners of the Company
Non-controlling interests
Total equity
Total liabilities and equity
23,598,600
(326,540)
23,272,060
495,308
930,000
257,322
50,892
17,849,919
605,448
306,227
138,375
302,288
46,113
-
-
-
-
-
-
(18,920)
-
-
-
495,308
930,000
257,322
50,892
17,849,919
605,448
287,307
138,375
302,288
46,113
20,981,892
(18,920)
20,962,972
44,620
2,794,358
273,708
(527,128)
2,585,558
31,150
2,616,708
23,598,600
-
-
(8,470)
(299,150)
(307,620)
-
(307,620)
(326,540)
44,620
2,794,358
265,238
(826,278)
2,277,938
31,150
2,309,088
23,272,060
95
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
6.
Transition disclosures (continued)
6.1.
Transitional Consolidated Balance Sheet on adoption of IFRS 9 (continued)
The classification and measurement and impairment requirements of IFRS 9 were applied retrospectively by
adjusting the opening balance sheet at the date of the initial adoption. The Group elected, as a policy choice
permitted by IFRS 9, to continue to apply hedge accounting in accordance with IAS 39. As permitted by
IFRS 9 the Group has not restated comparative periods. The impact on the adoption date on 1 January
2018, was therefore recognised through the consolidated statement of changes in equity in the opening
retained earnings and other components of equity, as appropriate.
6.2
Classification and measurement of financial instruments
The measurement category and the carrying amount of financial assets and liabilities in accordance with IAS
39 and IFRS 9 at 1 January 2018 are compared as follows:
Financial assets
Cash and balances with central banks
Loans and advances to banks
Derivative financial assets
Investments (including investments
pledged as collateral)
Loans and advances to customers
Life insurance business assets
attributable to policyholders
Other financial assets (included in
‘Prepayments, accrued income and
other assets’ in balance sheet)
Financial liabilities
Other financial liabilities and
provisions for financial guarantees
and commitments
IAS 39
Measurement
category
Carrying
amount
€000
IFRS 9
Measurement
category
Carrying
amount
€000
Loans and
receivables
(amortised cost)
Loans and
receivables
(amortised cost)
FVPL
Available-for-sale
Loans and
receivables
(amortised cost)
FVPL
Loans and
receivables
(amortised cost)
FVPL
(designated)
Loans and
receivables
(amortised cost)
3,393,934
Amortised cost
3,388,062
1,192,633
Amortised cost
1,192,613
18,027 FVPL (mandatory)
929,297
FVOCI
18,027
932,105
48,658
Amortised cost
46,815
142,657
FVPL
139,831
14,602,454
Amortised cost
13,894,381
FVPL (mandatory)
389,862
416,060 FVPL (designated)
416,060
105,474
Amortised cost
FVPL (mandatory)
98,743
6,425
n/a
228,633
n/a
209,713
There were no other changes to the classification and measurement of financial liabilities, namely deposits
by bank, funding from central banks, repurchase agreements, derivative financial liabilities, customer
deposits, subordinated loan stock and other financial liabilities included in ‘Accruals, deferred income and
other liabilities’. The carrying amount of these financial liabilities under IAS 39 and IFRS 9 is the same.
6.3
Reconciliation of balance sheet amounts from IAS 39 to IFRS 9
For the adoption of IFRS 9 on 1 January 2018, the Group performed an assessment of its business models
for managing financial assets and analysis of their cash flow characteristics, to determine their classification
and measurement category. On the basis of the result of their classification and measurement category the
Group has proceeded with the measurement of those financial assets under the new measurement
requirements of IFRS 9.
96
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
6.
Transition disclosures (continued)
6.3.
Reconciliation of balance sheet amounts from IAS 39 to IFRS 9 (continued)
The following table reconciles the carrying amounts of financial assets, from their previous measurement
category in accordance with IAS 39 to their new measurement categories upon transition to IFRS 9 on 1
January 2018:
Re-
classifications
ECL Re-
measurements
Other Re-
measurements
IFRS 9
carrying
amount 1
January 2018
€000
€000
€000
€000
Financial assets
Amortised cost under IFRS 9
Cash and balances with central banks
Carrying amount under IAS 39
Re-measurement: ECL allowance
Carrying amount under IFRS 9
Loans and advances to banks
Carrying amount under IAS 39
Re-measurement: ECL allowance
Carrying amount under IFRS 9
Investments (debt instruments)
Carrying amount under IAS 39
Re-measurement: ECL allowance
Carrying amount under IFRS 9
Loans and advances to customers
Carrying amount under IAS 39
Reclassification: To FVPL (mandatory)
Re-measurement: ECL allowance
Carrying amount under IFRS 9
Other assets
Carrying amount under IAS 39
Reclassification: To FVPL (mandatory)
Re-measurement: ECL allowance
Carrying amount under IFRS 9
Total financial assets measured at
amortised cost
Fair value through profit or loss (FVPL)
under IFRS 9
Derivative financial assets
Carrying amount under IAS 39 and under IFRS 9
(FVPL mandatory)
Investments – FVPL (debt instruments and
mutual funds) (mandatory)
Carrying amount under IAS 39
Reclassification: From available-for-sale
Reclassification: To FVOCI (debt instruments)
Carrying amount under IFRS 9
Investments – FVPL (equity instruments)
Carrying amount under IAS 39
Reclassification: From available-for-sale
Reclassification: To FVOCI (equity instruments)
B
D
C
C
Carrying amount under IFRS 9
Total investments at FVPL
Loans and advances to customers
(mandatory FVPL)
Carrying amount under IAS 39
Ref
IAS 39
carrying
amount 31
December
2017
€000
3,393,934
1,192,633
48,658
14,602,454
A
(388,971)
105,474
(6,425)
(5,872)
(20)
(1,843)
(319,102)
(576)
3,388,062
1,192,613
46,815
13,894,381
98,473
19,343,153
(395,396)
(327,413)
-
18,620,344
18,027
135,472
7,185
12,115
(14,041)
324
(1,224)
18,027
133,546
6,285
142,657
(2,826)
-
-
139,831
-
97
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
6.
Transition disclosures (continued)
6.3.
Reconciliation of balance sheet amounts from IAS 39 to IFRS 9 (continued)
Ref
IAS 39
carrying
amount 31
December
2017
€000
Re-
classifications
ECL Re-
measurements
Other Re-
measurements
IFRS 9
carrying
amount 1
January 2018
€000
€000
€000
€000
388,971
891
A
G
E
D
C
C
B
C
C
E
Financial assets (continued)
Reclassification: From loans and receivables
(amortised cost)
Re-measurement: Fair value
Carrying amount under IFRS 9
Life insurance business assets attributable
to policyholders
Carrying amount under IAS 39 and under IFRS 9
(FVPL designated)
Other assets (mandatory FVPL)
Carrying amount under IAS 39
Reclassification: From amortised cost
Carrying amount under IFRS 9
Total financial assets measured at FVPL
Fair value through other comprehensive
income (FVOCI) under IFRS 9
Investments – FVOCI (debt instruments)
Carrying amount under IAS 39
Reclassification: From available for sale
Reclassification: From FVPL
Re-measurement: ECL allowance
Carrying amount under IFRS 9
Investments – FVOCI (equity instruments)
Carrying amount under IAS 39
Reclassification: From available for sale
Reclassification: From FVPL
Carrying amount under IFRS 9
Total financial assets measured at FVOCI
Investments – Available-for-sale financial
assets
Carrying amount under IAS 39
Reclassification: To FVPL – debt instruments
(mandatory)
Reclassification: To FVPL – equity instruments
Reclassification: To FVOCI – equity instruments
Reclassification: To FVOCI – debt instruments
Carrying amount under IFRS 9
Financial liabilities
Other liabilities
Carrying amount under IAS 39
Re-measurement: ECL allowance
Carrying amount under IFRS 9
416,060
-
6,425
389,862
416,060
6,425
576,744
392,570
-
891
970,205
n/a
n/a
901,234
14,041
15,624
1,224
(18)
915,257
16,848
-
932,123
(18)
-
932,105
929,297
(12,115)
(324)
(15,624)
(901,234)
929,297
(929,297)
-
228,633
(18,920)
228,633
-
(18,920)
98
n/a
-
209,713
209,713
-
-
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
6.
Transition disclosures (continued)
6.3.
Reconciliation of balance sheet amounts from IAS 39 to IFRS 9 (continued)
A.
B.
C.
D.
E.
F.
G.
Loans and advances to customers carried at amortised cost under IAS 39 of a carrying amount of
€388,971 thousand as at 31 December 2017, failed to meet the SPPI criteria and, as a result, have
been classified at FVPL on 1 January 2018 and re-measured then at fair value with an initial
application impact of €891 thousand. The Group did not voluntarily designate any loans previously
measured at amortised cost as financial assets at FVPL.
The Group has classified certain debt and non-equity instruments of a carrying value of €12,115
thousand that were previously classified as available-for-sale under IAS 39 as investments at FVPL
as these instruments failed to meet the SPPI criteria.
The Group has made an irrevocable election to classify the majority of its equity investments of a
carrying value of €15,624 thousand that were classified as available-for-sale under IAS 39 as
equity instruments at FVOCI on transition to IFRS 9. The Group has also elected to classify at
FVOCI under IFRS 9, equity investments which were classified at FVPL under IAS 39 of an amount
of €1,224 thousand, as they were not held for trading on 1 January 2018. Equity investments of a
carrying amount of €1,420 thousand that were held for trading e.g. acquired principally for the
purpose of selling or repurchasing in the near term will continue to be measured at FVPL under
IFRS 9.
The Group holds debt instruments of €14,041 thousand which were classified at FVPL as they were
held for trading under IAS 39. As of 1 January 2018, these instruments are managed within a
business model of collecting contractual cash flows and selling the financial assets. Accordingly,
since these instruments pass the SPPI criteria, the Group classified these investments as debt
instruments measured at FVOCI.
Debt instruments that were classified as available-for-sale under IAS 39 will be measured at FVOCI
under IFRS 9 since they meet the SPPI criteria and the Group concluded that apart from a small
portion (refer to B above) these instruments are managed within a business model of collecting
contractual cash flows and selling the financial assets and have therefore been classified at FVOCI.
There is no impact on deferred tax on adoption of IFRS 9.
The Life insurance business assets attributable to policyholders are designated at FVPL because
they eliminate inconsistent treatment that would otherwise arise from measuring such assets on a
different basis to the liabilities such assets fund.
99
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
6.
Transition disclosures (continued)
6.4
losses
Impact on transition to IFRS 9: Financial instruments fair value reserve and accumulated
The impact on transition to IFRS 9 on financial instruments fair value reserve and accumulated losses is as
follows:
Balance under IAS 39 (31 December 2017)
Recognition of IFRS 9 ECL including those measured of FVOCI (Note 6.5)
Re-measurement impact of reclassifying financial assets held at amortised
cost to FVPL
Debt instruments from FVPL to FVOCI
Debt instruments from available-for-sale to FVOCI
Debt instruments from available-for-sale to FVPL
Equity securities from available-for-sale to FVOCI
Equity securities from FVPL to FVOCI
Restated balance at 1 January 2018
Accumulated
losses
€000
(527,128)
(308,511)
891
(807)
(854)
3,419
6,487
225
(826,278)
Financial
instruments
fair value
reserve
€000
54,485
-
-
807
854
(3,419)
(6,487)
(225)
46,015
6.5
IFRS 9
Reconciliation of impairment allowance balance from IAS 39 to ECL allowance balance of
The following table reconciles the opening loss provision allowances under IAS 39 and provisions for
financial guarantees and commitments in accordance with IAS 37 Provisions, Contingent Liabilities and
Contingent Assets to the ECL allowances under IFRS 9. Further details are disclosed in Note 46.
100
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
6.
Transition disclosures (continued)
6.5.
IFRS 9 (continued)
Reconciliation of impairment allowance balance from IAS 39 to ECL allowance balance of
Loans and receivables (IAS
39)/Financial assets at amortised
cost (IFRS 9)
Cash and balances with central banks
Loans and advances to banks
Investments (debt securities) –
amortised cost
Loans and advances to customers
Other assets
Available for sale (IAS 39)/
Financial assets at FVOCI (IFRS 9)
Investments (debt securities)
Provisions for financial guarantees
and commitments
Financial guarantees
Other commitments
Provision under
IAS
39/Provision
under IAS 37
Re-
classification
Re-
measurement
ECLs under
IFRS 9 at 1
January 2018
€000
€000
€000
€000
-
24,998
-
-
-
-
5,872
20
1,843
5,872
25,018
1,843
3,483,776
(30,926)
319,102
3,771,952
1,198
-
576
1,774
3,509,972
(30,926)
327,413
3,806,459
-
48,300
3,687
51,987
-
-
-
-
18
18
(15,233)
(3,687)
(18,920)
33,067
-
33,067
Total
3,561,959
(30,926)
308,511
3,839,544
Reclassification of an amount €30,926 thousand from loans and advances to customers relates to loan loss
provisions under IAS 39 as at 31 December 2017 on loans and advances to customers which failed the SPPI
criteria and, as a result, have been classified at FVPL.
As at 1 January 2018 the expected credit loss allowance on the other commitments is presented together
with the loss allowance for expected credit losses on the associated loans and advances to customers since
the expected credit losses related to the on and off balance sheet components cannot be separately
identified.
7.
Segmental analysis
Following the sale of its 100% subsidiaries, Bank of Cyprus UK Limited and Bank of Cyprus Financial
Services Ltd, the Group’s activities are mainly concentrated in Cyprus. Cyprus operations are organised into
operating segments based on the line of business. In this respect, the Group has changed its primary
segmental analysis including comparative information from analysis by geography to analysis by business
line. In previous reporting periods, analysis by business line was presented as secondary segmental
reporting analysis. The operating segments are analysed below:
The Corporate, Small and medium-sized enterprises and Retail business lines are managing loans and
advances to customers as detailed in ‘Credit risk concentration of loans and advances to customers’ (Note
46).
Restructuring and recoveries is the specialised unit which was set up to tackle the Group’s loan portfolio
quality and manages exposures to borrowers in distress situation through innovative solutions.
101
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
7.
Segmental analysis (continued)
International banking services specialises in the offering of banking services to the international corporate
and non-resident individuals, particularly international business companies whose ownership and business
activities lie outside Cyprus.
Wealth management oversees the provision of institutional wealth private banking, global markets,
brokerage, asset management, investment banking and depository services.
The Real Estate Management Unit manages properties acquired through debt-for-property swaps and
properties acquired through the acquisition of certain operations of Laiki Bank in 2013, and executes exit
strategies in order to monetise these assets.
Treasury is responsible for liquidity management and for overseeing operations to ensure compliance with
internal and regulatory liquidity policies and provide direction as to the actions to be taken regarding
liquidity availability. As from the period ended 30 June 2018, Treasury represents a separate business line.
Previously Treasury was disclosed within the business line 'Other'. Comparatives are not represented since
the necessary information is not readily available and can only be obtained through a cumbersome manual
process which could lead to inaccurate results with high development cost.
The Insurance business line is involved in both life and general insurance business.
The business line 'Other' includes head office functions such as finance, risk management, compliance,
legal, corporate affairs and human resources. For 2017 business line 'Other' includes also Treasury. Head
office functions provide services to the operating segments.
Overseas activities include Greece, Romania, UK and Russia which 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 ‘Overseas'.
The results of the UK subsidiary, disposed of during 2018, are presented as discontinued operations.
Comparatives are represented accordingly. The results of the remaining operations in the United Kingdom
being the management of a small portfolio of loans, are presented within continuing operations within
overseas.
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.
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 and disposal/dissolution of subsidiaries and associates, insurance income
net of claims and commissions, net (losses)/gains from revaluation and disposal of investment properties,
net 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. As from the year ended 31 December 2018 indirect other operating income and indirect other
operating expenses are re-allocated from the head office function to the business lines. For the year ended
31 December 2017, these items were allocated to the head office function. Comparatives were not
represented since the necessary information is not available and any attempt to develop it could lead to
inaccurate results with high development costs and delays. Management monitors the profit/(loss) before
tax of each business line. Additionally, for the purposes of the Cyprus analysis by business line, notional tax
at the 12.5% Cyprus tax rate is charged/credited on profit or loss before tax of each business line and
therefore any taxable and non-taxable items are excluded from this notional charge/credit.
102
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
7.
Segmental analysis (continued)
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 country where they are managed.
103
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
7.
Segmental analysis (continued)
Analysis by business line
Continuing operations
2018
Net interest income/(expense)
Net fee and commission income/(expense)
Net foreign exchange gains
Net gains/(losses) on financial instrument
transactions and on disposal/dissolution of
subsidiaries and associates
Insurance income net of claims and commissions
Net losses from revaluation and disposal of
investment properties
Net gains on disposal of stock of property
Total other income
Staff costs
Other operating expenses (excluding advisory and
other restructuring costs)
Special levy on deposits on credit institutions and
contribution to Single Resolution Fund
Other operating expenses - advisory and other
restructuring costs
Net gains on derecognition of financial assets
measured at amortised cost
Credit (losses)/gains to cover credit risk on loans
and advances to customers
Credit (losses)/gains of other financial
instruments
Impairment of non-financial instruments
Share of profit from associates
Loss before tax
Income tax
Loss after tax
Non-controlling interests-profit
Loss after tax attributable to the owners of
the Company
Corporate
€000
Small and
medium-sized
enterprises
€000
Retail
€000
Restructuring
and recoveries
€000
International
banking
services
€000
99,643
14,998
892
2,380
-
-
-
38,932
181,335
9,833
649
46,102
3,427
-
-
-
-
-
-
-
-
57,708
13,309
274
13,745
-
-
-
50,634
62,982
7,515
-
-
-
-
67
12
117
19
4
117,980
(7,902)
49,426
(5,641)
230,981
85,055
121,135
(69,949)
(23,857)
(15,501)
Wealth
management
REMU
Insurance
Treasury
Other
Total Cyprus
Overseas
€000
€000
€000
€000
€000
€000
€000
Total
continuing
operations
€000
8,106
2,330
3,250
70
-
-
-
64
13,820
(3,761)
(16,741)
-
-
-
-
(15,544)
31,043
16,418
15,176
(2,033)
208
(6,134)
-
(469)
51,101
35
-
718
19,514
1,763
17,353
(11,602)
427,737
(8,684)
419,053
9,731
3,192
154,914
36,552
357
1,136
155,271
37,688
21,755
41,000
-
78,481
51,101
(31,811)
1,811
46,670
52,912
3,875
(11,634)
(1,641)
(13,275)
62
6,503
31,105
23,922
762
1,682
31,867
25,604
-
-
-
-
45,459
(9,709)
60,385
(1,581)
52,761
792,178
(36,388)
755,790
(75,821)
(215,755)
(985)
(216,740)
(23,394)
(14,161)
(104,749)
(41,134)
(27,709)
(3,509)
(4,149)
(9,058)
(7,677)
67,975
(167,565)
(16,273)
(183,838)
-
(32)
-
(6)
-
-
(59)
(39,192)
-
(13)
-
(6)
-
(3,792)
-
-
-
-
(25,095)
(25,095)
-
(25,095)
(7,389)
(50,489)
(564)
(51,053)
86,652
29,618
56,224
(19,128)
77,912
6,544
5,202
26,692
51,127
12,431
333,274
(54,210)
279,064
7,701
2,305
9,835
6,913
901
26
(4,275)
436
(12,498)
(308,856)
(22,350)
(395)
-
-
-
90,078
(11,260)
78,818
-
-
-
-
32,359
(4,045)
28,314
-
-
-
-
-
-
-
53,561
(321,071)
(6,695)
40,134
46,866
(280,937)
-
-
-
-
-
56,463
(7,058)
49,405
-
-
-
-
6,175
(772)
5,403
-
-
-
-
(11,457)
-
(6,255)
782
(5,473)
-
-
-
90
-
(330)
4,988
-
-
56,205
(7,026)
-
-
26,362
(3,295)
23,067
-
-
27,771
54
27,825
2,896
(345,042)
15,959
(329,083)
(2,139)
(1,379)
9,095
2,519
(12,836)
9,095
(4,129)
(5,815)
-
(1,610)
(18,651)
9,095
20,904
14,781
(48,141)
(33,360)
(80,578)
(79,813)
3,897
(75,916)
49,179
(59,674)
(65,032)
(44,244)
(109,276)
-
(1,488)
(1,488)
-
(1,488)
78,818
28,314
46,866
(280,937)
49,405
5,403
(5,473)
23,067
49,179
(61,162)
(66,520)
(44,244)
(110,764)
104
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
7.
Segmental analysis (continued)
2017
Net interest income/(expense)
Net fee and commission income/(expense)
Net foreign exchange gains/(losses)
Net gains/(losses) on financial instrument
transactions and disposal/dissolution of subsidiaries
and associates
Insurance income net of claims and commissions
Net losses from revaluation and disposal of
investment properties
Net gains/(losses) on disposal of stock of property
Other income
Staff costs (excluding voluntary exit plans and other
termination benefits)
Staff costs-voluntary exit plans and other termination
benefits
Special levy on deposits on credit institutions and
contribution to Single Resolution Fund
Other operating expenses (excluding advisory and
other restructuring costs)
Other operating expenses - advisory and other
restructuring costs
Net gain on derecognition of financial assets
measured at amortised cost
Credit (losses)/gains to cover credit risk on loans and
advances to customers
Credit (losses)/gains of other financial instruments
Impairment of non-financial instruments
Share of profit from associates
Profit/(loss) before tax
Income tax
Profit/(loss) after tax
Non-controlling interests-loss
Profit/(loss) after tax attributable to the owners
of the Company
Corporate
€000
100,471
13,740
705
Small and
medium-sized
enterprises
€000
Retail
€000
50,175
213,909
9,875
619
49,589
4,525
Restructuring
and recoveries
€000
130,780
13,085
334
International
banking
services
€000
66,174
66,746
7,417
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Wealth
management
REMU
Insurance
Other
Total Cyprus
Overseas
€000
€000
€000
€000
€000
€000
9,728
2,526
3,301
-
-
-
-
(17,944)
-
-
-
-
(1,625)
31,232
3,762
15,425
428
(4,929)
-
45
48,760
-
-
430
44,734
(6,651)
21,854
29,030
2,975
-
(862)
280
12,660
59,286
547,070
172,486
45,931
3,020
48,760
(2,487)
31,512
17,353
(3,161)
1,055
(869)
(12)
1,641
(1,574)
(1,065)
1,689
Total
continuing
operations
€000
543,909
173,541
45,062
3,008
50,401
(4,061)
30,447
19,042
863,645
(2,296)
861,349
8
10
429
26
(5)
33
114,924
60,679
268,452
144,225
140,332
15,588
(7,235)
(5,345)
(66,509)
(22,198)
(14,151)
(3,044)
(1,742)
(9,090)
(73,806)
(203,120)
(2,224)
(205,344)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(206)
(338)
(544)
-
(22,846)
(22,846)
-
-
(544)
(22,846)
(4,408)
(5,744)
(45,095)
(12,173)
(11,200)
(1,277)
(5,953)
(8,776)
(104,450)
(199,076)
(47,442)
(246,518)
-
-
-
(16,903)
-
(2)
(6,294)
-
(5,068)
(28,267)
(533)
(28,800)
103,281
49,590
156,848
92,951
114,981
11,265
1,436
26,662
(147,222)
409,792
(52,495)
357,297
15,825
4,428
13,323
136,268
935
39
(20,940)
(13,512)
(48,032)
(841,480)
(10,666)
(486)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
98,166
(12,271)
40,506
(5,063)
122,139
(612,261)
(15,267)
76,533
105,250
(13,156)
10,818
(1,352)
-
-
-
(21,588)
-
(20,152)
2,519
-
-
-
(62)
-
26,600
(1,400)
2,595
173,413
30
173,443
448
(934,668)
(18,830)
(953,498)
(11,956)
(11,956)
5,497
(6,459)
(617)
8,957
(22,267)
(36,705)
(58,972)
8,957
-
8,957
(147,795)
(376,729)
(102,503)
(479,232)
(103,059)
(72,516)
(3,057)
(75,573)
85,895
35,443
106,872
(535,728)
92,094
9,466
(17,633)
25,200
(250,854)
(449,245)
(105,560)
(554,805)
-
-
-
-
-
-
-
-
2,473
2,473
-
2,473
85,895
35,443
106,872
(535,728)
92,094
9,466
(17,633)
25,200
(248,381)
(446,772)
(105,560)
(552,332)
105
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
7.
Segmental analysis (continued)
Discontinued operations
Net interest income
Net fee and commission income
Net foreign exchange gains
Net losses on financial instrument transactions
Other income
Staff costs
Other operating expenses
Credit gains to cover credit risk on loans and advances to customers
Profit before tax
Income tax
Profit after tax
2018
€000
34,764
5,063
250
(57)
-
40,020
(17,624)
(14,094)
8,302
624
8,926
(1,683)
7,243
2017
€000
38,831
6,857
346
(44)
10
46,000
(22,324)
(22,661)
1,015
572
1,587
(1,107)
480
Further information on the disposal of Bank of Cyprus UK Limited is disclosed in Note 53.2.1.
106
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
7.
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
2018
Total revenue from third parties
Inter-segment
revenue/(expense)
Revenue between Cyprus and
other countries
Total revenue
Corporate
€000
Small and
medium-sized
enterprises
€000
Retail
€000
Restructuring
and
recoveries
€000
International
banking
services
€000
Wealth
management
REMU
Insurance
Treasury
Other
Total Cyprus Overseas
€000
€000
€000
€000
€000
€000
€000
Total
continuing
operations
€000
138,267
53,669
116,012
233,260
68,574
4,323
31,917
50,561
39,760
47,233
783,576
(27,786)
755,790
(20,287)
(4,243)
114,969
(148,205)
52,561
9,497
(16,741)
(5,102)
20,625
(3,074)
-
-
-
-
-
-
-
-
-
-
-
8,602
8,602
(8,602)
-
-
117,980
49,426
230,981
85,055
121,135
13,820
15,176
45,459
60,385
52,761
792,178
(36,388)
755,790
2017
Total revenue from third parties
Inter-segment revenue/(expense)
Revenue between Cyprus and other countries
Corporate
€000
124,291
(9,367)
-
Small and
medium-sized
enterprises
€000
Retail
€000
Restructuring
and
recoveries
€000
International
banking
services
€000
64,737
(4,058)
-
131,630
315,161
136,822
(170,936)
-
-
74,718
65,614
-
Wealth
management
REMU
Insurance
Other
Total Cyprus Overseas
€000
€000
€000
€000
€000
€000
Total
continuing
operations
€000
23
33,369
15,565
(17,944)
48,549
(3,815)
62,875
855,353
5,996
861,349
(11,881)
-
-
-
-
-
8,292
8,292
(8,292)
-
-
Total revenue
114,924
60,679
268,452
144,225
140,332
15,588
15,425
44,734
59,286
863,645
(2,296)
861,349
The revenue from Overseas segment mainly relates to banking and financial services for 2018 and 2017.
107
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
7.
Segmental analysis (continued)
Analysis of assets and liabilities
2018
Assets
Assets
Corporate
€000
Small and
medium-sized
enterprises
€000
Retail
€000
Restructuring
and
recoveries
€000
International
banking
services
€000
Wealth
management
REMU
Insurance
Treasury
Other
Total Cyprus Overseas
Total
€000
€000
€000
€000
€000
€000
€000
€000
3,524,412
1,150,640
3,699,397
2,229,146
178,627
98,851
1,658,982
816,336
6,396,620
2,581,386 22,334,397
254,988 22,589,385
Inter-segment assets
-
-
-
-
-
-
-
(39,642)
-
(59,133)
(98,775)
-
(98,775)
3,524,412
1,150,640
3,699,397
2,229,146
178,627
98,851
1,658,982
776,694
6,396,620
2,522,253 22,235,622
254,988 22,490,610
(415,339)
22,075,271
Assets between Cyprus and
overseas operations
Total assets
2017
Assets
Assets
Inter-segment assets
Assets between Cyprus and overseas
operations
Total assets
Corporate
€000
Small and
medium-sized
enterprises
€000
Retail
€000
Restructuring
and
recoveries
€000
International
banking
services
€000
Wealth
management
REMU
Insurance
Other
Total Cyprus Overseas
Total
€000
€000
€000
€000
€000
€000
€000
3,142,341
1,183,151
3,932,956
4,380,174
235,184
45,438
1,417,420
831,698
6,589,510 21,757,872
2,553,519 24,311,391
-
-
-
-
-
-
-
(45,391)
-
(45,391)
-
(45,391)
3,142,341
1,183,151
3,932,956
4,380,174
235,184
45,438
1,417,420
786,307
6,589,510 21,712,481
2,553,519 24,266,000
(667,400)
23,598,600
108
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
7.
Segmental analysis (continued)
2018
Liabilities
Liabilities
Inter-segment liabilities
Liabilities between Cyprus and overseas
operations
Total liabilities
Corporate
€000
Small and
medium-sized
enterprises
€000
Retail
€000
Restructuring
and
recoveries
€000
International
banking
services
€000
Wealth
management
Insurance
Treasury
Other
Total Cyprus Overseas
Total
€000
€000
€000
€000
€000
€000
€000
1,750,517
800,671
10,032,047
121,744
3,707,713
430,866
632,308
1,877,549
452,708 19,806,123
417,159 20,223,282
-
-
-
-
-
-
-
(98,775)
-
(98,775)
-
(98,775)
1,750,517
800,671 10,032,047
121,744
3,707,713
430,866
632,308
1,778,774
452,708 19,707,348
417,159 20,124,507
(416,564)
19,707,943
2017
Liabilities
Liabilities
Inter-segment liabilities
Liabilities between Cyprus and overseas operations
Total liabilities
Corporate
€000
Small and
medium-sized
enterprises
€000
Retail
€000
Restructuring
and
recoveries
€000
International
banking
services
€000
Wealth
management
Insurance
Other
Total Cyprus Overseas
Total
€000
€000
€000
€000
€000
€000
1,529,521
665,940
8,670,625
192,442
4,163,384
760,993
641,922
2,355,730 18,980,557
2,716,667 21,697,224
-
-
-
-
-
-
-
(45,391)
(45,391)
-
(45,391)
1,529,521
665,940
8,670,625
192,442
4,163,384
760,993
641,922
2,310,339 18,935,166
2,716,667 21,651,833
(669,941)
20,981,892
Segmental analysis of customer deposits and loans and advances to customers is presented in Notes 32, 46.2 and 46.7, respectively.
109
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
8.
Interest income and income similar to interest income
Interest income
Financial assets at amortised cost:
- Loans and advances to customers
- Loans and advances to banks and central banks
- Debt securities
Debt securities at FVOCI
Investments available-for-sale
Investments classified as loans and receivables
Income similar to interest income
Loans and advances to customers at FVPL
Derivative financial instruments
Trading investments
Other investments at FVPL
Investments mandatorily classified at FVPL
9.
Interest expense and expense similar to interest expense
Interest expense
Financial liabilities at amortised cost:
Customer deposits
Funding from central banks and deposits by banks
Subordinated loan stock
Repurchase agreements
Negative interest on loans and advances to banks and central banks
Expense similar to interest expense
Derivative financial instruments
110
2018
€000
2017
(represented)
€000
526,468
5,179
5,445
19,973
-
-
689,578
11,101
-
-
19,883
2,706
557,065
723,268
2018
€000
2017
(represented)
€000
16,562
35,478
-
31,798
-
-
14
14
66
-
52,054
31,878
2018
€000
2017
(represented)
€000
93,457
2,902
23,325
10,198
14,142
125,060
2,648
22,176
10,207
7,132
144,024
167,223
2018
€000
2017
(represented)
€000
46,042
44,014
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
10.
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
2018
€000
58,228
97,705
2,934
757
19,283
178,907
2017
(represented)
€000
68,329
94,673
2,777
951
17,022
183,752
Mutual funds and asset management fees relate to fiduciary and other similar activities.
Other banking commissions include commissions from credit card arrangements amounting to €36,593
thousand (2017: €41,016 thousand).
Fee and commission expense
Banking commissions
Fee in relation to AT1 issue (Note 36)
Mutual funds and asset management fees
Brokerage commissions
11.
Net foreign exchange gains
2018
€000
11,999
11,215
283
139
2017
(represented)
€000
9,860
-
244
107
23,636
10,211
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.
111
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
12.
and associates
Net gains on financial instrument transactions and disposal/dissolution of subsidiaries
Trading portfolio:
- equity securities
- debt securities
- derivative financial instruments
Other investments at FVPL:
- debt securities
- equity securities
Net gains on disposal of FVOCI debt securities
Net gains on disposal of available-for-sale investments:
- equity securities
- debt securities
Net gains on loans and advances to customers at FVPL
Realised losses on disposal of loans
Revaluation of financial instruments designated as fair value hedges:
- hedging instruments (Note 22)
- hedged items (Note 22)
Net gain on financial liabilities at FVPL
Gain/(loss) on disposal/dissolution of subsidiaries and associates
2018
€000
2017
(represented)
€000
-
-
115
359
1,872
19,484
-
-
16,125
-
229
62
460
(57)
660
-
1,520
2,104
-
(12)
(10,028)
11,103
1,435
6,205
46,670
13,020
(12,791)
-
(2,187)
3,008
The gain on disposal/dissolution of subsidiaries for 2018 primarily relates to gain on disposal of Bank of
Cyprus UK Limited (Note 53.2.1) and gain on dissolution of the branch in Romania (Note 52). The loss on
disposal of subsidiaries for 2017, primarily relates to loss on disposal of Hotel New Montana SRL.
13.
Insurance income net of claims and commissions
2018
2017
Income
Claims and
commissions
€000
€000
Insurance
income net of
claims and
commissions
€000
Income
Claims and
commissions
€000
€000
Insurance
income net of
claims and
commissions
€000
65,824
(37,404)
28,420
102,259
(74,110)
28,149
48,875
(24,383)
114,699
(61,787)
24,492
52,912
44,789
147,048
(22,537)
(96,647)
22,252
50,401
Life insurance
business
General
insurance
business
112
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
13.
Insurance income net of claims and commissions (continued)
2018
2017
Income
Gross premiums
Reinsurance premiums
Net premiums
Change in provision for unearned premiums
Total net earned premiums
Investment income and other income
Commissions from reinsurers and other
income
Change in value of in-force business before
tax (Note 27)
Life
insurance
€000
General
insurance
€000
90,721
72,912
(14,917)
(32,128)
Life insurance
€000
86,277
(14,842)
71,435
-
71,435
22,157
5,924
99,516
2,743
General
insurance
€000
65,701
(29,246)
36,455
(1,187)
35,268
10
9,511
44,789
-
40,784
(1,215)
39,569
12
9,294
48,875
-
48,875
102,259
44,789
75,804
-
75,804
(11,302)
6,636
71,138
(5,314)
65,824
Claims and commissions
Gross payments to policyholders
Reinsurers' share of payments to
policyholders
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
2018
2017
Life
insurance
€000
(47,030)
General
insurance
€000
(34,516)
Life insurance
€000
(54,515)
General
insurance
€000
(27,017)
5,158
15,221
14,735
7,837
935
(16,812)
13,643
(3,177)
(7)
(241)
(771)
(1,476)
(10,746)
(5,316)
(9,849)
(4,509)
-
20
-
(1)
(37,404)
(24,383)
(74,110)
(22,537)
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 from non-linked insurance
business assets
Net (losses)/profit on financial instrument
transactions and other non-linked insurance
business income
Staff costs
Staff costs – restructuring costs
Other operating expenses
2018
2017
Life
insurance
€000
General
insurance
€000
Life insurance
€000
General
insurance
€000
(71)
(90)
(66)
(505)
(5,385)
-
(737)
(4,509)
-
(6,177)
(5,761)
(192)
(5,162)
(206)
(6,021)
79
96
(4,127)
-
(2,683)
113
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
14.
Other income
Dividend income
Profit/(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 and golf activities
Other income
2018
€000
2017
(represented)
€000
547
99
10,883
2,625
5,727
5,723
683
(208)
2,219
7,981
3,581
4,786
25,604
19,042
Dividend income relates to Cyprus operations.
The profit from hotel and golf activities primarily relates to activities of subsidiaries acquired in debt
satisfaction as part of loan restructuring activity.
15.
Staff costs
Salaries
Employer’s contributions to state social insurance
Retirement benefit plan costs
Restructuring costs - voluntary exit plans and other termination benefits
2018
€000
176,624
24,610
15,506
2017
(represented)
€000
166,436
23,080
15,828
216,740
205,344
-
544
216,740
205,888
During 2017 a small number of employees left the Group under the same terms of the voluntary exit plan
which took place during 2016. The cost of this exit amounted to €544 thousand.
The number of persons employed by the Group as at 31 December 2018 was 4,146 (2017: 4,355).
The following table shows the average number of employees (full-time equivalents) based on their
geographical location:
Cyprus
United Kingdom
Other countries
2018
2017
4,116
196
29
4,341
4,034
249
31
4,314
114
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
15.
Staff costs (continued)
The following table shows the business line analysis of average employees in Cyprus for 2018 and 2017 and
the Group’s other geographical locations as follows:
Corporate
Small and medium-sized enterprises
Retail
Restructuring and recoveries
International banking services
Wealth management
Treasury
REMU
Insurance
Other (primarily head office functions)
Total Cyprus
United Kingdom
Other countries
Retirement benefit plan costs
2018
2017
153
110
1,510
441
334
59
36
40
208
1,225
4,116
196
29
4,341
143
108
1,407
442
329
54
37
28
192
1,294
4,034
249
31
4,314
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
2018
€000
824
14,682
15,506
2017
€000
1,897
13,931
15,828
Cyprus
The main retirement plan for the Group’s permanent employees in Cyprus (89% of total Group employees)
is a defined contribution plan. This plan provides for employer contributions of 9% (2017: 9%) 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.
115
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
15.
Staff costs (continued)
Retirement benefit plan costs (continued)
United Kingdom
Prior to the sale of UK subsidiary, the Group’s employees in the United Kingdom were covered by a defined
contribution plan for all employees which provided 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 35)
2018
€000
2017
€000
8,777
10,037
One of the plans has a funded status surplus of €7,694 thousand (2017: €13,814 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:
116
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
15.
Staff costs (continued)
Retirement benefit plan costs (continued)
1 January 2018
Current service cost
Loss on curtailment and settlement
Net interest expense/(income)
Past service cost arising over last year
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
Demographic assumptions
Experience adjustments
Change in asset ceiling
Asset adjustment
Total amount recognised in the consolidated OCI
Exchange differences
Contributions:
Employer
Plan participants
Benefits paid from the plans
31 December 2018
Present value of
obligation
Fair value of
plan assets
Net amount
before impact of
asset ceiling
€000
€000
€000
Impact of
minimum
funding
requirement/
as set ceiling
€000
Net defined
benefit liability
€000
82,900
(86,677)
(3,777)
13,814
10,037
-
-
(1,948)
-
(1,948)
6,732
-
-
-
-
5,000
11,732
629
(2,912)
(185)
3,995
429
48
(7)
354
824
6,732
(4,523)
(560)
383
-
5,000
7,032
(84)
(2,912)
-
-
-
-
-
-
-
-
-
-
-
(6,120)
-
(6,120)
-
-
-
-
429
48
(7)
354
824
6,732
(4,523)
(560)
383
(6,120)
5,000
912
(84)
(2,912)
-
-
(75,366)
1,083
7,694
8,777
429
48
1,941
354
2,772
-
(4,523)
(560)
383
-
-
(4,700)
(713)
-
185
(3,995)
76,449
117
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
15.
Staff costs (continued)
Retirement benefit plan costs (continued)
1 January 2017
Current service cost
Loss 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
Demographic 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
31 December 2017
Present value of
obligation
Fair value of
plan assets
Net amount
before impact of
asset ceiling
€000
€000
€000
102,955
(94,846)
Impact of
minimum
funding
requirement/as
set ceiling
€000
Net defined
benefit liability
€000
13,999
22,108
-
-
-
-
-
-
-
-
(185)
(185)
-
-
-
-
408
1,150
339
1,897
(5,209)
566
(2,041)
(3,950)
(185)
(10,819)
(702)
(2,447)
-
-
8,109
408
1,150
339
1,897
(5,209)
566
(2,041)
(3,950)
-
(10,634)
(702)
(2,447)
-
-
-
-
(2,119)
(2,119)
(5,209)
-
-
-
-
(5,209)
1,849
(2,447)
(176)
16,271
(86,677)
(3,777)
13,814
10,037
408
1,150
2,458
4,016
-
566
(2,041)
(3,950)
-
(5,425)
(2,551)
-
176
(16,271)
82,900
118
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
15.
Staff costs (continued)
Retirement benefit plan costs (continued)
The actual return on plan assets for year 2018 was a loss of €4,784 thousand (2017: gain of €7,328
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
2018
2017
%47
%43
%10
%100
%48
%42
%10
%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 2018 €1,347 thousand (2017: €2,137 thousand).
The Group expects to make additional contributions to defined benefit plans of €3,105 thousand during
2019.
At the end of the reporting period, the average duration of the defined benefit obligation was 18.0 years
(2017: 19.3 years).
119
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
15.
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 2018 and 2017 are
set out below:
2018
Discount rate
Inflation rate
Future salary increases
Rate of pension increase
Life expectancy for pensioners at age 60
Life expectancy for pensioners at age 65
2017
Discount rate
Inflation rate
Future salary increases
Rate of pension increase
Life expectancy for pensioners at age 60
Life expectancy for pensioners at age 65
Cyprus
1.79%-1.98%
1.75%
2.25%
2.00%
23.5 years M
29.6 years F
n/a
1.58%-1.68%
1.75%
2.25%
2.00%
23.5 years M
29.6 years F
n/a
Greece
1.40%-2.10%
1.75%
2.00%
n/a
UK
2.90%
3.20%
n/a
3.05%
n/a
n/a
n/a
22.7 years M
25.3 years F
1.30%-1.90%
1.75%
2.00%
n/a
2.55%
3.20%
n/a
3.00%
n/a
n/a
n/a
23.0 years M
24.5 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
19% 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 81% 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.
120
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
15.
Staff costs (continued)
Retirement benefit plan costs (continued)
The impact of significant assumptions' fluctuations on the defined benefit obligation as at 31 December
2018 and 2017 is presented below:
Variable
Discount rate
Inflation growth rate
Salary growth rate
Pension growth rate
Life expectancy
2018
2017
Change
+0.5%
Change
-0.5%
Change
+0.5%
Change
-0.5%
%-8.2
%4.7
%1.2
%8.9
%-4.6
%-1.1
%0.1
%-0.1
Plus 1 year Minus 1 year
%4.3
%-4.3
-11.4
%
%9.6
%1.1
%0.1
Plus 1 year
%-1.5
%12.3
%-8.9
%-1.0
%-0.1
Minus 1 year
%1.9
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.
16.
Other operating expenses
Repairs and maintenance of property and equipment
Other property-related costs
Operating lease rentals for property and equipment
Consultancy and other professional services fees
Insurance
Advertising and marketing
Depreciation of property and equipment (Note 26)
Amortisation of intangible assets (Note 27)
Communication expenses
Provisions and settlements of litigations, claims and provisions for regulatory
matters (Note 40.3)
Printing and stationery
Local cash transfer expenses
Other operating expenses
Advisory and other restructuring costs
2018
€000
2017
€000
23,513
13,802
9,833
18,542
7,043
15,355
11,112
13,217
8,832
26,370
2,204
2,991
31,024
183,838
51,053
234,891
19,383
17,241
9,407
17,203
7,906
18,270
10,857
8,743
8,337
92,939
2,677
3,056
30,499
246,518
28,800
275,318
Advisory and other restructuring costs comprise mainly 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 (relevant to 2017) and (iii) disposal of operations and non-core assets.
Within the total other operating expenses an amount of €1,319 thousand (2017: nil) relates to investment
property that generated rental income.
121
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
16.
Other operating expenses (continued)
The special tax levy on credit institutions in Cyprus (the Special Levy) is imposed on the level of deposits as
at the end of the previous quarter, at the rate of 0.0375% per quarter. Following an amendment of the
Imposition of Special Credit Institution Tax Law in 2017, the Single Resolution Fund contribution, which is
charged annually by the Single Resolution Board, is offset by the Special Levy up to the level of the total
annual Special Levy charge.
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
2018
€000
2017
€000
2,280
2,570
416
474
-
647
3,817
3,780
37
3,817
407
462
114
499
4,052
3,628
424
4,052
122
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
17.
Credit losses of financial instruments and impairment of non-financial instruments
Credit losses to cover credit risk on loans and advances to customers
Impairment loss net of reversals on loans and advances to customers (Note
46.9)
Recoveries of loans and advances to customers previously written off
Changes in expected cash flows
Financial guarantees and commitments (Notes 46.8.1 and 46.8.2)
Credit losses/(gains) of other financial instruments
Amortised cost debt securities
FVOCI debt securities
Available-for-sale equity securities
Loans and advances to banks
Loans and advances to central banks
Other financial assets (Note 29)
Impairment of non-financial instruments
Stock of property (Note 28)
Property held for own use (Note 26)
Equipment (Note 26)
Other non-financial assets
18.
Income tax
Current tax:
- Cyprus
- overseas
Cyprus special defence contribution
Deferred tax
Prior years’ tax adjustments
Other tax (credits)/charges
2018
€000
2017
(represented)
€000
512,956
938,511
(140,735)
(37,756)
(5,382)
329,083
-
-
14,987
953,498
(1,011)
(274)
-
711
(5,872)
8,056
1,610
17,272
-
11
1,368
18,651
-
-
63
7,775
-
(1,379)
6,459
50,502
8,470
-
-
58,972
2018
€000
2017
(represented)
€000
3,488
399
347
81,436
(7,076)
(2,678)
75,916
3,174
769
175
67,108
2,917
1,430
75,573
The Group’s share of income tax charge from associates for 2018 amounts to €1,170 thousand (2017:
€1,129 thousand).
The reconciliation between the income tax expense and the loss before tax as estimated using the current
income tax rates is set out below:
123
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
18.
Income tax (continued)
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
- losses on which deferred tax was not recognised
Prior years' tax adjustments
Other tax (credit)/charges
2018
€000
(33,360)
2017
€000
(479,232)
(3,822)
(59,529)
8,503
(15,343)
22,054
(10,825)
8,207
81,720
6,405
85,670
(7,076)
(2,678)
75,916
9,105
66,858
43,563
71,226
2,917
1,430
75,573
Income tax in Cyprus is calculated at the rate of 12.5% on taxable income (2017: 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% (2017: 3%) and on interest income from
activities outside the ordinary course of business at a rate of 30% (2017: 30%).
The Group’s profits from overseas operations are taxed at the rates prevailing in the respective countries,
which for 2018 were: Greece 29% (2017: 29%), Romania 16% (2017: 16%), Russia 20% (2017: 20%), UK
19% (2017: 20% until 31 March 2017 and 19% thereafter).
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.
124
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
18.
Income tax (continued)
The accumulated income tax losses are presented in the table below:
2018
Expiring within 5 years
Expiring by the end of 2028
2017
Expiring within 5 years
Expiring by the end of 2028
Total income
tax losses
€000
950,084
Income tax
losses for
which a
deferred tax
asset was
recognised
€000
Income tax
losses for
which no
deferred tax
asset was
recognised
€000
-
950,084
7,378,801
2,414,176
4,964,625
8,328,885
2,414,176
5,914,709
2,761,640
7,378,801
10,140,441
-
3,067,936
3,067,936
2,761,640
4,310,865
7,072,505
The deferred tax asset relates to the Laiki Bank income tax losses transferred to BOC PCL 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 tax 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 BOC PCL’s acquisition of certain operations of Laiki Bank, these tax 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 BOC PCL by 2028 at the applicable income tax rate, currently at 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 assessment of the recognition of a deferred tax asset is a critical judgement, given the inherent
uncertainties associated with projecting profitability over a long time period. Τhe Group performed its
assessment for the recoverability of its deferred tax asset as at 31 December 2018 taking into account a
range of both positive and negative evidence, including the Group’s actual and historic performance, the key
objectives of the Group’s strategy as well as the macroeconomic environment in Cyprus, the impact of tax
legislations enacted as at the reporting date and the detailed financial business and capital plan, approved
by the Board, up to the end of 2022 and projections which have been extrapolated beyond 2022 until the
tax losses expiry date end of 2028.
The positive evidence, among others, includes:
BOC PCL's strong branch network in Cyprus.
The continuous improvement of the Cyprus economy and sovereign rating.
The negative evidence, among others, includes:
The absolute level of the DTA compared to the Group’s equity (c. 13%) and the level of future
profitability required for its utilisation.
The level of forecasting over the remaining 10 years of the tax losses expiry date.
Impact of Brexit and instability in the Eurozone.
Legislative changes and the likelihood of future developments and their impact on profitability.
125
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
18.
Income tax (continued)
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 NPEs loans
Further improve the funding structure
Maintain an appropriate capital position by internally generating capital
Focus on the core Cyprus market
Achieve a lean operating model
Deliver value to shareholders and other stakeholders
The key assumptions and factors taken into consideration, amongst others, include the following:
Reduction of NPEs.
Increase in new loan originations and loan repayments.
Improvement in net interest income, mainly driven by the increase of loans to deposits ratio,
reduction in the deposits cost, management of liquidity surplus and evolution of interest rate
curves/forecasts.
Diversified income streams mainly due to increase in fee and commission income which is an
area that the Group is intensifying its efforts.
Reduction in the level of operating expenses mainly due to the implementation of digital
transformation program underway, aimed at enhancing productivity through alternative
distribution channels and reducing operating costs over time.
Decrease in the cost of risk, supported by the asset quality improvement and the recovery of the
economy.
The above assumptions are based on both internal and external information for attributing a value to each
key assumption in the deferred tax asset forecasts. There were no changes in the key assumptions during
the year 2018, compared to those of 2017.
The internal key variables include, amongst others, the Bank’s strategy, plans and planned actions for (i)
expansion of certain business lines and other income streams, (ii) capital and liquidity management, (iii)
cost management, (iv) loan restructuring activity and NPE portfolio sales, (v) cost of funding and (vi) pricing
of deposits and loans.
External key variables mainly include the interest rate evolution which impacts the local and international
business activity of the Group, the Eurozone and Cypriot macroeconomic performance unemployment
levels, tourist industry and the changes in the regulatory framework.
The recoverability assessment performed at 31 December 2018 resulted in an impairment of €79,000
thousand. For the remaining amount of the deferred tax asset of €301,772 thousand as at 31 December
2018, management has concluded that it is probable that there will be sufficient taxable profits in the future
to recover the deferred tax asset by the end of 2028.
The Group’s financial and capital plan used for the purposes of the 2018 recoverability assessment has been
conservatively prepared and various assumptions and variables used are already stressed. The use of
alternative assumptions/sensitivity analysis representing reasonably possible alternative outcomes, could
impact the recognition of the deferred tax asset of the Group and the recovery period.
The Group has performed sensitivity analysis on the following key assumptions of DTA recoverability
assessment for years 2019-2028. The table below shows the impact on DTA carrying value:
126
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
18.
Income tax (continued)
Key assumption
Reduction of yield on customer loans and advances by 10 bps
Increase in cost of customer deposits by 10 bps
Increase of ECL cost by 10 bps on gross loans
Increase of yield on customer loans and advances by 10 bps
Lower new loan origination by 10% of the forecasted growth
Slower pace of NPE decrease by 5% of the forecasted drop
Higher net commission income by 5% on average than the forecasted
growth
Higher average Cost/Income ratio by 100 bps than the forecasted
ratio
Increase/(decrease) of DTA
carrying value
2018
€million
2017
€million
(14)
(18)
(11)
13
(12)
(28)
10
(8)
-
-
-
21
-
-
15
-
For year end 2018, the sensitivity results that indicate a decrease in the carrying value of the DTA would
not result in any increase in the recoverable period as the loss expiry date is 31 December 2028, which is
the considered recoverable period. At the same time, the sensitivity results that indicate an increase in the
carrying value of the DTA are not individually significant enough to either significantly increase the
recoverable amount or reduce the recoverable period.
The recoverability assessment for year end 2017 indicated the recoverable period for deferred tax asset to
be 31 December 2027, a year earlier than the expiry date of losses. As a result, the sensitivity results that
indicated a decrease in the carrying value of the DTA did not have a material impact on its carrying value
considering also that the recoverability assessment has shown sufficient headroom over and above the
negative sensitivity impacts. The sensitivity results that indicated an increase in the carrying value of the
DTA were not individually significant enough to either significantly increase the recoverable amount or
reduce the recoverable period.
On 1 March 2019 the Cyprus Parliament adopted legislative amendments allowing for the conversion of
deferred tax assets into deferred tax credits. The law amendment covers the income tax losses transferred
from Laiki Bank to BOC PCL in March 2013. The law amendment, which entered into force on 15 March
2019, applies only to tax losses transferred following resolution of a credit institution within the framework
of ‘The Resolution of Credit and Other Institutions Law’. The legislation enacted on 1 March 2019 has not
been taken into account for the purpose of the year end recoverability assessment. Further information is
disclosed in Note 56.
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
127
2018
€000
(8,728)
(16,063)
(2,847)
301,772
(14,429)
(2,209)
257,496
2017
€000
(7,938)
(17,545)
(3,807)
383,492
(15,093)
(1,724)
337,385
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
18.
Income tax (continued)
Deferred tax (continued)
Deferred tax assets
Deferred tax liabilities
Net deferred tax assets
The deferred tax assets relate to Cyprus operations.
The movement of the net deferred tax assets is set out below:
1 January
Deferred tax recognised in the consolidated income statement - continuing
operations
Deferred tax recognised in the consolidated income statement - discontinued
operations
Deferred tax recognised in the consolidated statement of comprehensive
income
Disposal of subsidiary
Foreign exchange adjustments
31 December
2018
€000
301,778
(44,282)
257,496
2017
€000
383,498
(46,113)
337,385
2018
€000
337,385
2017
€000
405,066
(81,436)
(67,108)
-
579
967
1
(50)
(522)
-
(1)
257,496
337,385
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.
The analysis of the net deferred tax expense recognised in the consolidated income statement is set out
below:
Difference between capital allowances and depreciation
Reversal of previously recognised deferred tax assets
Value of in-force life insurance business
Investment revaluation and stock of property
Other temporary differences
2018
€000
2017
€000
855
81,720
(664)
(960)
485
81,436
100
66,858
343
-
(193)
67,108
The analysis of the net deferred tax recognised in other comprehensive income in the consolidated
statement of comprehensive income is set out below:
Timing differences on property revaluation - income/(expense)
2018
€000
2017
€000
579
(522)
128
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
19.
Earnings per share
Basic and diluted losses per share attributable to the owners of the
Company
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)
Basic and diluted losses per share (€ cent)
Basic and diluted losses per share attributable to the owners of the
Company-continuing operations
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 losses per share-continuing operations (€ cent)
Basic and diluted earnings per share attributable to the owners of
the Company-discontinued operations
Profit 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 earnings per share-discontinued operations (€ cent)
2018
2017
(103,521)
(551,852)
446,058
446,057
(23.2)
(123.7)
2018
2017
(110,764)
(552,332)
446,058
446,057
(24.8)
(123.8)
7,243
480
446,058
446,057
1.6
0.1
20.
Cash, balances with central banks and loans and advances to banks
Cash
Balances with central banks
Loans and advances to banks
Allowance for expected credit losses
2018
€000
153,723
2017
€000
143,905
4,456,768
3,250,029
4,610,491
3,393,934
473,263
1,192,633
(731)
-
472,532
1,192,633
An analysis of the movement of the gross carrying amount and ECL of balances with central banks is
presented in the table below:
2018
1 January
Net increase
Changes to models and inputs used for ECL calculation
Disposal of subsidiary
Foreign exchange adjustments
31 December
129
Gross
carrying
amount
Stage 1
€000
3,250,029
1,483,635
-
(277,811)
915
4,456,768
ECL
Stage 1
€000
(5,872)
-
5,872
-
-
-
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
20.
Cash, balances with central banks and loans and advances to banks (continued)
An analysis of the movement of the gross carrying amount of loans and advances to banks is presented in
the table below:
2018
1 January
Net decrease
Disposal of subsidiary
Foreign exchange adjustments
31 December
Stage 1
€000
1,159,629
(642,995)
(42,974)
(397)
473,263
Stage 2
€000
Stage 3
€000
Total
€000
-
-
-
-
-
58,002
1,217,631
(58,002)
(700,997)
-
-
-
(42,974)
(397)
473,263
An analysis of the movement of the change on the ECL of the above financial assets is presented in the
table below:
Stage 1
€000
Stage 2
€000
Stage 3
€000
2018
1 January
Impact of adopting IFRS 9 at 1 January 2018
Restated balance at 1 January
Changes to models and inputs used for ECL
calculation
Decrease
31 December
-
(20)
(20)
(711)
-
(731)
-
-
-
-
-
-
Total
€000
(24,998)
(20)
(24,998)
-
(24,998)
(25,018)
-
24,998
-
(711)
24,998
(731)
Balances with central banks include obligatory deposits for liquidity purposes as at 31 December 2018 which
amount to €162,675 thousand (2017: €153,733 thousand) (Note 43).
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 46.13.
Loans and advances to banks earn interest based on the interbank rate of the relevant term and currency.
21.
Investments
Investments
Investments mandatorily measured at FVPL
Other investments at FVPL
Investments at FVOCI
Investments at amortised cost
Investments available-for-sale
Investments classified as loans and receivables
2018
€000
152,473
-
231,548
393,083
-
-
777,104
2017
€000
103,165
39,492
-
-
639,168
48,658
830,483
130
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
21.
Investments (continued)
The amounts pledged as collateral under repurchase agreements with banks are shown below:
Investments pledged as collateral
Investments at FVOCI
Investments at amortised cost
Investments available-for-sale
2018
€000
600,291
137,296
-
737,587
2017
€000
-
-
290,129
290,129
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 Note 46.1 and the debt securities’ price
risk sensitivity analysis is disclosed in Note 47.
There were no reclassifications of investments during the year.
The credit rating analysis of investments is disclosed in Note 46.13.
131
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
21.
Investments (continued)
Investments at fair value through profit or loss
Investments
mandatorily measured at
FVPL
2018
€000
14,616
3,775
134,082
2017
€000
14,577
2,644
85,944
152,473
103,165
547
14,577
14,069
14,616
-
14,577
547
14,577
14,069
14,616
-
14,577
2,294
1,965
972
509
679
-
3,775
2,644
94,679
39,403
85,944
-
134,082
85,944
Debt securities
Equity securities
Mutual funds
Debt securities
Cyprus government
Banks and other
corporations
Listed on other stock
exchanges
Unlisted
Equity securities
Listed on the Cyprus
Stock Exchange
Listed on other stock
exchanges
Unlisted
Mutual funds
Listed on other stock
exchanges
Unlisted
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Other investments at
FVPL
2018
€000
2017
€000
Total
2018
€000
14,616
3,775
134,082
152,473
2017
€000
14,577
7,185
120,895
142,657
-
4,541
34,951
39,492
-
-
-
-
-
-
547
14,577
14,069
14,616
-
14,577
547
14,577
14,069
14,616
-
14,577
3,945
2,294
5,910
-
596
972
509
679
596
4,541
3,775
7,185
-
34,951
34,951
94,679
39,403
85,944
34,951
134,082
120,895
The investments classified as mandatorily measured at FVPL are classified as such since they failed to meet
the SPPI criteria.
The majority of the unlisted mutual funds relate to investments whose underlying assets are listed on stock
exchanges and are therefore presented in Level 1 hierarchy in Note 23.
Investments at FVOCI
Debt securities
Equity securities (including preference shares)
Mutual funds
132
2018
€000
819,748
11,534
557
831,839
2017
€000
-
-
-
-
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
21.
Investments (continued)
Debt securities
Cyprus 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
Other European countries
Supranational organisations
Other countries
Equity securities
Listed on the Cyprus Stock Exchange
Listed on other stock exchanges
Unlisted
2018
€000
322,021
299,876
197,851
819,748
5,977
813,771
819,748
322,021
282,691
83,085
20,049
111,902
819,748
1,498
167
9,869
11,534
An analysis of the movement of debt instruments before ECL is presented in the table below:
2018
1 January
New assets acquired in the year
Assets derecognised and redeemed in the year
Interest accrued
Foreign exchange adjustments
Change in fair value
31 December
An analysis of changes on the ECL is presented in the table below:
2018
1 January
Changes to models and inputs used for ECL calculation
31 December
133
2017
€000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Stage 1
€000
916,129
186,605
(251,498)
(4,428)
7,765
(34,227)
820,346
Stage 1
€000
(872)
274
(598)
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
21.
Investments (continued)
At 1 January 2018 the Group irrevocably made the election to classify its equity investments previously
classified as available-for-sale as equity investments at FVOCI on the basis that these are not held for
trading. Their carrying value included in the table above amounts to €11,534 thousand at 31 December
2018 and is equal to their fair value. The dividend income amounts to €197 thousand for year 2018 and
has been recognised in the income statement.
During the year 2018 an amount of €5,458 thousand of equity investments measured at FVOCI have been
disposed of as part of the Group’s strategy to dispose of its non-core assets. The cumulative gain
transferred to retained earnings amounts to €173 thousand. There were no other transfers from OCI to
retained earnings during the year.
The fair value of the financial assets that have been reclassified out of FVPL to FVOCI on transition to IFRS
9, amounts to €13,764 thousand at 31 December 2018. The fair value loss that would have been recognised
in the consolidated income statement if these financial assets had not been reclassified as part of the
transition to IFRS 9, amounts to €186 thousand. The effective interest rate of these instruments is 1.6%-
5.0% per annum and the respective interest income during 2018 amounts to €398 thousand.
Investments at amortised cost
Debt securities
Cyprus government
Other governments
Banks and other corporations
European Financial Stability Facility and European Investment Fund
Listed on the Cyprus Stock Exchange
Listed on other stock exchanges
Geographic dispersion by country of issuer
Cyprus
Germany
Other European countries
Other countries
UK
Supranational organisations
2018
€000
530,379
119,189
123,799
103,457
183,934
530,379
48,292
482,087
530,379
119,189
64,184
69,814
80,190
13,068
183,934
530,379
2017
€000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
An analysis of changes in the gross carrying amount (before ECL) is presented in the table below:
2018
1 January
New assets acquired in the year
Assets derecognised and redeemed in the year
Fair value due to hedging relationship
Accrued interest
31 December
Stage 1
€000
Stage 2
€000
-
48,658
522,398
(43,000)
58
2,773
-
-
530
(206)
Total
€000
48,658
522,398
(43,000)
588
2,567
482,229
48,982
531,211
134
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
21.
Investments (continued)
An analysis of changes on the ECL is presented in the table below:
Stage 1
€000
Stage 2
€000
Total
€000
-
(142)
(142)
(1,843)
(1,843)
1,153
(690)
1,011
(832)
2018
1 January
Change to models and inputs used for ECL calculation
31 December
Investments available-for-sale
Debt securities
Equity securities (including preference shares)
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
Unlisted
Geographic dispersion by country of issuer
Cyprus
France
Other European Union 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
2018
€000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2017
€000
901,734
27,176
387
929,297
451,071
281,979
22,462
146,222
901,734
451,071
450,163
500
901,734
451,571
281,979
75,573
11,443
9,058
72,110
901,734
5,750
546
20,880
27,176
At 31 December 2017 there were no available-for-sale investments in debt securities which have been
determined to be individually impaired.
Available-for-sale mutual funds were mainly unlisted and issued in other countries.
135
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
21.
Investments (continued)
Investment classified as Loans and receivables
At 31 December 2017 investments classified as loans and receivables amounted to €48,658 thousand. They
were issued by the Cyprus government and they were listed on the CSE.
22.
Derivative financial instruments
The contract amount and fair value of the derivative financial instruments is set out below:
2018
Fair value
Contract
amount
€000
Assets
Liabilities
€000
€000
Contract
amount
€000
2017
Fair value
Assets
€000
Liabilities
€000
Trading
derivatives
Forward
exchange rate
contracts
Currency
swaps
Interest rate
swaps
Currency
options
Interest rate
caps/floors
Derivatives
qualifying for
hedge
accounting
Fair value
hedges -
interest rate
swaps
Net
investments -
forward
exchange rate
contracts and
currency
swaps
Total
17,114
240
192
33,259
99
114
1,219,749
3,405
6,342
1,419,915
1,103
14,082
57,652
12,704
1,650,000
2,957,219
471
8
462
4,586
422
382
-
69,022
396
-
216
18
-
873
402
-
7,338
1,522,592
1,436
15,471
1,016,083
20,137
29,029
1,171,424
16,315
35,420
74,973
1,091,056
4,048,275
31
20,168
24,754
2,616
31,645
38,983
61,012
1,232,436
2,755,028
276
16,591
18,027
1
35,421
50,892
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.
Credit risk for derivatives arises from the possibility of the counterparty’s failure to meet the terms of any
contract. In the case of derivatives, credit losses are a small portion of the derivatives’ notional amount
(positive market value of the derivative contract) compared to the total notional amount of the derivative
contracts. In order to manage credit risk, the Group sets derivative limits based on the creditworthiness of
the involved counterparties and uses credit mitigation techniques such as netting and collateralisation.
136
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
22.
Derivative financial instruments (continued)
Interest rate risk is explained in Note 47. The interest rate risk is managed through the use of plain vanilla
interest rate swaps and interest rate options. In fair value hedges of interest rate risk, the Group converts
fixed rate assets/liabilities to floating. In cash flow hedging of interest rate risk, the Group converts floating
rate assets/liabilities to fixed.
Currency risk is explained in Note 47. In order to eliminate the risk, the Group hedges its open position by
entering into foreign exchange deals such as: foreign exchange spot, foreign exchange forwards, foreign
exchange swaps or foreign exchange options. The foreign currency risk mainly arises from customer-driven
transactions on deposits and loans and advances.
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.
Interest rate, currency and equity options provide the buyer with the right but not the obligation, to either
buy 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 elected, as a policy choice permitted by IFRS 9, to continue to apply hedge accounting in
accordance with IAS 39. The Group implements the amended IFRS 7 hedge disclosure requirements.
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.
137
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
22.
Derivative financial instruments (continued)
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 debt securities measured at FVOCI 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 2018, deposits, and forward and swap exchange rate contracts amounting to €9,843
thousand and €74,973 thousand respectively (2017: €142,273 thousand and €61,012 thousand
respectively) have been designated as hedging instruments and have given rise to a loss of €9,760
thousand (2017: loss of €1,166 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.
2018
Derivatives qualifying for hedge accounting
Fair value hedges
-interest rate swaps
Net investments
-forward exchange rate contracts
Total
Gains/(losses) attributable
to hedged risk
Hedged in-
effectiveness
Hedged items
€000
Hedging
instrument
€000
€000
11,103
(10,028)
(1,075)
9,775
(9,775)
-
20,878
(19,803)
(1,075)
The accumulated fair value adjustment arising from the hedging relationships is presented in the table
below:
2018
Derivatives qualifying for hedge
accounting
Fair value hedges - interest rate swaps
-debt securities
-subordinated loan stock
Net investments - forward and swap
exchange rate contracts
Net assets
Total
Carrying amount of hedged
items
Accumulated amount of fair
value hedging adjustments
gains/(losses) on the
hedged item
Assets
Liabilities
Assets
Liabilities
€000
€000
€000
€000
770,768
-
11,657
-
270,930
74,973
-
-
-
845,741
270,930
11,657
-
(555)
2,585
2,030
138
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
22.
Derivative financial instruments (continued)
For assets hedged using fair value hedges the fixed rate is 3.08% and the floating rate is 1.65%. For
liabilities hedged using fair value hedges, the fixed rate is 9.25% and the foating rate 8.86%.
The maturity of the Group's contract amount of the derivatives is presented in the table below:
2018
Trading
derivatives
Forward
exchange rate
contracts
Currency
swaps
Interest rate
swaps
Currency
options
Interest rate
caps/floors
Derivatives
qualifying for
hedge
accounting
Fair value
hedges -
interest rate
swaps
Net
investments -
forward and
swap
exchange rate
contracts
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
€000
Over five
years
€000
Total
contract
amount
€000
6,405
10,263
1,179,201
40,102
-
12,704
-
-
-
-
446
446
-
-
-
-
-
57,652
-
1,650,000
1,198,310
50,365
892
1,707,652
-
-
-
-
-
-
17,114
1,219,749
57,652
12,704
1,650,000
2,957,219
-
74,973
74,973
-
-
-
77,619
729,702
208,762
1,016,083
-
-
-
74,973
77,619
729,702
208,762
1,091,056
Total
1,273,283
50,365
78,511
2,437,354
208,762
4,048,275
139
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
23.
Fair value measurement
The following table presents the carrying value and fair value of the Group's financial assets and liabilities.
Financial assets
Cash and balances with central banks
Loans and advances to banks
Investments mandatorily measured at FVPL
Other investments measured at FVPL
Investments at FVOCI
Investments at amortised cost
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
Financial assets classified as held for sale
Other financial assets
Financial liabilities
Obligations to central banks and deposits by
banks
Repurchase agreements
Derivative financial liabilities
Customer deposits
Subordinated loan stock
Other financial liabilities
2018
2017
Fair value
Carrying value
Fair value
Carrying
value
€000
€000
4,610,491
4,610,491
472,532
152,473
-
831,839
530,379
-
-
467,026
152,473
-
831,839
538,631
-
-
24,754
24,754
€000
3,393,934
€000
3,393,934
1,192,633
1,191,617
103,165
39,492
103,165
39,492
-
-
-
-
929,297
929,297
48,658
18,027
55,104
18,027
10,921,786
10,788,446
14,602,454
15,385,385
388,745
388,745
416,060
416,060
1,154,108
1,154,108
-
-
144,381
144,381
105,473
105,473
19,231,488
19,100,894
20,849,193
21,637,554
1,261,942
1,261,942
1,425,308
1,425,308
248,945
38,983
263,511
38,983
257,322
50,892
281,951
50,892
16,843,558
16,849,222
17,849,919
17,875,239
270,930
188,512
276,527
188,512
302,288
176,646
334,783
176,646
18,852,870
18,878,697
20,062,375
20,144,819
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.
140
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
23.
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 BOC PCL’s own credit quality respectively.
The Group calculates the CVA by applying the 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 CRR and takes into account the netting
agreements where they exist. A standard 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 at FVPL investments at FVOCI and investments at amortised cost
Investments 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. The
rest of the investments are valued using quoted prices in active markets.
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 risk free rate per currency, funding cost, servicing cost and the cost of capital, considering the
risk weight of each loan.
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 BOC PCL. 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.
141
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
23.
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.
Subordinated loan stock
The current issue of BOC PCL is liquid with quoted prices in an active market.
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.
142
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
23.
Fair value measurement (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:
2018
Assets measured at fair value
Investment properties
Residential
Offices and other commercial properties
Manufacturing and industrial properties
Hotels
Land (fields and plots)
Investment properties held for sale
Offices and other commercial properties
Freehold property
Offices and other commercial properties
Freehold property held for sale
Offices and other commercial properties
Loans and advances to customers measured
at FVPL
Trading derivatives
Forward exchange rate contracts
Currency swaps
Interest rate swaps
Currency options
Interest rate caps/floors
Derivatives qualifying for hedge accounting
Fair value hedges-interest rate swaps
Net investments-forward exchange rate
contracts and currency swaps
Investments mandatorily measured at FVPL
Investments at FVOCI
Other financial assets not measured at
fair value
Loans and advances to banks
Investments at amortised cost
Loans and advances to customers
Level 1
€000
Level 2
€000
Level 3
€000
Total
€000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
137,093
822,628
959,721
-
484,417
-
-
-
-
-
-
-
-
-
-
-
-
240
3,405
471
8
462
4,586
20,137
31
20,168
394
1,051
1,041
2,002
452
2,465
18,515
24,475
1,041
2,002
452
2,465
18,515
24,475
152,348
152,348
152,348
152,348
236,405
236,405
88,022
88,022
395,572
395,572
-
-
-
-
-
-
-
-
-
14,986
8,160
240
3,405
471
8
462
4,586
20,137
31
20,168
152,473
831,839
26,199
919,968
1,905,888
467,026
54,214
-
-
467,026
538,631
-
10,788,446
10,788,446
484,417
521,240
10,788,446
11,794,103
143
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
23.
Fair value measurement (continued)
For loans and advances to customers measured at FVPL categorised as Level 3, an increase in the discount
factor by 10% would result in a decrease of €12,134 thousand in their fair value and a decrease in the
discount factor by 10% would result in an increase of €5,263 thousand in their fair value. For investments
mandatorily measured at fair value through profit and loss categorised as Level 3, for one investment with a
carrying amount of €13,569 thousand, a change in the conversion factor by 10% would result in a change in
the value of the debt securities by €1,357 thousand.
For additional disclosures on sensitivity analysis of equity securities refer to Note 47.
2018
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
Subordinated loan stock
Level 1
€000
Level 2
€000
Level 3
€000
Total
€000
-
-
-
-
-
-
-
-
-
-
-
-
276,527
276,527
192
6,342
422
382
7,338
29,029
2,616
31,645
38,983
431,942
263,511
-
-
-
-
-
-
-
-
-
-
-
-
-
192
6,342
422
382
7,338
29,029
2,616
31,645
38,983
431,942
263,511
16,849,222
16,849,222
-
276,527
695,453
16,849,222
17,821,202
144
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
23.
Fair value measurement (continued)
2017
Assets measured at fair value
Investment properties
Residential
Offices and other commercial properties
Manufacturing and industrial properties
Hotels
Land (fields and plots)
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
Other financial assets not measured at
fair value
Loans and advances to banks
Investments classified as loans and
receivables
Loans and advances to customers
Level 1
€000
Level 2
€000
Level 3
€000
Total
€000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
102,535
37,823
140,358
907,360
-
-
-
-
-
-
-
338
2,752
477
2,124
13,955
19,646
338
2,752
477
2,124
13,955
19,646
6,500
6,500
16,332
239,559
255,891
99
1,103
216
18
1,436
16,315
276
16,591
-
1,573
1,573
42
-
-
-
-
-
-
-
-
99
1,103
216
18
1,436
16,315
276
16,591
630
96
726
21,895
103,165
39,492
142,657
929,297
1,047,718
35,974
288,326
1,372,018
-
-
-
-
1,191,617
55,104
-
-
1,191,617
55,104
-
15,385,385
15,385,385
1,246,721
15,385,385 16,632,106
For available-for-sale equity securities categorised as Level 3, for one investment with a carrying amount of
€11,228 thousand, a change in the conversion factor by 10% would result in a change in the value of the
equity securities by €1,123 thousand.
For additional disclosures on sensitivity analysis of equity securities refer to Note 47.
145
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
23.
Fair value measurement (continued)
2017
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
Subordinated loan stock
Level 1
€000
Level 2
€000
Level 3
€000
Total
€000
-
-
-
-
-
-
-
-
-
-
-
-
300,980
300,980
114
14,082
873
402
15,471
35,420
1
35,421
50,892
495,308
281,951
-
-
-
-
-
-
-
-
-
-
-
114
14,082
873
402
15,471
35,420
1
35,421
50,892
495,308
281,951
-
17,875,239
17,875,239
33,803
-
334,783
811,062
17,875,239
18,987,281
The cash and balances with central banks and the funding from central banks 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 and they are categorised as Level 2. The carrying
value of other assets and other liabilities and assets classified as held for sale is a close approximation of
their fair value and they are categorised as Level 3. The other assets and other liabilities are of a financial
nature.
During the years 2018 and 2017 there were no significant transfers between Level 1 and Level 2.
146
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
23.
Fair value measurement (continued)
Movements in Level 3 assets 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:
2018
Investment
properties
held for sale
€000
Own use
properties
€000
Own use
properties
held for sale
€000
Loans and
advances to
customers
€000
Financial
instruments
Investment
properties
€000
€000
Investment
properties held
for sale
€000
2017
Own use
properties
€000
Own use
properties held
for sale
€000
Financial
instruments
€000
1 January
Additions
Disposals
Transfers from investment
properties to own use properties
Transfers from/(to) stock of
property (Note 28)
Transfers to non-current assets
and disposal group held for sale
Net gains from fair value changes
recognised in the consolidated
statement of other
comprehensive income
Depreciation charge for the year
Impairment charge for the year
(Note 17)
Fair value (losses)/gains
Net gains on loans and advances
to customers measured at FVPL
Repayments of loans
Interest on loans
Investment
properties
€000
19,646
4,522
-
-
166,572
-
-
-
(13,325)
-
-
-
6,500
239,559
-
2,739
(6,500)
-
-
-
-
84,744
-
-
-
-
-
(152,298)
152,298
(88,022)
88,022
-
-
-
50
-
-
-
-
-
(2,614)
-
-
-
-
-
(1)
-
-
-
-
-
-
-
-
389,862
35,601
-
-
-
-
-
-
-
-
16,125
(62,809)
16,793
-
22,621
-
-
-
-
-
525
-
-
-
-
-
-
-
38,059
4,273
11,065
246,215
-
1,280
(12,248)
(10,864)
(395)
-
-
-
(6,500)
6,500
-
-
-
(3,309)
-
-
-
-
-
-
-
-
-
-
-
395
129
-
2,740
(2,652)
(8,470)
-
-
-
-
(234)
19,646
(201)
6,500
(78)
239,559
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
17,479
724
(689)
-
-
-
5,738
-
-
-
-
-
-
(631)
22,621
Foreign exchange adjustments
(642)
31 December
24,475
152,348
236,405
88,022
395,572
23,146
147
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
23.
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.
148
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
23.
Fair value measurement (continued)
Valuation policy and sensitivity analysis (continued)
Analysis of investment properties and investment properties held for sale
Type and country
2018
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
Residential
Russia
Offices and other commercial
properties
Cyprus
Russia
Manufacturing and industrial
Russia
Hotels
Russia
Land (fields and plots)
Cyprus
Russia
Total
€000
1,041
153,667
683
154,350
452
2,465
17,780
735
18,515
176,823
Land
Building
area
Age of
building
m2
m2
Years
n/a
n/a €196-€2,020
n/a
€45-€2,020
€8-€114
800-6,087
102-719
8
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a 5%-6.3%
€471-€4,653
n/a 798-20,026 214-24,094
€175-€485
n/a
€47-€198
€26-€161
256-3,498
154-1,644
n/a
n/a
n/a
€64-€153
n/a
€12-€153
€3-€21
5,220-
29,538
304-8,874
9-35
n/a
€318
n/a
€318
n/a
n/a
7,436
13
n/a
n/a
n/a
n/a
n/a
n/a
n/a €370-€1,028
2,316-
21,053
€1-€33
€1-€33 300-58,600
n/a
n/a
n/a
n/a
149
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
23.
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
2018
Offices and other commercial
properties
Cyprus
Total
€000
324,427
324,427
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
€26-€277
n/a €821-€1,895
5%-6%
€19-€6,557 €70-€3,381 390-598,767 122-31,000
1-78
150
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
23.
Fair value measurement (continued)
Valuation policy and sensitivity analysis (continued)
Analysis of investment properties and investment properties held for sale
2017
€000
338
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
n/a
n/a €225-€2,326
n/a
€51-€2,326
€9-€11
570-1,573
102-384
7
8,830
€54-€353
n/a
n/a
n/a
n/a
n/a
n/a
4%-6% €1,339-€7,059
€1,053
1,591
68-4,788
14-34
€210-€410
n/a
€88-€124
€9-€73 2,588-2,773
649-1,644
8
n/a
€20-€176
n/a
€7-€176
€5-€24
5,220-
29,538
304-8,874
8-29
n/a
€361
n/a
€361
n/a
n/a
5,946
12
Type and country
Residential
Russia
Offices and other commercial
properties
Cyprus
Russia
Manufacturing and industrial
Russia
Hotels
Russia
Land (fields and plots)
Cyprus
Total
422
9,252
477
2,124
13,955
26,146
n/a
n/a
€1,000-
€1,200
n/a
n/a €279-€1,028
2,316-
21,053
n/a
n/a
151
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
23.
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
2017
Offices and other commercial
properties
€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
Cyprus
Romania
UK
Total
236,268
€26-€277
n/a €821-€1,895
5%-6%
€19-€6,557 €70-€3,381 390-598,767 122-11,109
3,291
n/a
n/a
n/a
9%
n/a
n/a
660
2,284
16,332
255,891
€214-€777
0%-6%
n/a
5%-7% €3,260-€16,959
n/a
173-1,740
173-1,689
11-77
10
Refurnished
in 2009
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.
152
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
24.
Loans and advances to customers
Gross loans and advances to customers at amortised cost
Allowance for ECL/provisions for impairment of loans and advances to
customers (Note 46)
Loans and advances to customers measured at amortised cost
Loans and advances to customers measured at FVPL
2018
€000
12,430,367
2017
€000
18,086,230
(1,904,153)
(3,483,776)
10,526,214
14,602,454
395,572
-
10,921,786
14,602,454
Loans and advances to customers pledged as collateral are disclosed in Note 48.
Additional analysis and information regarding credit risk and analysis of the allowance for ECL and of the
provisions for impairment of loans and advances to customers are set out in Note 46.
25.
Life insurance business assets attributable to policyholders
Equity securities
Debt securities
Mutual funds
Bank deposits
Property
2018
€000
1,025
43,952
311,892
31,876
388,745
13,820
402,565
2017
€000
1,171
46,806
325,091
42,992
416,060
13,830
429,890
Financial assets of life insurance business attributable to policyholders are classified as investments at FVPL.
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 2018 of €215
thousand (2017: €350 thousand). Such shares are presented in the consolidated financial statements as
treasury shares (Note 36).
The analysis of the financial assets of life insurance business attributable to policyholders measured at fair
value by level, is presented below:
2018
Equity securities
Debt securities
Mutual funds
2017
Equity securities
Debt securities
Mutual funds
Level 1
€000
Level 2
€000
Level 3
€000
-
24,887
-
24,887
-
25,492
-
25,492
-
-
273
273
-
-
856
856
1,025
19,065
311,619
331,709
1,171
21,314
324,235
346,720
153
Total
€000
1,025
43,952
311,892
356,869
1,171
46,806
325,091
373,068
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
25.
Life insurance business assets attributable to policyholders (continued)
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
2018
€000
2017
€000
856
(583)
273
1,208
(352)
856
During years 2018 and 2017 there were no significant transfers between Level 1 and Level 2.
26.
Property and equipment
2018
Net book value at 1 January
Additions
Transfers from stock of property (Note 28)
Transfers to non-current assets and disposal group held for
sale
Disposals and write-offs
Property
€000
Equipment
€000
257,360
4,460
84,744
(88,022)
-
22,454
9,132
-
(110)
(37)
Total
€000
279,814
13,592
84,744
(88,132)
(37)
Disposal of subsidiary (Note 53.2.1)
(16,073)
(1,151)
(17,224)
Depreciation charge for the year - continuing operations
(Note 16)
Depreciation charge for the year - discontinued operations
Impairment charge for the year (Note 17)
Foreign exchange adjustments
Net book value at 31 December
(3,320)
(252)
-
(8)
(7,792)
(11,112)
(652)
(11)
1
(904)
(11)
(7)
238,889
21,834
260,723
1 January 2018
Cost or valuation
Accumulated depreciation
Net book value
31 December 2018
Cost or valuation
Accumulated depreciation
Net book value
293,664
(36,304)
257,360
149,263
442,927
(126,809)
(163,113)
22,454
279,814
277,206
(38,317)
238,889
138,767
415,973
(116,933)
(155,250)
21,834
260,723
154
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
26.
Property and equipment (continued)
2017
Net book value at 1 January
Additions
Revaluation
Transfers from investment properties (Note 23)
Transfers from stock of property (Note 28)
Disposals and write-offs
Depreciation charge for the year - continuing operations
(Note 16)
Depreciation charge for the year - discontinued operations
Impairment charge for the year (Note 17)
Foreign exchange adjustments
Net book value at 31 December
1 January 2017
Cost or valuation
Accumulated depreciation
Net book value
31 December 2017
Cost or valuation
Accumulated depreciation
Net book value
The net book value of the Group's property comprises:
Freehold property
Improvements on leasehold property
Total
Property
€000
Equipment
€000
258,552
1,843
9,319
395
129
(35)
(3,707)
(276)
(8,470)
(390)
Total
€000
280,893
10,299
9,319
395
129
(277)
22,341
8,456
-
-
-
(242)
(7,150)
(10,857)
(797)
-
(154)
(1,073)
(8,470)
(544)
257,360
22,454
279,814
298,743
(40,191)
258,552
152,838
451,581
(130,497)
(170,688)
22,341
280,893
293,664
(36,304)
257,360
149,263
442,927
(126,809)
(163,113)
22,454
279,814
2018
€000
236,405
2,484
238,889
2017
€000
255,891
1,469
257,360
Freehold property includes land amounting to €92,471 thousand (2017: €92,471 thousand) for which no
depreciation is charged.
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. The Group
performed revaluations as at 31 December 2017. As a result, a net gain on revaluation of €9,319 thousand
was recognised in the consolidated statement of comprehensive income and an impairment loss of €8,470
thousand was recognised in the consolidated income statement for the year ended 31 December 2017. The
valuations at year end were carried out by independent 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 23.
As at 31 December 2018 and 2017 there are charges against freehold property of the Group with carrying
value €20,711 thousand (2017: €20,850 thousand).
The net book value of freehold property, on a cost less accumulated depreciation basis, as at 31 December
2018 would have amounted to €180,340 thousand (2017: €194,446 thousand).
155
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
27.
Intangible assets
2018
Net book value at 1 January
Additions
Transfers to non-current assets and disposal group held for
sale
Decrease in value of in-force life insurance business
(Note 13)
Disposals and write-offs
Disposal of subsidiaries (Note 53.2.1)
Amortisation charge for the year - continuing operations
(Note 16)
Amortisation charge for the year - discontinuing operations
Foreign exchange adjustments
Net book value at 31 December
1 January 2018
Cost
Accumulated amortisation and impairment
Net book value
31 December 2018
Cost
Accumulated amortisation and impairment
Net book value
Computer
software
€000
45,205
27,006
(20)
In-force life
insurance
business
€000
120,747
-
-
-
(5,314)
(1,784)
(1,883)
(13,217)
(325)
(4)
-
-
-
-
-
Total
€000
165,952
27,006
(20)
(5,314)
(1,784)
(1,883)
(13,217)
(325)
(4)
54,978
115,433
170,411
169,612
(124,407)
120,747
290,359
-
(124,407)
45,205
120,747
165,952
186,196
(131,218)
115,433
301,629
-
(131,218)
54,978
115,433
170,411
156
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
27.
Intangible assets (continued)
2017
Net book value at 1 January
Additions
Increase in value of in-force life insurance business (Note 13)
Disposals and write-offs
Amortisation charge for the year - continuing operations
(Note 16)
Amortisation charge for the year - discontinuing operations
Foreign exchange adjustments
Net book value at 31 December
1 January 2017
Cost
Accumulated amortisation and impairment
Net book value
31 December 2017
Cost
Accumulated amortisation and impairment
Net book value
Valuation of in-force life insurance business
Computer
software
€000
In-force life
insurance
business
€000
28,959
25,723
-
(22)
(8,743)
(661)
(51)
118,004
-
2,743
-
-
-
-
Total
€000
146,963
25,723
2,743
(22)
(8,743)
(661)
(51)
45,205
120,747
165,952
144,898
(115,939)
118,004
262,902
-
(115,939)
28,959
118,004
146,963
169,612
(124,407)
120,747
290,359
-
(124,407)
45,205
120,747
165,952
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
28.
Stock of property
2018
10.0%
5.0%
3.5%
2017
10.0%
5.0%
4.0%
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 2018 an impairment
loss of €17,272 thousand was recognised in 'Impairment of non-financial instruments' in the consolidated
income statement (2017: €50,502 thousand). At 31 December 2018, stock of €387,085 thousand (2017:
€418,559 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.
There is no stock of property pledged as collateral for central bank funding facilities under Eurosystem
monetary policy operations.
157
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
28.
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 to investment properties (Note 23)
Transfers to own use properties (Note 26)
Transfers to disposal group 1 (Note 30)
Impairment (Note 17)
Foreign exchange adjustments
Net book value at 31 December
2018
€000
1,641,422
2017
€000
1,427,272
427,828
523,061
(196,358)
(257,662)
(166,572)
(84,744)
(73,899)
(17,272)
(17)
-
(129)
-
(50,502)
(618)
1,530,388
1,641,422
Additions during 2018 include costs of construction of €31,860 thousand (2017: €3,404 thousand).
The Group has transferred to the Cyreit Variable Capital Investments Company PLC (Cyreit), following its
set-up in March 2018 (Note 52), a diversified portfolio of commercial real estate assets acquired as part of
loan restructuring activity, which are to be managed and used in accordance with the investment objective
of the Cyreit that is to generate and grow medium to long term income, both in terms of rental income as
well as capital appreciation. The Group assessed that there was a change in use of these properties upon
transfer to Cyreit and has therefore reclassified from stock of property to investment properties.
The table below shows the result on the disposal of stock of property in the year:
Net proceeds
Carrying value of stock of property disposed of (excluding stock of property
held by subsidiary disposed of)
Net gains on disposal of stock of property
2018
€000
228,225
2017
€000
280,365
(196,358)
(249,918)
31,867
30,447
Analysis by type and country
2018
Residential properties
Offices and other commercial properties
Manufacturing and industrial properties
Hotels
Land (fields and plots)
Properties under construction
Total
Cyprus
€000
Greece
€000
Romania
€000
163,988
226,999
79,691
34,840
897,020
678
24,538
44,347
38,434
484
7,546
-
313
7,401
498
-
3,611
-
Total
€000
188,839
278,747
118,623
35,324
908,177
678
1,403,216
115,349
11,823
1,530,388
158
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
28.
Stock of property (continued)
2017
Residential properties
Offices and other commercial properties
Manufacturing and industrial properties
Hotels
Land (fields and plots)
Properties under construction
Total
Cyprus
€000
Greece
€000
Romania
€000
146,214
288,282
112,890
77,820
836,543
56,992
29,057
38,882
33,427
493
6,402
-
189
9,138
498
-
4,595
-
Total
€000
175,460
336,302
146,815
78,313
847,540
56,992
1,518,741
108,261
14,420
1,641,422
29.
Prepayments, accrued income and other assets
Receivables relating to disposal of operations
Reinsurers’ share of insurance contract liabilities (Note 33)
Taxes refundable
Debtors
Prepaid expenses
Other assets
2018
€000
2017
€000
85,606
48,348
14,637
30,671
8,658
68,082
36,282
48,000
25,647
24,121
1,391
90,664
256,002
226,105
An analysis of changes in the gross carrying amount of the financial asset included in prepayments, accrued
income and other assets is presented in the table below:
2018
1 January
New assets acquired
Net increase/(decrease)
31 December
25,032
54,760
1,073
80,865
Stage 1
Stage 2
Stage 3
€000
€000
€000
Simplified
method
€000
36,282
38,173
14,485
-
(5,436)
30,846
-
(6,850)
31,323
-
371
14,856
157,890
Total
€000
113,972
54,760
(10,842)
An analysis of the changes on the ECL of the above financial assets is presented in the table below:
2018
1 January
Impact of adopting IFRS 9 at
1 January 2018
Restated balance at 1 January
Changes to models and inputs
used for ECL calculations
31 December
Stage 1
Stage 2
Stage 3
€000
€000
€000
Simplified
method
€000
Total
€000
-
-
-
-
-
-
-
-
-
-
14,923
-
14,923
4,099
19,022
-
576
576
336
912
14,923
576
15,499
4,435
19,934
159
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
29.
Prepayments, accrued income and other assets (continued)
As at 31 December 2018, the receivable relating to the disposal of operations in the UK amounts to €54,760
thousand. Half of the consideration was received upon completion of the transaction and the remaining half
is deferred over 24 months, without any performance conditions attached (Note 53.2.1). The receivable
relating to the disposal of the Ukrainian operations in 2014, amounted to €30,846 thousand and the
deferred consideration is due to be paid to BOC PCL under a repayment programme which has been
extended from June 2019 to December 2022. The receivable is fully secured.
During 2018, credit losses of €8,056 thousand were recognised in relation to other assets of which €4,435
thousand relate to ECL for the year and the remaining €3,621 thousand relate to write-offs (2017: reversal
of impairment of €1,379 thousand) (Note 17).
30.
Non-current assets and disposal groups held for sale
Non-current assets and disposal groups held for sale
The following non-current assets and disposal groups were classified as held for sale as at 31 December
2018 and 2017:
Gross loans and advances to customers at amortised cost (Note 46.7)
Allowance for ECL
Stock of property (Note 28)
Disposal group 1
Disposal group 2
Disposal group 3
Investment properties held for sale
2018
€000
2,711,960
(1,557,852)
1,154,108
73,899
1,228,007
151,248
89,683
1,100
1,470,038
2017
€000
-
-
-
-
-
-
-
6,500
6,500
Non-current labilities and disposal groups held for sale
The liabilities amounting to €5,812 thousand relate to disposal group 3 and represent other liabilities.
Disposal group 1
Disposal group 1 comprises loans and advances to customers and stock of property of Projects Helix and
Velocity as further analysed below. The disposal group has been classified as held for sale as management
is committed to sell it and has proceeded with an active programme to complete this plan. The plan is
expected to be completed within 12 months from the classification date.
During 2018, the Group has reached an agreement for the sale of a portfolio (the ‘Portfolio’) of loans and
advances to customers (known as ‘Project Helix’, or the ‘Transaction’). The Portfolio will be transferred to a
licensed Cypriot Credit Acquiring Company (the ‘CyCAC’) by BOC PCL. The shares of the CyCAC will then be
acquired by certain funds affiliated with Apollo Global Management LLC, together with its consolidated
subsidiaries 'Apollo', the purchaser of the Portfolio. Funds managed by Apollo will provide equity capital in
relation to the financing of the purchase of the Portfolio.
As at 31 December 2018, the Portfolio including stock of property, had a net book value of €1.2 billion. At
completion, BOC PCL will receive a gross cash consideration of c.€1.4 billion. BOC PCL will participate in the
senior debt in relation to such financing in an amount which has been syndicted down to €50 million, from
the initial level of €450 million.
In March 2019, BOC PCL received approval from the ECB for the Significant Risk Transfer (SRT) benefit from
the Transaction. This is an important step towards completion of the Transaction, which remains subject to
various outstanding conditions precedent. Completion is currently expected to occur in early in the second
quarter 2019.
160
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
30.
Non-current assets and disposal groups held for sale (continued)
In addition, the Group has entered into an agreement for the sale of a portfolio of loans and advances to
customers of a gross book value of €33 million (carrying value: €6 million) known as project 'Velocity'. The
sale is subject to the necessary approvals and is expected to be completed within the second quarter of
2019.
Further analysis of the loans and advances to customers portfolio, which is included in this disposal group, is
disclosed in Note 46.7.
Disposal group 2
As at 31 December 2018, the disposal group 2 relates to the subsidiary Cyreit, which is the holding
company of a group of companies which holds and manages investment properties. Management is
committed to sell Cyreit and has proceeded with an active programme to complete this plan. In November
2018, BOC PCL signed an agreement for the disposal of its entire holding of the investment shares of Cyreit
and the disposal is expected in the second quarter of 2019.
The investment properties held within the disposal group are measured at fair value. The results of the fair
value changes are presented within ‘Net losses from revaluation and disposal of investment properties’ in
the consolidated income statement and are within the Cyprus operating segment since the investment
properties are in Cyprus.
Disposal group 3
As at 31 December 2018, the disposal group 3 relates to the subsidiary Nicosia Mall Holdings (NMH) Limited
and its subsidiaries (NMH group) which are involved in the construction and management of the Nicosia
Mall. Management is committed to sell NMH group and has proceeded with an active programme to
complete this plan. The disposal is expected to be completed within the next 12 months from the
classification date. Disposal group 3 includes stock of property amounting to €88,022 thousand and other
assets of €1,661 thousand.
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 ‘Net losses from
revaluation and disposal of investment properties’ in the consolidated income statement and are within the
Cyprus operating segment since these investment properties are in Cyprus.
31.
Funding from central banks
Funding from central banks comprises funding from the ECB under Eurosystem monetary policy operations
as set out in the table below:
Main Refinancing Operations (MRO)
Targeted Longer-Term Refinancing Operations (TLTRO II)
2018
€000
-
830,000
830,000
2017
€000
100,000
830,000
930,000
As at 31 December 2018, ECB funding was at €830 million that was borrowed from the 4-year TLTRO II.
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. The interest rate applicable to the amount
borrowed by BOC PCL under the TLTRO II transactions will be 0% as eligible net lending in the pre-specified
period did not exceed the benchmark.
161
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
31.
Funding from central banks (continued)
In addition to TLTRO as at 31 December 2017 funding from central banks also included an amount of €100
million borrowed through the MRO. In January 2018, BOC PCL raised an additional €10 million through the
MRO, bringing the funding from the MRO to €110 million. The total amount borrowed from the MRO was
fully repaid during April 2018.
Details on encumbered assets related to the above funding facilities are disclosed in Note 48.
32.
Customer deposits
By type of deposit
Demand
Savings
Time or notice
By geographical area
Cyprus
United Kingdom
By currency
Euro
US Dollar
British Pound
Russian Rouble
Romanian Lei
Swiss Franc
Other currencies
By customer sector
2018
Corporate
SMEs
Retail
Restructuring
– Corporate
– SMEs
– Retail other
Recoveries
– Corporate
International banking services
Wealth management
2018
€000
2017
€000
6,708,852
6,313,244
1,352,452
1,536,576
8,782,254
10,000,099
16,843,558
17,849,919
16,843,558
15,982,905
-
1,867,014
16,843,558
17,849,919
14,961,025
13,829,991
1,482,867
1,743,513
292,640
2,110,265
25,529
443
7,994
73,060
49,788
42
14,943
101,377
16,843,558
17,849,919
United
Kingdom
€000
Total
€000
1,750,517
800,671
10,032,047
69,180
29,299
16,773
6,492
3,707,713
430,866
16,843,558
-
-
-
-
-
-
-
-
-
-
Cyprus
€000
1,750,517
800,671
10,032,047
69,180
29,299
16,773
6,492
3,707,713
430,866
16,843,558
162
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
32.
Customer deposits (continued)
By customer sector
2017
Corporate
SMEs
Retail
Restructuring
– Corporate
– SMEs
Recoveries
– Corporate
International banking services
Wealth management
Cyprus
€000
1,529,521
United
Kingdom
€000
Total
€000
29,742
1,559,263
665,940
201,536
867,476
8,670,625
1,635,736
10,306,361
145,084
40,743
6,615
4,163,384
760,993
-
-
-
-
-
145,084
40,743
6,615
4,163,384
760,993
15,982,905
1,867,014
17,849,919
Deposits by geographical area are based on the originator country of the deposit.
33.
Insurance liabilities
Life
insurance
Life insurance
contract
liabilities
General
insurance
Provision for
unearned
premiums
Other
liabilities
Claims
outstanding
Unexpired
risks reserve
Equalisation
reserve
General
insurance
contract
liabilities
Gross
€000
2018
Reinsurers'
share
€000
Net
€000
Gross
€000
2017
Reinsurers'
share
€000
Net
€000
531,640
(27,601)
504,039
546,887
(27,608)
519,279
25,962
(9,475)
16,487
24,151
(8,879)
15,272
33,397
(11,272)
22,125
34,076
(11,513)
22,563
58
-
-
-
58
-
314
20
-
-
314
20
59,417
(20,747)
38,670
591,057
(48,348)
542,709
58,561
605,448
(20,392)
(48,000)
38,169
557,448
Reinsurers' share of insurance contract liabilities and other reinsurance balances receivable are included in
'Prepayments, accrued income and other assets' (Note 29).
163
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
33.
Insurance liabilities (continued)
Life insurance contract liabilities
The movement of life insurance contract liabilities and reinsurance assets during the year is analysed as
follows:
Gross
€000
546,887
2018
Reinsurers'
share
€000
(27,608)
13,633
(1,275)
Net
€000
519,279
12,358
Gross
€000
530,075
9,367
2017
Reinsurers'
share
€000
(28,379)
(1,173)
Net
€000
501,696
8,194
(28,880)
1,282
(27,598)
7,445
1,944
9,389
531,640
(27,601)
504,039
546,887
(27,608)
519,279
1 January
New business
Change in
existing
business
31 December
General insurance contract liabilities
The movement in general insurance contract liabilities and reinsurance assets for the year is analysed as
follows:
Gross
2018
Reinsurers'
share
Net
Gross
2017
Reinsurers'
share
Net
€000
€000
€000
€000
€000
€000
24,151
(8,879)
15,272
22,690
(8,605)
14,085
72,912
(32,128)
40,784
65,701
(29,246)
36,455
(71,101)
31,532
(39,569)
(64,240)
25,962
(9,475)
16,487
24,151
28,972
(8,879)
(35,268)
15,272
Liabilities for
unearned
premium
1 January
Premium
income
Earned
premiums
31 December
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.
164
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
33.
Insurance liabilities (continued)
Gross
€000
2018
Reinsurers'
share
€000
Net
€000
Gross
€000
2017
Reinsurers'
share
€000
Net
€000
34,076
(11,513)
22,563
31,009
(12,989)
18,020
(34,516)
14,735
(19,781)
(27,017)
13,643
(13,374)
33,837
33,397
(14,494)
(11,272)
19,343
22,125
30,084
34,076
(12,167)
(11,513)
17,917
22,563
31,427
(10,395)
21,032
32,202
(10,704)
21,498
1,970
(877)
33,397
(11,272)
1,093
22,125
1,874
34,076
(809)
(11,513)
1,065
22,563
Claims
outstanding
1 January
Amount paid
for claims
settled in the
year
Increase in
liabilities
arising from
claims
31 December
Reported
claims
Incurred but
not reported
31 December
34.
Subordinated loan stock
Subordinated Tier 2 Capital Note with
nominal value of €250 million
9.25% up to 19 January 2022
Subordinated Tier 2 Capital Loan
8.00% up to 21 December 2022
Contractual interest rate
2018
€000
2017
€000
270,930
-
270,930
268,485
33,803
302,288
BOC PCL maintains a Euro Medium Term Note (ΕΜΤΝ) Programme with an aggregate nominal amount up to
€4,000 million.
In January 2017, BOC PCL issued a €250 million unsecured and subordinated Tier 2 Capital Note (the Note)
under BOC PCL’s EMTN Programme. The Note was priced at par with a coupon of 9.25% per annum payable
annually up to 19 January 2022 and then a rate at the then prevailing 5-year swap rate plus a margin of
9.176% per annum up to 19 January 2027, payable annually. The Note matures on 19 January 2027. BOC
PCL has the option to redeem the Note early on 19 January 2022, subject to applicable regulatory consents.
The Note is listed on the Luxembourg Stock Exchange’s Euro Multilateral Trading Facility (MTF) market. The
fair value as at 31 December 2018 is disclosed in Note 23.
In December 2017, Bank of Cyprus UK Ltd, a 100% subsidiary of BOC PCL issued a £30 million unsecured
and subordinated Tier 2 Capital Loan, priced at par.
165
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
35.
Accruals, deferred income and other liabilities
Income tax payable and related provisions
Special defence contribution payable
Retirement benefit plans liabilities (Note 15)
Provisions for financial guarantees and commitments (Notes 46.8.1 and
46.8.2)
Liabilities for investment-linked contracts under administration
Accrued expenses and other provisions
Deferred income
Items in the course of settlement
Other liabilities
2018
€000
2017
€000
14,568
4,270
8,777
27,685
2,971
72,702
18,869
47,958
87,683
20,410
5,891
10,037
51,987
7,873
60,078
9,439
72,241
68,271
285,483
306,227
The ECL allowance for financial guarantees and commitments as at 31 December 2018 is analysed by stage
in the table below:
2018
Stage 1
Stage 2
Stage 3
36.
Share capital
ECL
allowance
€000
1,314
2,593
23,778
27,685
Authorised
Ordinary shares of €0.10 each
10,000,000
1,000,000
10,000,000
1,000,000
2018
2017
Number of
shares
(thousand)
€000
Number of
shares
(thousand)
€000
Issued
1 January
Cancellation of shares due to reorganisation
Issue of shares
31 December
Authorised and issued share capital
All issued ordinary shares carry the same rights.
2018
446,200
44,620
8,922,945
892,294
-
-
-
-
446,200
44,620
(8,922,945)
(892,294)
446,200
446,200
44,620
44,620
There were no changes to the authorised or issued share capital during the year ended 31 December 2018.
166
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
36.
Share capital (continued)
2017
The Extraordinary General Meeting (EGM) of the shareholders of BOC PCL held on 13 December 2016
approved a scheme of arrangement between the Company, BOC PCL and its shareholders. The scheme of
arrangement introduced the Company as the new holding company of the Group. Additionally the EGM
authorised the directors of BOC PCL to take all actions necessary or appropriate to carry the scheme of
arrangement into effect. The scheme of arrangement was sanctioned by the District Court of Nicosia on 21
December 2016.
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 on the same date, the authorised share capital of BOC PCL which amounted to €4,767,759,272
divided into 47,677,592,720 ordinary shares with a nominal value of €0.10 each was reduced to
€3,875,464,818.70 divided into 38,754,648,453.30 ordinary shares with a nominal value of €0.10 each and
its issued share capital which amounted to €892,294,453.30 divided into 8,922,944,533 ordinary shares
with a nominal value of €0.10 each was reduced to nil by cancelling all the shares comprising the issued
share capital of BOC PCL (the Existing Shares) resulting in the creation of a capital reduction reserve in the
accounts of BOC PCL, 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 Cyprus Companies Law, Cap. 113 (the Reduction of Capital).
Following the reduction of the share capital of BOC PCL, the authorised share capital was increased to
€4,767,759,272 divided into 47,677,592,720 ordinary shares with a nominal value of €0.10 each through
the creation of 8,922,944,533 ordinary shares with a nominal value of €0.10 each, each of which have the
same rights and rank pari passu with the existing ordinary shares of BOC PCL. Also, the reserve arising in
the books of account of BOC PCL as a result of the cancellation of the Existing Shares was applied 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
BOC PCL, which were issued and allotted, credited as fully paid, to the Company or its nominee(s) in
accordance with the scheme of arrangement.
As mentioned above, all of the shares comprising the issued share capital of BOC PCL were cancelled and
BOC PCL issued and allotted 8,922,944,533 new ordinary shares of nominal value €0.10 each, credited as
fully paid to the Company; and the Company issued and allotted new shares (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 Depositary Interest represents one New Share for each individual
holding of 20 Existing Shares. As a result, the Company issued 446,199,933 ordinary shares with a nominal
value of €0.10 each.
Share premium reserve
2018
The Annual General Meeting of the shareholders of the Company held in August 2018 approved a reduction
of up to €1.5 billion of the Company's share premium to eliminate the Company's accumulated losses and
create distributable reserves (retained earnings). This was approved by the Irish High Court pursuant to
sections 85(1) of the Companies Act on 13 December 2018.
2017
Following the reorganisation of the Group on 18 January 2017 the Company became the sole shareholder of
BOC PCL and consequently the new parent of the Group. The share premium reserve was created in an
amount equal to the difference between the nominal value of the shares issued following the reorganisation
and pursuant to the terms of the scheme of arangement and the net asset value of BOC PCL.
167
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
36.
Share capital (continued)
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. Following the restructuring of the Group and the introduction of the Company as the new
holding company of the Group, the shares held by the life insurance subsidiary were cancelled and New
Shares of the company were issued.
The life insurance subsidiary of the Group, as at 31 December 2018, held a total of 142 thousand ordinary
shares of the Company of a nominal value of €0.10 each (2017: 142 thousand ordinary shares of a nominal
value of €0.10 each), as part of its financial assets which are invested for the benefit of insurance
policyholders. The cost of acquisition of these shares was €21,463 thousand (31 December 2017: €21,463
thousand).
The movement in treasury shares for the years 2018 and 2017 are as follows:
1 January
Disposals of treasury shares
Cancellation of shares due to reorganisation
Change of parent company to Bank of Cyprus Holdings Public Limited
Company and issue of new shares
31 December
2018
Number of
shares
(thousand)
142
-
-
-
142
2017
Number of
shares
(thousand)
2,889
(45)
(2,844)
142
142
The treasury shares represent 0.03% of the total issued share capital of the Company (2017: 0.03%).
The Company did not provide financial assistance permitted by Section 82 of the Companies Act 2014 for
the purchase of its shares.
Share-based payments - share options
Following the incorporation of the 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 the Company. The Share Option Plan is identical to the Long Term Incentive Plan except that the
number of shares in the 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 term of the options was also extended to between 4-10 years after the
grant date.
No share options were granted since the date of replacement of the Long Term Incentive Plan by the Share
Option Plan at the level of the Company. Any shares related to the Share Option Plan carry rights with
regards to control of the company that are only exercisable directly by the employee.
Other equity instruments
Reset Perpetual Additional Tier 1 Capital Securities
2018
€000
220,000
2017
€000
-
168
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
36.
Share capital (continued)
In December 2018 the Company issued €220 million Subordinated Fixed Rate Reset Perpetual Additional
Tier 1 Capital Securities (AT1). AT1 constitutes an unsecured and subordinated obligation of the Company.
The coupon is at 12.50% and is payable semi-annually. The Company may elect to cancel any interest
payment for an unlimited period, on a non cumulative basis, whereas it mandatorily cancels interest
payment under certain circumstances. AT1 is perpetual and has no fixed date for redemption but can be
redeemed (in whole but not in part) at the Company's option on the fifth anniversary of the issue date and
each subsequent fifth anniversary subject to the prior approval of the regulator. AT1 was listed on the
Luxembourg Stock Exchange's Euro Multilateral Trading Facility (MTF) market on 24 December 2018.
The transaction costs, directly attributable to the issuance, amounted to €2,458 thousand and have been
recognised in retained earnings.
37.
Dividends
Based on the SREP decisions of prior years, the Company and BOC PCL were under a regulatory prohibition
for equity dividend distribution and therefore no dividends were declared or paid during years 2018 and
2017.
Following the 2018 SREP decision, the Company and BOC PCL are still under equity dividend distribution
prohibition. This prohibition does not apply if the distributions are made via the issuance of new ordinary
shares to the shareholders which are eligible as Common Equity Tier 1 capital.
No prohibition applies to the payment of coupons on any AT1 capital instruments issued by the Company
and BOC PCL.
38.
Retained earnings/(accumulated losses)
For the purpose of dividend distribution, retained earnings determined at the Company level, 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 2018 and
2017 no deemed dividend distribution was paid by the Company and by BOC PCL.
39.
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 2018 amounted to €1,244,908 thousand (2017: €1,120,817 thousand).
169
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
40.
Pending litigation, claims, regulatory and other 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 BOC PCL in 2013 as a result of the Bail-in
Decrees, BOC PCL 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 2018 and hence it is not believed that such matters, when concluded, will have a material impact
upon the financial position of the Group.
40.1
Pending litigation and claims
Investigations and litigation relating to securities issued by BOC PCL
A number of institutional and retail customers have filed various separate actions against BOC PCL alleging
that BOC PCL is guilty of misselling in relation to securities issued by BOC PCL 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 BOC
PCL 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).
BOC PCL 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 BOC PCL officers 'persuaded' them to proceed with the purchase
and/or purported to offer 'investment advice', BOC PCL may face significant difficulties. To date, a number
of cases have been tried in Greece. BOC PCL 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. Also a small number of cases are being heard in Cyprus. Provision has been made based on
management's best estimate of probable outflows and based on advice of legal counsel.
In July 2018 the Nicosia district court ruled in favour of BOC PCL in an action against BOC PCL by a capital
securities holder and rejected the claim to reimburse the plaintiff for alleged damages sustained from
investing in the capital securities of BOC PCL. In September 2018 judgement was issued by the district
court of Larnaca against BOC PCL with respect to a capital security case. The plaintiffs were seeking
compensation against BOC PCL for negligence/fraud/breach of statutory duty in selling to the plaintiffs
contingent convertible bonds. The court found against BOC PCL, awarding damages. BOC PCL has filed an
appeal against this judgement.
170
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
40
Pending litigation, claims, regulatory and other matters (continued)
40.1
Pending litigation and claims (continued)
Bail-in related litigation
Depositors
A number of the BOC PCL's depositors, who allege that they were adversely affected by the bail-in, filed
claims against BOC PCL 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. BOC PCL is defending these
actions.
Shareholders
Numerous claims were filed by shareholders in 2013 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. BOC PCL
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. A number of actions for damages have been filed and are
still being filed with the District Courts of Cyprus.
Claims based on set-off
Certain claims have been filed by customers against BOC PCL 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. BOC PCL intends to contest such claims.
Laiki Bank depositors and shareholders
BOC PCL 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 BOC PCL’s bailed-in depositors and shareholders as described
above. BOC PCL, inter alia, maintains the position that it should not be a party to these proceedings.
Implementation of Decrees
Occasionally, other claims are brought against BOC PCL 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.
Provident fund case
In December 2015, the Bank of Cyprus Employees Provident Fund (the Provident Fund) filed an action
against BOC PCL claiming €70 million allegedly owed as part of BOC PCL'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 BOC PCL to predict the resolution of this matter, including the timing or any possible impact on
BOC PCL, however at this stage the Group does not expect a material impact on its financial position.
171
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
40
Pending litigation, claims, regulatory and other matters (continued)
40.1
Pending litigation and claims (continued)
Employment litigation
Former senior officers of BOC PCL have instituted one claim for unfair dismissal and one claim for Provident
Fund entitlements against BOC PCL 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 subsequently filed a civil action in the District Court
on the same grounds as the previous case which was filed in the Labour Disputes Court. The Group does not
consider that these cases will have a material impact on its financial position.
Swiss Francs loans litigation in Cyprus and UK
A number of actions have been instituted against BOC PCL by borrowers who obtained loans in foreign
currencies (mainly Swiss Francs). The central allegation in these cases is that BOC PCL misled these
borrowers and/or misrepresented matters, in violation of applicable law. BOC PCL intends to contest such
proceedings. The Group does not expect that these actions will have a material impact on its financial
position.
UK property lending claims
BOC PCL is the defendant in certain proceedings alleging that BOC PCL 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. BOC PCL 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 had filed a criminal case against BOC PCL and five former members of the Board of
Directors for alleged market manipulation offences referring to the non-publication in a timely manner of
the increased capital shortfall of BOC PCL in 2012. On 14 December 2017, the Court found BOC PCL and its
former Chief Executive Officer guilty only in relation to the one charge regarding market manipulation and
acquitted all accused of all remaining charges. On 5 January 2018 the Court imposed a fine of €120,000 on
BOC PCL and a prison sentence of two and a half years on Mr. Andreas Eliades. BOC PCL has filed an appeal
against both the decision and the fine imposed on it. In September 2018 both BOC PCL and Mr. Andreas
Eliades were acquitted.
The Attorney General had also filed a separate criminal case against BOC PCL and six former members of
the Board of Directors of BOC PCL for alleged market manipulation offences referring to the non-disclosure
of the purchase of the Greek Government Bonds during a specified period. On 18 December 2017, the
Criminal Court dismissed the proceedings against the accused following a ruling by the Supreme Court (first
instance jurisdiction) which rendered the charges void ab initio. The Attorney General has filed an appeal
against the first instance ruling of the Supreme Court. In April 2018 the Supreme Court rejected the appeal
and thus this is the end of this criminal case.
In January 2017 the Attorney General has filed a criminal case against a number of current and former
officers of BOC PCL relating to the reclassification of Greek Government Bonds in April 2010. No charges
were instituted against BOC PCL in this case. Two of the former officers accused, have already been
acquitted on the basis of preliminary objections raised by them. The Attorney General has filed an appeal
against the acquittals. Meanwhile the hearing of this case has not yet commenced.
172
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
40
Pending litigation, claims, regulatory and other matters (continued)
40.2
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 BOC PCL'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 BOC PCL'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
The only pending CySEC investigation against BOC PCL concerns possible price manipulation attributable to
BOC PCL for the period from 1 November 2009 to 30 June 2010 post the investment in Banca Transylvania.
It is not expected that any resulting liability or fine will have a material impact on the financial position of
the Group.
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,
BOC PCL and JCC Payment Systems Ltd (JCC), a card-processing business currently 75% owned by BOC
PCL.
There was also an allegation concerning BOC PCL's arrangements with American Express, namely that such
exclusive arrangements violated Cypriot and EU competition law. On both matters, the CPC has concluded
that BOC PCL (in common with other banks and JCC) has breached the relevant provisions of the applicable
law for the protection of competition. In May 2017 the CPC imposed a fine of €18 million upon BOC PCL and
BOC PCL filed a recourse against the decision and the fine. The payment of the fine has been stayed
pending the final outcome of the recourse. In June 2018 the Administrative court accepted BOC PCL’s
position and cancelled the decision as well as the fine imposed upon BOC PCL. The Attorney General has
filed an appeal before the Supreme court with respect to such decision.
UK regulatory matters
During 2016 and 2017 the BOC group recognised losses of €57,540 thousand on a conduct principle issue.
The provision outstanding as at 31 December 2018 is €15,795 thousand (31 December 2017: €46,962
thousand). As part of the agreement for the sale of Bank of Cyprus UK Ltd (Note 53.2.1), liability in regards
to UK regulatory matters remains an obligation for settlement by the Group. The level of the provision
represents the best estimate of all probable outflows arising from customer redress based on information
available to management. Management continues to reassess the adequacy of the provision, as well as the
assumptions underlying the calculations based upon experience and other relevant factors prevailing at the
time.
173
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
40
Pending litigation, claims, regulatory and other matters (continued)
40.3
Provisions for pending litigation, claims, regulatory and other matters
2018
1 January
Increase of provisions including unwinding of
discount - continuing operations (Note 16)
Utilisation of provisions
Release of provisions - continuing operations
(Note 16)
Foreign exchange adjustments
31 December
Provisions expected to be settled within no
more than 12 months post reporting date
2017
1 January
Increase of provisions including unwinding of
discount - continuing operations (Note 16)
Increase of provisions including unwinding of
discount - discontinued operations
Utilisation of provisions
Release of provisions - continuing operations
(Note 16)
Foreign exchange adjustments
31 December
Provisions expected to be settled within no
more than 12 months post reporting date
Pending
litigation or
claims
(Note 40.1)
€000
Regulatory
matters
(Note 40.2)
Other matters
Total
€000
€000
62,646
70,672
20,804
(9,016)
(62)
-
74,372
6,675
(39,242)
(9,000)
464
29,569
5,057
7,953
-
-
-
€000
138,375
35,432
(48,258)
(9,062)
464
13,010
116,951
2,000
15,795
-
17,795
25,234
23,648
5,057
53,939
41,282
52,877
-
(2,650)
(1,220)
-
62,646
4,598
(9,990)
-
(461)
70,672
-
-
-
-
-
94,159
4,598
(12,640)
(1,220)
(461)
5,057
138,375
1,200
4,000
-
5,200
The decrease of accumulated provisions for regulatory matters during the six months ended 31 December
2018 mainly relates to utilisation of in provisions on UK regulatory matters as detailed in Note 40.2. The
increase of provisions for pending litigation and claims during the six months ended 31 December 2018
mainly relates to increase in provision recognised on investigations and litigations relating to securities
issued by BOC PCL as detailed in Note 40.1.
Other matters include other provisions for various open examination requests of the Group, by
governmental and other public bodies. The provisions for pending litigation, claims, regulatory and 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 33).
Some information required by the IAS 37 (Provision, Contingent Liabilities and Contingent Assets) is not
disclosed on the grounds that it can be expected to prejudice seriously the outcome of the litigation.
41.
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 46).
174
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
41.
Contingent liabilities and commitments (continued)
41.2
Other contingent liabilities (continued)
41.1
Capital commitments
Capital commitments for the acquisition of property, equipment and intangible assets as at 31 December
2018 amount to €28,851 thousand (2017: €38,306 thousand).
41.2
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 (Note 46.8.1).
175
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
42.
Net cash flow from operating activities
Loss before tax from continuing operations
Profit before tax from discontinued operations
Adjustments for:
Credit losses to cover credit risk on loans and advances to customers and net gains on
derecognition of financial assets measured at amortised cost
Depreciation of property and equipment
Amortisation of intangible assets
Impairment of property held for own use and equipment
Impairment of other non-financial assets
Credit losses of other financial instruments
Amortisation of discounts/premiums, catch-up adjustment on debt securities and interest on debt
securities
(Profit)/loss on sale and write-offs of property and equipment and intangible assets
Net losses on disposal of investment properties and investment properties held for sale
Net losses from revaluation of investment properties and investment properties held for sale
Dividend income
Net gains on disposal of investments at FVOCI
Net gains on financial liabilities at FVPL
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
Loss from revaluation of debt securities designated as fair value hedges
(Profit)/loss on disposal/dissolution of subsidiaries and associates
Net gains on disposal of stock of property
Impairment of stock of property
Interest on funding from central banks
Interest on subordinated loan stock
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 measured at amortised cost
Loans and advances to customers measured at FVPL
Other assets
Accrued income and prepaid expenses
Other liabilities and pending litigation, claims, regulatory and other matters
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
Tax received
Net cash flow from operating activities
176
Year ended 31 December
2018
€000
(33,360)
8,926
2017
€000
(479,232)
1,588
300,634
12,016
13,542
11
1,368
1,610
779,483
11,930
9,404
8,470
-
6,459
(25,418)
(22,669)
(99)
-
13,275
(547)
(19,484)
(1,435)
-
-
(9,095)
22,775
(6,205)
(31,867)
17,272
3
25,365
5,314
294,601
(284,836)
(61,938)
(8,942)
983,999
12,934
208
752
3,309
(683)
-
-
(1,520)
(2,104)
(8,957)
14,150
2,187
(30,447)
50,502
28
22,258
(2,743)
362,373
60,130
60,522
(11,036)
1,340,178
2,306
(320,757)
(227,629)
(5,710)
12,230
(8,306)
(46,236)
27,855
(18,636)
(9,816)
(8,377)
228,225
786,290
3,913
790,203
-
28,424
374
91,673
3,377
5,075
(8,451)
(45)
280,365
1,987,636
5,630
1,993,266
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
42.
Net cash flow from operating activities (continued)
Non-cash transactions
2018
Repossession of collaterals
During the year ended 31 December 2018, the Group acquired stock of property by taking possession of
collaterals held as security for loans and advances to customers of €395,968 thousand (2017: €519,657
thousand) (Note 28).
Increase in the shareholding of Nicosia Mall Holdings (NMH) Ltd
During 2018, BOC PCL increased its controlling interest from 51% to 64% in Nicosia Mall Holdings (NMH)
Ltd.
2017
Closure of the operations of Bank of Cyprus branch in Romania
In accordance with the Group’s strategy to exit from overseas non-core operations, the operations of the
branch in Romania were terminated, subject to the final completion of deregistration formalities with
respective authorities. Most of the remaining assets and liabilities of the branch in Romania with third
parties have been transferred to others entities of the Group.
Acquisition of Nicosia Mall Holdings (NMH) Limited
During the year ended 31 December 2017 the Group acquired a 51% interest in the share capital of NMH
Limited as part of the restructuring of its debt. The acquisition did not include any cash consideration.
Further information is disclosed in Note 53.3.1.
Net cash flow from operating activities - interest and dividends
Interest paid
Interest received
Dividends received
2018
€000
(225,585)
633,733
547
2017
€000
(194,666)
782,476
683
408,695
588,493
177
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
42.
Net cash flow from operating activities (continued)
Changes in liabilities arising from financing activities
2018
1 January
Cash flows
Foreign exchange adjustments
Other non-cash movements
Disposal of subsidiary
31 December
2017
1 January 2017
Cash flows
Foreign exchange adjustments
Other non-cash movements
31 December 2017
43.
Cash and cash equivalents
Cash and cash equivalents comprise:
Funding from
central banks
€000
Subordinated
loan stock
€000
Total
€000
930,000
302,288
1,232,288
(100,000)
(24,476)
(124,476)
-
-
-
(33)
28,491
(33)
28,491
(35,340)
(35,340)
830,000
270,930
1,100,930
850,014
79,986
-
-
-
280,983
(680)
21,985
850,014
360,969
(680)
21,985
930,000
302,288
1,232,288
Cash and non-obligatory balances with central bank
Loans and advances to banks with original maturity less than three months
2018
€000
4,447,816
2017
€000
3,240,201
357,028
1,040,030
4,804,844
4,280,231
Analysis of cash and balances with central banks and loans and advances to banks
Cash and non-obligatory balances with central bank
Obligatory balances with central banks (Note 20)
Total cash and balances with central banks (Note 20)
Loans and advances to banks with original maturity less than three months
Restricted loans and advances to banks
Other loans and advances to banks
Total loans and advances to banks (Note 20)
2018
€000
4,447,816
2017
€000
3,240,201
162,675
153,733
4,610,491
3,393,934
357,028
115,504
-
1,040,030
117,273
35,330
472,532
1,192,633
Restricted loans and advances to banks include collaterals under derivative transactions of €42,631
thousand (2017: €59,997 thousand) which are not immediately available for use by the Group, but are
released once the transactions are terminated.
178
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
44.
Operating leases - The Group as lessee
The total future minimum lease payments under non-cancellable operating leases at 31 December 2018 and
2017 are presented below:
Within one year
Between one and five years
After five years
2018
€000
2017
€000
1,864
2,542
47
4,453
1,850
2,663
62
4,575
The above mainly relate to property leases for the Group's branches and offices in Cyprus.
179
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
45.
Analysis of assets and liabilities by expected maturity
Assets
Cash and balances with
central banks
Loans and advances to
banks
Derivative financial assets
Investments
Loans and advances to
customers
Life insurance business
assets attributable to
policyholders
Prepayments, accrued
income and other assets
Stock of property
Property, equipment and
intangible assets
Investment properties
Investment in associates
and joint venture
Deferred tax assets
Non-current assets and
disposal group held for
sale
Liabilities
Deposits by banks
Funding from central
banks
Repurchase agreements
Derivative financial
liabilities
Customer deposits
Insurance liabilities
Accruals, deferred income
and other liabilities and
pending litigation, claims,
regulatory and other
matters
Subordinated loan stock
Deferred tax liabilities
Non-current liabilities and
disposal group classified
as held for sale
Less than
one year
€000
2018
Over one
year
€000
Total
€000
Less than
one year
€000
2017
Over one
year
€000
Total
€000
4,447,816
162,675 4,610,491
3,241,396
152,538
3,393,934
364,655
107,877
472,532
1,094,918
97,715
1,192,633
4,148
20,606
24,754
1,495
16,532
18,027
135,679 1,379,012 1,514,691
39,050
1,081,562
1,120,612
1,525,865 9,395,921 10,921,786
3,642,968 10,959,486 14,602,454
498
402,067
402,565
20,317
409,573
429,890
82,214
173,788
256,002
98,196
127,909
226,105
542,419
987,969 1,530,388
441,800
1,199,622
1,641,422
6
431,128
431,134
13
445,753
445,766
-
-
-
24,475
24,475
114,637
114,637
-
-
301,778
301,778
26,000
19,646
19,646
118,113
357,498
118,113
383,498
1,470,038
-
1,470,038
6,500
-
6,500
8,573,338 13,501,933 22,075,271
8,612,653 14,985,947 23,598,600
168,740
263,202
431,942
360,277
135,031
495,308
-
830,000
830,000
100,000
80,692
168,253
248,945
-
830,000
257,322
930,000
257,322
12,459
26,524
38,983
15,205
35,687
50,892
2,946,714 13,896,844 16,843,558
4,786,907 13,063,012 17,849,919
90,464
500,593
591,057
89,689
515,759
605,448
300,765
101,669
402,434
283,754
-
-
270,930
270,930
44,282
44,282
5,812
-
5,812
-
-
-
160,848
302,288
46,113
444,602
302,288
46,113
-
-
3,605,646 16,102,297 19,707,943
5,635,832 15,346,060 20,981,892
The main assumptions used in determining the expected maturity of assets and liabilities are set out below.
180
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
45.
Analysis of assets and liabilities by expected maturity (continued)
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. Investments in equity securities are classified in the 'less than one year' time band.
Trading investments are classified in the ‘less than one year’ time band.
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 Stage 3 Loans 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 classified in the ‘over one year’
time band, based on the observed behavioural analysis.
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.
46.
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 Management department sets the Group’s credit disbursement policies and monitors
compliance with credit risk policy applicable to each business line and 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 Management 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 Management 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 ‘Significant and other judgements, estimates and
assumptions’ of these Consolidated Financial Statements.
181
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
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 recommendation for limits to be set to the
Assets and Liabilities Committee (ALCO) for approval.
46.1
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
United Kingdom
Other countries
Off-balance sheet
Cyprus
United Kingdom
Other countries
Total on and off-balance sheet
Cyprus
United Kingdom
Other countries
2018
€000
18,504,113
2017
€000
17,986,526
511
2,056,334
82,796
138,725
18,587,420
20,181,585
2,781,943
2,934,269
-
60,592
31,471
73,600
2,842,535
3,039,340
21,286,056
20,920,795
511
2,087,805
143,388
212,325
21,429,955
23,220,925
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.
182
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.1
Maximum exposure to credit risk and collateral and other credit enhancements (continued)
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.
183
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.1
Maximum exposure to credit risk and collateral and other credit enhancements (continued)
2018
Balances with central banks (Note 20)
Loans and advances to banks (Note 20)
FVPL debt securities (Note 21)
Debt securities classified at amortised cost and
FVOCI (Note 21)
Derivative financial instruments (Note 22)
Loans and advances to customers (Note 24)
Loans and advances to customers classified as
held for sale (Note 30)
Debtors (Note 29)
Reinsurers' share of insurance contract
liabilities (Note 29)
Other assets
On-balance sheet total
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
Fair value of collateral and credit enhancements held by the Group
Maximum
exposure to
credit risk
€000
4,456,768
472,532
14,616
1,350,127
24,754
Cash
€000
-
12,220
-
-
-
Securities
Letters of credit/
guarantee
Property
Other
Surplus collateral Net collateral
Net exposure to
credit risk
€000
€000
€000
€000
€000
€000
€000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4,456,768
12,220
-
-
-
460,312
14,616
1,350,127
24,754
10,921,786
419,735
291,662
209,274
15,735,094
1,315,573
(8,241,099)
9,730,239
1,191,547
1,154,108
30,671
48,348
113,710
2,726
14,283
13,156
2,371,672
13,307
(1,374,545)
1,040,599
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
31,768
48,900
46,683
(96,505)
30,846
113,509
30,671
48,348
82,864
18,587,420
434,681
305,945
254,198
18,155,666
1,375,563
(9,712,149)
10,813,904
7,773,516
5,561
748,705
323
120,139
24,297
3,115
2,063,972
2,842,535
21,429,955
30,197
153,774
588,455
-
985
-
8,490
9,475
34
4,563
10
810
4,506
152,272
492
34,958
6,440
5,143
346,736
5,417
509,954
41,288
81,881
-
-
-
-
-
5,355
312,917
206
435,788
14,708
9,589
427,521
1,636,451
760,501
2,082,034
315,420
259,615
18,665,620
1,457,444
(9,712,149)
11,574,405
9,855,550
As at 31 December 2018 the contingent liabilities and commitments include exposures relating to loans and advances to customers classified as held for sale
amounting to €3,656 thousand which largely relate to the Cyprus geographical area.
184
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.1
Maximum exposure to credit risk and collateral and other credit enhancements (continued)
2017
Balances with central banks (Note 20)
Loans and advances to banks (Note 20)
Trading investments debt securities (Note 21)
Debt securities classified as available-for-sale
and loans and receivables (Note 21)
Derivative financial instruments (Note 22)
Loans and advances to customers (Note 24)
Debtors (Note 29)
Reinsurers' share of insurance contract
liabilities (Note 29)
Other assets
On-balance sheet total
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
Fair value of collateral and credit enhancements held by the Group
Maximum
exposure to
credit risk
€000
Cash
€000
3,250,029
1,192,633
14,577
950,392
18,027
-
-
-
-
-
Securities
Letters of credit/
guarantee
Property
Other
Surplus collateral Net collateral
Net exposure to
credit risk
€000
€000
€000
€000
€000
€000
€000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3,250,029
1,192,633
14,577
950,392
18,027
14,602,454
339,050
275,111
258,848
21,803,417
747,362
(10,369,288)
13,054,500
1,547,954
24,121
48,000
81,352
-
-
-
-
-
-
-
-
37,798
-
-
-
-
-
-
-
-
-
-
(1,516)
36,282
24,121
48,000
45,070
20,181,585
339,050
275,111
296,646
21,803,417
747,362
(10,370,804)
13,090,782
7,090,803
8,367
768,165
813
85,099
29,630
1,139
2,233,178
3,039,340
23,220,925
38,132
125,183
464,233
-
464
7
5,563
6,034
-
3,736
190
1,543
5,469
9,817
153,756
79
11,405
7,550
486
402,309
573,432
36,266
48,236
(4,056)
-
-
6,653
254,460
1,714
513,705
9,372
20,258
(19,699)
464,114
1,769,064
(23,755)
734,599
2,304,741
281,145
302,115
22,376,849
795,598
(10,394,559)
13,825,381
9,395,544
185
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.2
Credit risk concentration of loans and advances to customers
There are restrictions on loan concentrations which are imposed by the Banking Law in Cyprus, the relevant
CBC Directives and CRR. According to these restrictions, banks are prohibited from lending more than 25%
of their 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.
BOC PCL categorises its loans using the following customer sectors:
Retail – all personal customers and small businesses with facilities from BOC PCL of up to €260
thousand, excluding professional property loans.
SME – any company or group of companies (including personal and housing loans to the directors
or shareholders of a company) with facilities with BOC PCL in the range of €260 thousand to €6
million and a maximum annual credit turnover of €10 million.
Corporate – any company or group of companies (including personal and housing loans to the
directors or shareholders of a company) with available credit lines with BOC PCL in excess of an
aggregate principal amount of €6 million or having a minimum annual credit turnover of €10
million.
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. 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.
Industry concentrations and geographical analysis of Group loans and advances to customers are presented
in the table below. Following the disposal of the UK subsidiary during 2018, the loans in Romania, Russia,
Greece and the remaining portfolio in UK are disclosed within 'Other countries'.
2018
By economic activity
Trade
Manufacturing
Hotels and catering
Construction
Real estate
Private individuals
Professional and other services
Other sectors
Cyprus
Other
countries
Total
Fair value
adjustment
on initial
recognition
€000
€000
1,447,623
39,682
€000
1,487,305
€000
(24,096)
Gross loans
at amortised
cost after fair
value
adjustment
on initial
recognition
€000
1,463,209
437,030
877,501
991,122
980,152
7,572
3,806
2,552
444,602
(6,439)
881,307
(20,354)
993,674
(14,661)
21,644
1,001,796
(16,231)
438,163
860,953
979,013
985,565
6,234,765
11,536
6,246,301 (135,603)
6,110,698
866,093
720,876
45,758
4,704
911,851
(36,551)
725,580
(8,114)
875,300
717,466
12,555,162
137,254 12,692,416 (262,049)
12,430,367
186
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.2
Credit risk concentration of loans and advances to customers (continued)
2017
By economic activity
Trade
Manufacturing
Hotels and catering
Construction
Real estate
Private individuals
Professional and other
services
Other sectors
Fair value
adjustment
on initial
recognition
Gross loans
after fair
value
adjustment
on initial
recognition
€000
Cyprus
United
Kingdom
Other
countries
Total
€000
€000
€000
€000
1,969,360
630,101
13,859
6,468
58,247 2,041,466
€000
(71,636) 1,969,830
27,983
664,552
(19,968)
644,584
1,283,512
103,808
6,208 1,393,528
(47,257) 1,346,271
2,310,057
3,398
24,000 2,337,455 (144,899) 2,192,556
1,760,498 1,339,680
95,934 3,196,112
(89,647) 3,106,465
6,677,670
97,992
301 6,775,963 (195,686) 6,580,277
1,181,920
1,000,434
54,616
1,231
71,548 1,308,084
(61,954) 1,246,130
35,890 1,037,555
(37,438) 1,000,117
16,813,552 1,621,052
320,111 18,754,715 (668,485) 18,086,230
Cyprus
Other
countries
Total
Fair value
adjustment
on initial
recognition
Gross loans
at amortised
cost after fair
value
adjustment
on initial
recognition
€000
3,438,454
2018
By business line
Corporate
SMEs
Retail
- housing
- consumer, credit cards and other
Restructuring
- corporate
- SMEs
- retail housing
- retail other
Recoveries
- corporate
- SMEs
- retail housing
- retail other
International banking services
Wealth management
€000
3,363,298
1,188,456
2,871,294
940,388
531,462
560,806
498,601
328,952
164,821
630,968
697,212
480,733
192,646
105,525
€000
125,138
€000
3,488,436
€000
(49,982)
11,188
1,199,644
(16,537)
1,183,107
-
2,871,294
(45,016)
2,826,278
904
941,292
2,965
944,257
24
531,486
(7,907)
-
-
-
-
-
-
-
-
-
560,806
(11,637)
498,601
328,952
(4,481)
(8,588)
164,821
(7,439)
630,968
(26,178)
697,212
(40,577)
480,733
(39,923)
192,646
105,525
(2,158)
(4,591)
523,579
549,169
494,120
320,364
157,382
604,790
656,635
440,810
190,488
100,934
12,555,162
137,254 12,692,416 (262,049)
12,430,367
187
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
Gross loans
after fair
value
adjustment
on initial
recognition
€000
46.
Risk management - Credit risk (continued)
46.2
Credit risk concentration of loans and advances to customers (continued)
Cyprus
United
Kingdom
Other
countries
Total
Fair value
adjustment
on initial
recognition
2017
By business line
Corporate
SMEs
Retail
- housing
- consumer, credit cards
and other
Restructuring
- major corporate
- corporate
- SMEs
- retail housing
- retail other
Recoveries
- corporate
- SMEs
- retail housing
- retail other
International banking
services
Wealth management
€000
€000
3,321,730 1,293,304
€000
245,540 4,860,574
€000
€000
(83,251) 4,777,323
1,219,350
238,509
17,079 1,474,938
(14,566) 1,460,372
3,007,487
72,856
-
3,080,343
(30,274) 3,050,069
1,085,146
13,977
296 1,099,419
(14,348) 1,085,071
1,292,607
777,460
1,085,221
437,892
226,623
-
-
-
-
-
33,860 1,326,467
(55,850) 1,270,617
-
-
-
-
777,460
(15,303)
762,157
1,085,221
(37,096) 1,048,125
437,892
226,623
(6,319)
(8,037)
431,573
218,586
1,709,190
2,406
23,336 1,734,932 (179,336) 1,555,596
950,171
652,421
737,566
256,554
54,134
-
-
-
-
-
-
-
-
-
-
950,171
(69,852)
880,319
652,421
(52,206)
600,215
737,566
(94,367)
643,199
256,554
54,134
(3,005)
(4,675)
253,549
49,459
16,813,552 1,621,052
320,111 18,754,715 (668,485) 18,086,230
The fair value adjustment on initial recognition for loans and advances to customers included in the Cyprus
geographical area amounts to €261,862 thousand (2017: €658,205 thousand).
The loans and advances to customers in Cyprus include lending exposures to Greek entities granted by BOC
PCL in Cyprus in its normal course of business with a carrying value of €67,930 thousand (2017: €69,616
thousand) and lending exposures in Cyprus with collaterals in Greece with a carrying value of €76,303
thousand (2017: €98,660 thousand). Additionally as at 31 December 2018, the loans and advances to
customers in Cyprus include lending exposures to Serbian entities or with collaterals in Serbia with a
carrying value of €10,722 thousand (2017: €15,000 thousand).
188
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.3
Credit risk concentration of loans and advances to customers classified as held for sale
Industry and business lines concentrations and geographical analysis of Group loans and advances to
customers at amortised cost classified as held for sale are presented in the table below.
2018
By economic activity
Trade
Manufacturing
Hotels and catering
Construction
Real estate
Private individuals
Professional and other
services
Other sectors
2018
By business line
Corporate
SMEs
Retail
- consumer, credit cards and
other
Restructuring
- corporate
- SMEs
- retail housing
- retail other
Recoveries
- corporate
- SMEs
- retail housing
- retail other
International banking services
Cyprus
Other
countries
Total
Fair value
adjustment
on initial
recognition
€000
€000
373,351
202,193
258,529
995,430
409,632
218,531
140,748
191,463
-
-
-
-
55,225
-
-
6,011
€000
373,351
202,193
258,529
995,430
464,857
218,531
140,748
197,474
€000
(12,213)
(7,216)
(11,960)
(74,233)
(11,765)
(9,098)
(5,941)
(6,727)
Gross loans
at amortised
cost after fair
value
adjustment
on initial
recognition
€000
361,138
194,977
246,569
921,197
453,092
209,433
134,807
190,747
2,789,877
61,236
2,851,113
(139,153)
2,711,960
Cyprus
Other
countries
Total
Fair value
adjustment
on initial
recognition
€000
€000
€000
€000
Gross loans
at amortised
cost after fair
value
adjustment
on initial
recognition
€000
15,249
2,841
128
859,214
216,866
272
5,773
1,274,835
374,336
635
39,720
8
-
-
-
-
-
-
-
15,249
2,841
(584)
-
14,665
2,841
128
(1)
127
859,214
216,866
272
5,773
(24,379)
(4,858)
-
(210)
834,835
212,008
272
5,563
61,236
1,336,071
(86,644)
1,249,427
-
-
-
-
374,336
(17,991)
356,345
635
39,720
8
(115)
(4,371)
-
520
35,349
8
2,789,877
61,236
2,851,113
(139,153)
2,711,960
189
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.3
(continued)
Credit risk concentration of loans and advances to customers classified as held for sale
There were no loans and advances to customers classified as held for sale at 31 December 2017.
46.4
Currency concentration of loans and advances to customers
2018
Euro
US Dollar
British Pound
Russian Rouble
Romanian Lei
Swiss Franc
Other currencies
2017
Euro
US Dollar
British Pound
Russian Rouble
Romanian Lei
Swiss Franc
Other currencies
Cyprus
Other
countries
Total
Fair value
adjustment
on initial
recognition
€000
11,992,100
300,718
37,955
81
-
203,026
21,282
€000
€000
€000
60,006 12,052,106 (256,720)
28,523
11,735
36,058
932
-
-
329,241
49,690
36,139
932
203,026
21,282
(276)
(248)
-
-
(3,242)
(1,563)
Gross loans
at amortised
cost after fair
value
adjustment
on initial
recognition
€000
11,795,386
328,965
49,442
36,139
932
199,784
19,719
12,555,162
137,254 12,692,416 (262,049)
12,430,367
Gross loans
after fair
value
adjustment
on initial
recognition
€000
Cyprus
United
Kingdom
Other
countries
Total
Fair value
adjustment
on initial
recognition
€000
16,000,016
228,660
€000
16,050
424
€000
191,126 16,207,192 (649,671) 15,557,521
€000
€000
42,550
271,634
(525)
271,109
74,707
1,599,844
92
1,674,643
(423) 1,674,220
229
-
451,883
58,057
-
-
2,128
2,606
85,376
85,605
967
(1)
-
85,604
967
454,011
(14,525)
439,486
60,663
(3,340)
57,323
967
-
-
16,813,552
1,621,052
320,111 18,754,715 (668,485) 18,086,230
190
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.5
Currency concentration of loans and advances to customers classified as held for sale
2018
Euro
US Dollar
British Pound
Swiss Franc
Other currencies
Cyprus
Other
countries
Total
Fair value
adjustment
on initial
recognition
€000
€000
€000
€000
Gross loans
at amortised
cost after fair
value
adjustment
on initial
recognition
€000
2,638,647
61,236
2,699,883 (129,898)
2,569,985
20,593
2,469
90,951
37,217
-
-
-
-
20,593
2,469
90,951
37,217
(123)
(18)
(8,239)
(875)
20,470
2,451
82,712
36,342
2,789,877
61,236
2,851,113 (139,153)
2,711,960
46.6
Credit quality of loans and advances to customers
The following tables present the Group’s loans and advances to customers at amortised cost by staging and
by business line concentration.
2018
Gross loans at amortised cost
before fair value adjustment
on initial recognition
Fair value adjustment on
initial recognition
Gross loans at amortised
cost after fair value
adjustment on initial
recognition
Stage 1
€000
Stage 2
€000
Stage 3
€000
POCI
€000
Total
€000
6,035,781
1,921,255
3,915,591
819,789
12,692,416
(77,738)
(20,673)
(40,432)
(123,206)
(262,049)
5,958,043
1,900,582
3,875,159
696,583
12,430,367
191
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.6
Credit quality of loans and advances to customers (continued)
Gross loans at amortised
cost before fair value
adjustment on initial
recognition
2018
By business line
Corporate
SMEs
Retail
- housing
- consumer, credit cards and
other
Restructuring
- corporate
- SMEs
- retail housing
- retail other
Recoveries
- corporate
- SMEs
- retail housing
- retail other
International banking services
Wealth management
69,620
44,163
78,109
54,468
Stage 1
Stage 2
Stage 3
POCI
Total
€000
€000
€000
€000
€000
2,215,264
739,166
793,249
346,148
387,093
103,384
92,830
10,946
3,488,436
1,199,644
2,259,976
300,101
300,584
10,633
2,871,294
591,242
199,099
130,816
20,135
941,292
48,943
55,295
6,883
5,140
-
-
-
89
92,537
52,573
3,745
1,226
-
-
-
-
303,955
406,369
473,444
304,076
120,234
515,542
512,175
313,529
41,352
3,038
86,051
46,569
14,529
18,510
44,587
115,426
185,037
167,115
3,565
3,856
531,486
560,806
498,601
328,952
164,821
630,968
697,212
480,733
192,646
105,525
6,035,781
1,921,255
3,915,591
819,789
12,692,416
192
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.6
Credit quality of loans and advances to customers (continued)
Fair value adjustment on
initial recognition
2018
By business line
Corporate
SMEs
Retail
- housing
- consumer, credit cards and
other
Restructuring
- corporate
- SMEs
- retail housing
- retail other
Recoveries
- corporate
- SMEs
- retail housing
- retail other
International banking services
Wealth management
(303)
(1,088)
(1,164)
(1,439)
Stage 1
Stage 2
Stage 3
€000
€000
€000
POCI
€000
Total
€000
(25,159)
(10,652)
(11,564)
(4,150)
(12,282)
(1,113)
(977)
(622)
(49,982)
(16,537)
(43,528)
3,248
(199)
28
(119)
34
-
-
-
-
(97)
352
(1,988)
(580)
(3)
(40)
-
-
-
-
(1,246)
(145)
(45,016)
(375)
(260)
2,965
(2,687)
(3,931)
(2,796)
(3,971)
(1,654)
(2,073)
(3,200)
(4,695)
(195)
(214)
(3,033)
(7,154)
(1,563)
(4,611)
(5,785)
(24,105)
(37,377)
(35,228)
(496)
(1,850)
(7,907)
(11,637)
(4,481)
(8,588)
(7,439)
(26,178)
(40,577)
(39,923)
(2,158)
(4,591)
(77,738)
(20,673)
(40,432)
(123,206)
(262,049)
193
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.6
Credit quality of loans and advances to customers (continued)
Gross loans at amortised
cost after fair value
adjustment on initial
recognition
2018
By business line
Corporate
SMEs
Retail
- housing
- consumer, credit cards and
other
Restructuring
- corporate
- SMEs
- retail housing
- retail other
Recoveries
- corporate
- SMEs
- retail housing
- retail other
Stage 1
Stage 2
Stage 3
POCI
Total
€000
€000
€000
€000
€000
2,190,105
728,514
781,685
341,998
374,811
102,271
91,853
10,324
3,438,454
1,183,107
2,216,448
300,004
299,338
10,488
2,826,278
594,490
199,451
130,441
19,875
944,257
48,744
55,323
6,764
5,174
-
-
-
89
90,549
51,993
3,742
1,186
-
-
-
-
301,268
402,438
470,648
300,105
118,580
513,469
508,975
308,834
41,157
2,824
83,018
39,415
12,966
13,899
38,802
91,321
147,660
131,887
3,069
2,006
523,579
549,169
494,120
320,364
157,382
604,790
656,635
440,810
190,488
100,934
International banking services
Wealth management
69,317
43,075
76,945
53,029
5,958,043
1,900,582
3,875,159
696,583
12,430,367
An analysis of changes in the gross loans at amortised cost after fair value adjustment on initial recognition
by staging including the loans and advances to customers classified as held for sale is presented in the table
below. Details on the loans and advances to customers classified as held for sale are disclosed in Note 46.7.
194
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.6
Credit quality of loans and advances to customers (continued)
2018
1 January
Change in the basis of
calculation of gross carrying
value (IFRS 9 Grossing up
adjustment)
Restated balance at 1 January
2018
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Write offs
Interest accrued and other
adjustments
New assets originated or
purchased and drawdowns of
existing facilities
Assets derecognised or repaid
(excluding write offs)
Changes to contractual cash
flows due to modifications
resulting in derecognition
Disposal of subsidiary
31 December
Stage 1
€000
5,100,964
Stage 2
€000
4,418,226
Stage 3
€000
6,838,643
POCI
€000
1,308,500
Total
€000
17,666,333
5,068
6,594
1,350,043
327,792
1,689,497
5,106,032
4,424,820
8,188,686
1,636,292
19,355,830
2,180,460
(1,952,997)
(269,513)
(171,920)
(12,256)
462,775
(441,097)
(227,463)
(193,262)
613,017
-
-
-
-
-
-
(21,814)
(2,028,137)
(556,097)
(2,618,304)
97,860
38,850
516,425
109,977
763,112
1,752,138
193,416
111,124
33,044
2,089,722
(1,021,693)
(603,701)
(879,866)
(112,836)
(2,618,096)
(22)
(65)
(654)
1,511
770
(1,696,090)
(108,266)
(26,351)
-
(1,830,707)
5,964,996
1,991,921
6,073,519
1,111,891
15,142,327
For revolving facilities, overdrafts and credit cards the net positive change in balance by stage excluding
write-offs is reported in ‘New assets originated’ and if negative change is reported as ‘Assets derecognised
or repaid'.
Loans and advances to customers at amortised cost after fair value adjustment on initial recognition, in the
corporate and retail business line in Cyprus (excluding loans under Restructuring Recoveries, International
banking services and Wealth management) including loans and advances to customers classified as held for
sale are presented in the table below:
2018
1 January
Change in the basis of calculation of gross carrying value (IFRS 9 Grossing
up adjustment)
Restated balances at 1 January 2018
Transfers in/(out) of business line
Interest accrued, foreign exchange and other adjustments
Write offs
New assets originated or purchased
Assets derecognised or repaid (excluding write offs)
Changes to contractual cash flows due to modifications not resulting to
derecognition
31 December
Corporate
€000
2,822,022
Retail
€000
4,048,153
33,867
22,650
2,855,889
4,070,803
358,019
172,622
(80,160)
870,620
(305,898)
144,670
(25,188)
446,855
(852,997)
(561,675)
(192)
305
3,323,801
3,769,872
195
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.6
Credit quality of loans and advances to customers (continued)
The following table presents the credit quality of the Group's loans and advances to customers at amortised
cost by geographical concentration:
2018
By staging
Stage 1
Stage 2
Stage 3
POCI
Cyprus
Other
countries
Total
Fair value
adjustment
on initial
recognition
€000
6,023,870
1,921,234
3,790,269
819,789
€000
€000
11,911
6,035,781
21
1,921,255
125,322
3,915,591
€000
(77,738)
(20,673)
(40,432)
-
819,789
(123,206)
Gross loans at
amortised cost
after fair value
adjustment on
initial
recognition
€000
5,958,043
1,900,582
3,875,159
696,583
12,555,162
137,254
12,692,416
(262,049)
12,430,367
The following table presents the credit quality of the Company's loans and advances to customers as
presented in the 2017 financial statements in accordance with IAS 39 based on Credit risk analysis.
2017
Gross loans
before fair
value
adjustment
Fair value
adjustment on
initial
recognition
Gross loans
after fair value
adjustment on
initial
recognition
€000
11,009,564
Neither past due nor impaired
Past due but not impaired
Impaired
€000
11,149,969
2,084,694
5,520,052
€000
(140,405)
(29,554)
2,055,140
(498,526)
5,021,526
18,754,715
(668,485)
18,086,230
Loans and advances to customers that are neither past due nor impaired
2017
Cyprus
United Kingdom
Romania
Grade 1
€000
7,031,123
1,503,234
978
Grade 2
€000
1,384,121
48,975
-
Grade 3
€000
1,158,512
22,812
214
Total
€000
9,573,756
1,575,021
1,192
8,535,335
1,433,096
1,181,538
11,149,969
196
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.6
Credit quality of loans and advances to customers (continued)
Loans and advances to customers that are past due but not impaired and impaired
Past due analysis:
- no arrears
- up to 30 days
- 31 to 90 days
- 91 to 180 days
- 181 to 365 days
- over one year
Impaired loans and advances to customers
Cyprus
Greece
Russia
United Kingdom
Romania
2017
Impaired
€000
Past due but
not impaired
€000
401,933
141,329
20,880
26,340
73,073
-
438,538
261,453
124,484
252,034
4,856,497
1,008,185
5,520,052
2,084,694
2017
Gross loans and
advances
€000
5,213,278
Fair value of
collateral
€000
3,297,980
15,555
143,979
6,447
140,793
7,041
34,847
19,932
20,385
5,520,052
3,380,185
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.
46.6.1 Credit quality of loans and advances to customers based on the internal credit rating
Credit scoring is the primary risk rating system for assessing obligor and transaction risk for the key
portfolios of BOC PCL. These are corporate, retail and SMEs. Corporate and SME clients include legal
entities. Retail includes individuals.
Scoring models use internal and external data to assess and “score” borrowers, predict future performance
and manage limits for existing loans and collection activities. The data is specific to the borrower but
additional data which could affect the borrower’s behaviour is also used.
Credit score is one of the factors employed on new clients and management of existing clients. The credit
score of the borrower is used to assess the predicted credit risk for each independent acquisition or account
management action, leading to an automated decision or guidance for an adjudicator. Credit scoring
improves credit decision quality, adjudication timeframes and consistency in the credit decision process and
facilitates risk-based pricing.
Borrower scores define the rating of the borrower from a range of 1-7 and 8 is defined as defaulted. The 12
months default rates (PDs) are calculated per rating. These default rates are assumed to be the 12 month
probability of default for the scored borrowers. The following table maps PD bands to various risk levels for
corporate, retail and SME exposures.
197
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.6
Credit quality of loans and advances to customers (continued)
46.6.1 Credit quality of loans and advances to customers based on the internal credit rating
(continued)
Unrated loans for corporate are assessed using a decision tree methodology based on customer’s
characteristics such as days past due and gross book value. Unrated loans for retail include qualifying
revolving facilities without scoring (i.e. prepaid cards) and other revolving facilities (i.e. financial
guarantees) which are assigned a more generic curve. Similarly unrated SME exposures are assigned a
more generic segment curve.
New customers for corporate and SME legal entities and new lending for retail individuals are separately
disclosed since a time span of seven months is necessary in order to provide an accurate rating.
Rating
1
2
3
4
5
6
7
Corporate legal entities
%
2.46
3.04
3.37
3.74
4.21
7.47
12.28
12-month PD
Retail individuals
%
1.49
1.87
3.20
5.42
7.92
13.37
29.54
SME legal entities
%
0.88
1.85
2.57
3.84
6.49
9.03
18.17
Low rating exposures demonstrate a good capacity to meet financial commitments, with low probability of
default. Medium range rating exposures require closer monitoring and demonstrate an average to fair
capacity to meet financial commitments, with moderate default risk. High rating exposures require varying
degrees of special attention and default risk is of greater concern.
The tables below shows the gross loans after fair value adjustment on initial recognition in Cyprus, using the
corporate legal entities, SMEs legal entities and retail individual definition as per the internal rating of BOC
PCL. Loans and advances to customers classified based on the internal credit rating grades include €67,381
thousand managed in Cyprus but originated in other countries.
2018
Corporate legal entities
Rating 1
Rating 2
Rating 3
Rating 4
Rating 5
Rating 6
Rating 7
Unrated
New customers
Total Stage 3 and POCI
Stage 1
€000
Stage 2
€000
203,010
485,028
398,722
429,053
184,338
174,717
123,716
184,900
259,165
51,808
110,127
61,739
223,243
62,825
12,577
16,911
573,703
19,023
2,442,649
1,131,956
Total
€000
254,818
595,155
460,461
652,296
247,163
187,294
140,627
758,603
278,188
3,574,605
1,237,585
4,812,190
198
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.6
Credit quality of loans and advances to customers (continued)
46.6.1 Credit quality of loans and advances to customers based on the internal credit rating
(continued)
Retail individuals
Rating 1
Rating 2
Rating 3
Rating 4
Rating 5
Rating 6
Rating 7
Unrated
New lending
Total Stage 3 and POCI
2018
SMEs legal entities
Rating 1
Rating 2
Rating 3
Rating 4
Rating 5
Rating 6
Rating 7
Unrated
New customers
Total Stage 3 and POCI
279,305
686,960
930,261
423,067
330,270
174,645
42,216
-
259,495
67,286
94,836
99,008
74,341
76,060
52,359
51,842
3,470
36,397
3,126,219
555,599
Stage 1
€000
Stage 2
€000
55,500
87,460
51,932
41,757
40,685
35,414
37,283
-
37,717
30,751
31,678
17,992
15,644
22,250
32,538
36,180
19,080
6,918
387,748
213,031
346,591
781,796
1,029,269
497,408
406,330
227,004
94,058
3,470
295,892
3,681,818
2,709,494
6,391,312
Total
€000
86,251
119,138
69,924
57,401
62,935
67,952
73,463
19,080
44,635
600,779
556,403
1,157,182
46.7
Credit quality of loans and advances to customers classified as held for sale
The following tables present the credit quality of the Group’s loans and advances at amortised cost classified
as held for sale by business line concentration.
2018
Gross loans at amortised cost
before fair value adjustment
on initial recognition
Fair value adjustment on
initial recognition
Gross loans at amortised cost
after fair value adjustment on
initial recognition
Stage 1
€000
Stage 2
€000
Stage 3
€000
POCI
€000
Total
€000
7,148
(195)
94,600
2,222,931
526,434
2,851,113
(3,261)
(24,571)
(111,126)
(139,153)
6,953
91,339
2,198,360
415,308
2,711,960
199
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.7
Credit quality of loans and advances to customers classified as held for sale (continued)
Gross loans at amortised
cost before fair value
adjustment on initial
recognition
Corporate
SMEs
Retail
- consumer, credit cards and
other
Restructuring
- corporate
- SMEs
- retail housing
- retail other
Recoveries
- corporate
- SMEs
- retail housing
- retail other
International banking services
Fair value adjustment on
initial recognition
Corporate
Retail
- consumer, credit cards and
other
Restructuring
- corporate
- SMEs
- retail other
Recoveries
- corporate
- SMEs
- retail housing
- retail other
Stage 1
Stage 2
Stage 3
POCI
Total
€000
€000
€000
€000
€000
165
2,835
-
2,110
2,038
-
-
-
-
-
-
-
-
-
-
85,783
8,817
-
-
-
-
-
-
-
14,343
6
741
-
15,249
2,841
125
3
128
722,631
187,831
231
5,575
967,761
300,509
484
23,427
8
48,690
18,180
41
198
859,214
216,866
272
5,773
368,310
1,336,071
73,827
374,336
151
16,293
-
635
39,720
8
7,148
94,600
2,222,931
526,434
2,851,113
Stage 1
Stage 2
Stage 3
€000
€000
€000
POCI
€000
Total
€000
-
-
-
(195)
-
-
-
-
-
-
-
(2,722)
(539)
-
-
-
-
-
(584)
-
(13,730)
(1,470)
(132)
(4,900)
(3,473)
-
(282)
-
(1)
(7,927)
(2,654)
(78)
(81,744)
(14,518)
(115)
(4,089)
(584)
(1)
(24,379)
(4,858)
(210)
(86,644)
(17,991)
(115)
(4,371)
(195)
(3,261)
(24,571)
(111,126)
(139,153)
200
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.7
Credit quality of loans and advances to customers classified as held for sale (continued)
Gross loans at amortised
cost after fair value
adjustment on initial
recognition
Corporate
SMEs
Retail
- consumer, credit cards and
other
Restructuring
- corporate
- SMEs
- retail housing
- retail other
Recoveries
- corporate
- SMEs
- retail housing
- retail other
International banking services
Stage 1
Stage 2
Stage 3
POCI
Total
€000
€000
€000
€000
€000
165
2,835
-
2,110
1,843
-
-
-
-
-
-
-
-
-
-
83,061
8,278
-
-
-
-
-
-
-
13,759
6
741
-
14,665
2,841
125
2
127
708,901
186,361
231
5,443
962,861
297,036
484
23,145
8
40,763
15,526
41
120
834,835
212,008
272
5,563
286,566
1,249,427
59,309
356,345
36
12,204
-
520
35,349
8
6,953
91,339
2,198,360
415,308
2,711,960
The following table presents the credit quality of the Group's loans and advances to customers at amortised
cost classified as held for sale by geographical concentration:
2018
By staging
Stage 1
Stage 2
Stage 3
POCI
Cyprus
Other countries
Total
Fair value
adjustment
on initial
recognition
€000
€000
€000
€000
Gross loans
at amortised
cost after fair
value
adjustment
on initial
recognition
€000
7,148
94,600
2,161,695
526,434
-
-
7,148
94,600
(195)
(3,261)
6,953
91,339
61,236
2,222,931
(24,571)
2,198,360
-
526,434
(111,126)
415,308
2,789,877
61,236
2,851,113
(139,153)
2,711,960
201
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.7
Credit quality of loans and advances to customers classified as held for sale (continued)
Corporate legal entities
Rating 2
Rating 3
Rating 6
Unrated
New customers
Total Stage 3 and POCI
Retail legal entities
Rating 4
Rating 5
Rating 7
Total Stage 3 and POCI
SMEs legal entities
Rating 7
Unrated
New customers
Total Stage 3 and POCI
Stage 1
€000
Stage 2
€000
Total
€000
2,452
722
3,000
-
99
-
4,468
951
80,402
-
6,273
85,821
10
670
-
680
-
-
-
-
-
2,276
2,092
4,368
129
362
659
1,150
2,452
5,190
3,951
80,402
99
92,094
2,363,960
2,456,054
10
2,946
2,092
5,048
234,237
239,285
129
362
659
1,150
15,471
16,621
202
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.8
Contingent liabilities and commitments
The Group enters into various irrevocable commitments and contingent liabilities. These consist of
acceptances and endorsements, guarantees, documentary credits and undrawn formal stand-by facilities,
credit lines and other commitments to lend.
46.8.1 Contingent liabilities
An analysis of changes in the outstanding exposures and the corresponding ECLs are disclosed in the tables
below:
2018
Exposures
1 January
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Net increase/(decrease)
Foreign exchange and other adjustments
Disposal of subsidiary
31 December
2018
ECL
1 January
Impact of adopting IFRS 9 at 1 January 2018
Restated balance at 1 January
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Charge for the year*
31 December
Individually assessed
Collectively assessed
Stage 1
€000
Stage 2
€000
Stage 3
€000
Total
€000
302,437
48,097
(9,298)
(2,528)
62,315
(25)
(1,425)
252,230
(32,459)
26,050
(6,749)
221,865
(15,638)
(16,752)
9,277
776,532
-
-
-
(44,996)
(38,135)
(20,816)
-
-
-
-
(25)
(1,425)
399,573
194,076
160,617
754,266
Stage 1
€000
Stage 2
€000
Stage 3
€000
Total
€000
877
(796)
81
77
(16)
(887)
1,047
302
35
267
302
2,095
(1,865)
43,214
46,186
(14,158)
(16,819)
230
(47)
290
(3,890)
4,228
811
149
662
811
29,056
29,367
(30)
(274)
4,777
(9,751)
23,778
23,778
-
23,778
-
-
-
(4,476)
24,891
23,962
929
24,891
* The charge for the year mainly relates to changes to models and inputs.
The outstanding contingent liabilities by geography are disclosed in the table below:
Cyprus
Other countries
Total
Stage 1
€000
Stage 2
€000
Stage 3
€000
399,573
-
158,630
35,446
135,814
24,803
Total
€000
694,017
60,249
399,573
194,076
160,617
754,266
203
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.8
Contingent liabilities and commitments (continued)
46.8.1 Contingent liabilities (continued)
The credit quality of contingent liabilities in Cyprus, as per the internal rating system of BOC PCL is
disclosed in the table below.
Corporate legal entities
Rating 1
Rating 2
Rating 3
Rating 4
Rating 5
Rating 6
Rating 7
Unrated
New customers
Total Stage 3
SME legal entities
Rating 1
Rating 2
Rating 3
Rating 4
Rating 5
Rating 6
Rating 7
Unrated
New customers
Total Stage 3
Retail individuals
Unrated
Total Stage 3
Stage 1
€000
Stage 2
€000
Total
€000
78,723
28,878
41,333
27,406
22,468
4,811
10,717
37,573
86,675
63
24
1,356
2,569
40
418
420
145,101
-
338,584
149,991
Stage 1
€000
10,951
4,520
1,343
4,243
2,797
4,898
1,901
-
30,336
60,989
Stage 2
€000
2,515
1,233
192
900
673
1,588
1,429
13,211
555
22,296
78,786
28,902
42,689
29,975
22,508
5,229
11,137
182,674
86,675
488,575
155,784
644,359
Total
€000
13,466
5,753
1,535
5,143
3,470
6,486
3,330
13,211
30,891
83,285
2,824
86,109
Stage 1
€000
Stage 2
€000
Total
€000
-
-
21,789
21,789
21,789
21,789
2,009
23,798
204
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.8
Contingent liabilities and commitments (continued)
46.8.2 Commitments
An analysis of changes in the outstanding exposures and the corresponding ECLs are disclosed in the tables
below:
2018
Exposure
1 January
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Net increase/(decrease)
Disposal of subsidiary
Foreign exchange and other adjustments
31 December
2018
ECL
1 January
Impact of adopting IFRS 9 at 1 January 2018
Restated balance at 1 January 2018
Transfers to stage 1
Transfers to stage 2
Charge for the year*
31 December
Individually assessed
Collectively assessed
Stage 1
€000
Stage 2
€000
Stage 3
€000
Total
€000
-
-
-
-
1,160,742
883,737
218,329
2,262,808
232,355
(205,220)
(150,375)
(10,820)
172,014
(12,993)
(27,135)
(21,639)
23,813
-
-
-
93,749
(222,036)
(27,830)
(156,117)
(18,232)
(190)
-
-
-
-
(18,232)
(190)
1,307,229
615,502
165,538
2,088,269
Stage 1
€000
Stage 2
€000
Stage 3
€000
Total
€000
-
25
367
392
282
(265)
603
1,012
78
934
1,012
-
22
1,204
1,226
(203)
754
5
1,782
71
1,711
1,782
-
5,754
(3,672)
2,082
(79)
(489)
(1,514)
-
-
-
-
-
5,801
(2,101)
3,700
-
-
(906)
2,794
149
2,645
2,794
*The charge in the year mainly relates to changes to models and inputs.
Commitments by geography are presented in the table below:
Cyprus
Other countries
Total
Stage 1
€000
1,307,229
Stage 2
€000
Stage 3
€000
Total
€000
615,502
165,195
2,087,926
-
-
343
343
1,307,229
615,502
165,538
2,088,269
205
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.8
Contingent liabilities and commitments (continued)
46.8.2 Commitments (continued)
The credit quality of commitments in Cyprus, as per the internal rating system of BOC PCL is disclosed in
the table below.
Corporate legal entities
Rating 1
Rating 2
Rating 3
Rating 4
Rating 5
Rating 6
Rating 7
Unrated
New customers
Total Stage 3
SME legal entities
Rating 1
Rating 2
Rating 3
Rating 4
Rating 5
Rating 6
Rating 7
Unrated
New customers
Total Stage 3
Stage 1
€000
Stage 2
€000
175,810
155,852
85,480
54,717
28,247
10,853
11,606
31,070
103,441
7,993
5,246
15,600
5,614
1,969
1,982
2,167
198,058
2,604
657,076
241,233
Stage 1
€000
Stage 2
€000
83,581
31,666
12,873
19,947
10,731
27,252
5,109
-
25,035
54,630
14,277
3,432
15,805
5,295
28,475
13,091
23,122
733
216,194
158,860
Total
€000
183,803
161,098
101,080
60,331
30,216
12,835
13,773
229,128
106,045
898,309
137,557
1,035,866
Total
€000
138,211
45,943
16,305
35,752
16,026
55,727
18,200
23,122
25,768
375,054
12,672
387,726
206
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.8
Contingent liabilities and commitments (continued)
46.8.2 Commitments (continued)
Retail individuals
Rating 1
Rating 2
Rating 3
Rating 4
Rating 5
Rating 6
Rating 7
Unrated
New lending
Total Stage 3
Stage 1
€000
Stage 2
€000
84,297
122,073
85,405
50,785
16,026
5,475
1,240
-
68,658
43,628
67,980
38,570
18,416
7,423
5,054
3,466
26,481
4,391
433,959
215,409
Total
€000
127,925
190,053
123,975
69,201
23,449
10,529
4,706
26,481
73,049
649,368
15,309
664,677
207
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.9
customers held for sale
Credit losses of loans and advances to customers, including loans and advances to
The movement in ECL of loans and advances, including the loans and advances to customers held for sale,
is as follows:
2018
Cyprus
1 January
Change in the basis of
calculation of gross carrying
value (IFRS 9 Grossing up
adjustment)
Impact of adopting IFRS 9 at
1 January 2018
Restated balance at 1 January
Transfer from Romania branch
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Foreign exchange and other
adjustments
Write offs
Interest (provided) not
recognised in the income
statement
New assets originated or
purchased*
Assets derecognised or repaid
(excluding write offs)*
Write offs*
Changes to models and inputs
(changes in PDs, LGDs and
EADs) used for ECL
calculations*
Changes to contractual cash
flows due to modifications not
resulting in derecognition*
Impact on transfer between
stages during the year*
31 December
Individually assessed
Collectively assessed
Stage 1
€000
Stage 2
€000
20,840
29,510
Stage 3
€000
2,654,800
POCI
€000
Total
€000
500,027
3,205,177
5,068
6,561
1,294,541
326,152
1,632,322
(6,660)
19,248
-
54,379
(1,721)
(5,459)
32,744
68,815
-
(29,841)
28,096
(11,362)
235,471
52,373
313,928
4,184,812
878,552
5,151,427
-
22,176
22,176
(24,538)
(26,375)
16,821
-
-
-
-
-
-
-
-
1,601
317
1,918
(13,693)
(20,303)
(1,961,979)
(552,912)
(2,548,887)
-
6,345
832
2,334
-
-
141,719
17,521
159,240
-
5,581
11,926
(3,760)
(107,462)
(9,868)
(120,258)
5,369
68,483
11,690
87,876
3,691
36,336
380,988
61,123
482,138
119
(39,842)
26,233
6,326
19,907
26,233
226
294
(1,616)
(576)
(1,847)
110,778
(1,680)
69,550
73,870
2,783,232
431,924
3,315,259
17,411
56,459
147,327
22,206
193,270
2,635,905
409,718
3,121,989
73,870
2,783,232
431,924
3,315,259
* Individual components of the ‘Impairment loss net of reversals of loans and advances to customers’
208
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.9
customers held for sale (continued)
Credit losses of loans and advances to customers, including loans and advances to
2018
Other countries
1 January
Stage 1
€000
Stage 2
€000
Stage 3
€000
POCI
€000
1,344
365
222,389
23,575
Total
€000
247,673
Change in the basis of
calculation of gross carrying
value (IFRS 9 Grossing up
adjustment)
Impact of adopting IFRS 9 at
1 January 2018
Restated balance at 1 January
Transfer to Cyprus operations
Transfers to stage 2
Foreign exchange and other
adjustments
Write offs
Disposal of UK subsidiaries
Interest (provided) not
recognised in the income
statement
New assets originated or
purchased*
Assets derecognised or repaid
(excluding write offs)*
Write offs*
Changes to models and inputs
(changes in PDs, LGDs and
EADs) used for ECL
calculations*
Discontinued operations
Impact on transfer between
stages during the year*
31 December
Individually assessed
Collectively assessed
-
(7)
1,337
-
-
(236)
1
(1,495)
-
(1)
-
-
33
233
263
135
-
135
135
33
55,502
1,640
57,175
4,215
4,613
-
28
-
(42)
(368)
-
-
(3)
6
(4,212)
3
(25)
-
-
-
-
933
33
5,174
278,824
25,248
310,022
-
(28)
(8,189)
(116,353)
(1,731)
5,197
-
(4,209)
944
(9,346)
(860)
2,362
146,611
88,716
57,895
146,611
(22,176)
(22,176)
-
1
-
(8,424)
(832)
(117,226)
-
-
-
(3,594)
5,197
(1)
(89)
3
(4,301)
953
(2,155)
(15,680)
-
-
-
-
-
-
(624)
2,600
146,746
88,716
58,030
146,746
*Individual components of the ‘Impairment loss net of reversals of loans and advances to customers’
209
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.9
customers held for sale (continued)
Credit losses of loans and advances to customers, including loans and advances to
2018
Total
1 January
Stage 1
€000
Stage 2
€000
22,184
29,875
Stage 3
€000
2,877,189
POCI
€000
Total
€000
523,602
3,452,850
Change in the basis of
calculation of gross carrying
value (IFRS 9 Grossing up
adjustment)
Impact of adopting IFRS 9 at
1 January 2018 (Note 6.5)
Restated balance at 1 January
Transfers to stage 1
Transfers to stage 2
Transfers to stage 3
Foreign exchange and other
adjustments
Write offs
Disposal of UK subsidiaries
Interest (provided) not
recognised in the income
statement
New assets originated or
purchased*
Assets derecognised or repaid
(excluding write offs)*
Write offs*
Changes to models and inputs
(changes in PDs, LGDs and
EADs) used for ECL
calculations*
Discontinued operations
Changes to contractual cash
flows due to modifications not
resulting in derecognition*
Impact on transfer between
stages during the year*
31 December
Individually assessed
Collectively assessed
5,068
6,594
1,350,043
327,792
1,689,497
(6,667)
20,585
54,379
(1,721)
(5,459)
(236)
(13,692)
(1,495)
-
6,344
832
2,334
36,959
73,428
(29,841)
28,124
(11,362)
236,404
52,406
319,102
4,463,636
903,800
5,461,449
(24,538)
(26,403)
16,821
-
-
-
-
-
-
-
(6,588)
318
(6,506)
(20,345)
(2,078,332)
(553,744)
(2,666,113)
(368)
(1,731)
-
(3,594)
-
-
146,916
17,521
164,437
-
5,581
11,925
(3,763)
(111,671)
(9,957)
(124,559)
5,375
69,427
11,693
88,829
3,724
233
32,124
3
371,642
(860)
58,968
466,458
-
(624)
119
(39,579)
26,368
6,326
20,042
26,368
226
269
(1,616)
(576)
(1,847)
113,140
(1,680)
72,150
73,870
2,929,843
431,924
3,462,005
17,411
56,459
236,043
22,206
281,986
2,693,800
409,718
3,180,019
73,870
2,929,843
431,924
3,462,005
* Individual components of the 'Impairment loss net of reversals on loans and advances to customers' as
disclosed in Note 17.
The above tables do not include the fair value adjustments on initial recognition of loans acquired from Laiki
Bank and ECL on financial guarantees which are part of other liabilities on the balance sheet. There were no
loans and advances to customers classified as held for sale as at 31 December 2017.
210
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.9
customers held for sale (continued)
Credit losses of loans and advances to customers, including loans and advances to
The movement of credit losses of loans and advances to customers includes credit losses relating to loans
and advances to customers classified as held for sale. Their balance at 31 December 2018 by staging and
geographical area is presented in the table below:
Stage 1
€000
Stage 2
€000
Stage 3
€000
1,271,559
50,393
POCI
€000
Total
€000
188,482
1,507,459
-
50,393
43,977
-
31 December 2018
Cyprus
Other countries
Total
Collectively assessed
3,441
-
3,441
3,441
2017
1 January
Foreign exchange and other adjustments
Transfer between geographical areas
Transfer upon acquisition of property through
a restructuring activity
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
Charge for the year - discontinued operations
31 December
Individual impairment
Collective impairment
43,977
1,321,952
188,482
1,557,852
43,977
1,321,952
188,482
1,557,852
Cyprus
€000
3,170,161
77,234
23
(12,792)
United
Kingdom
€000
Other countries
€000
Total
€000
10,782
371,298
3,552,241
(183)
(23)
-
(7,059)
69,992
-
-
-
(12,792)
(831,708)
(117)
(138,684)
(970,509)
(97,951)
5,975
925,161
-
3,236,103
2,367,205
868,898
(2)
287
(1,406)
(99,359)
2
6,264
(2,650)
16,000
938,511
(572)
7,522
4,751
2,771
-
(572)
240,151
3,483,776
227,739
2,599,695
12,412
884,081
The provision for impairment of loans and advances, including the loans and advances to customers held for
sale, by business line is presented in the table below:
211
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.9
customers held for sale (continued)
Credit losses of loans and advances to customers, including loans and advances to
Stage 1
€000
Stage 2
€000
Stage 3
€000
POCI
€000
16,008
3,333
165,706
22,574
5,143
320
Total
€000
195,179
31,848
31 December 2018
Corporate
SMEs
Retail
- housing
- consumer, credit cards and
other
Restructuring
- corporate
- SMEs
- retail housing
- retail other
Recoveries
- corporate
- SMEs
- retail housing
- retail other
International banking services
Wealth management
8,322
5,621
4,052
4,848
1,803
1,507
23
127
-
-
-
-
52
13
1,028
4,655
42,745
5,469
102
53
-
-
-
-
462
15
28,109
301
33,490
26,152
1,878
37,533
402,181
253,504
138,799
171,882
696,310
538,148
248,429
226,379
10,180
1,490
21,621
24,325
4,309
9,479
147,552
83,209
59,651
72,396
1,175
565
468,350
284,805
143,233
181,541
843,862
621,357
308,080
298,775
11,869
2,083
26,368
73,870
2,929,843
431,924
3,462,005
212
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.9
customers held for sale (continued)
Credit losses of loans and advances to customers, including loans and advances to
The movement of the ECL allowance for the loans and advances to customers in the corporate and retail
business line in Cyprus (excluding loans under Restructuring, Recoveries, International banking services and
Wealth management) including ECL allowance for loans and advances to customers held for sale is
presented in the table below:
2018
1 January
Change in the basis of calculation of gross carrying value (IFRS 9 Grossing
up adjustment)
Impact of adopting IFRS 9 at 1 January 2018
Restated balance at 1 January
Transfer in/(out) of the business line
Write offs
Interest (provided) not recognised in the income statement
New assets originated or purchased*
Assets derecognised or repaid (excluding write offs)*
Write offs*
Changes to models and inputs (changes in PDs, LGDs and EADs) used for
ECL calculations*
Changes to contractual cash flows due to modifications not resulting in
derecognition*
Impact on transfer between stages during the year*
31 December
Corporate
€000
106,153
Retail
€000
115,197
33,867
40,270
180,290
18,978
(80,160)
1,788
5,987
22,651
40,645
178,493
(95,078)
(25,188)
1,531
1,385
(36,005)
(10,796)
772
8,018
(1,156)
17,962
7
17,368
107,869
827
(6,678)
70,476
As from 1 January 2018, to comply with the requirements of IFRS 9, relating to the measurement and
presentation of the gross carrying amount and accumulated allowance for impairment as impacted from
interest income on impaired loans, the gross carrying amounts of the loans have been increased by an
amount of €1,689,497 thousand and an equivalent adjustment was effected on the accumulated allowance
for impairment. There was no impact on the net carrying amount of the customer loans and advances from
this charge in the presentation.
During 2018 the total non-contractual write-offs recorded by the Group amounted to €2,264,902 thousand
(2017: €466,248 thousand).
Assumptions have been made about the future changes in property values, as well as the timing for the
realisation of the collateral, taxes and expenses on the repossession and subsequent sale of the collateral as
well as any other applicable haircuts. 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.
At 31 December 2018 the weighted average haircut (including liquidity haircut and selling expenses) used in
the collectively assessed provision calculation for loans and advances to customers other than those
classified as held for sale is c.32% under the baseline scenario (31 December 2017: c.34%).
The timing of recovery from real estate collaterals used in the collectively assessed provision calculation for
loans and advances to customers other than those classified as held for sale has been estimated to be on
average 7 years under the baseline scenario (2017: average of 6 years).
213
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.9
customers held for sale (continued)
Credit losses of loans and advances to customers, including loans and advances to
For the calculation of individually assessed provisions, the timing of recovery of collaterals as well as the
haircuts used are based on the specific facts and circumstances of each case.
For Stage 3 customers, the calculation of individually assessed provision is the weighted average of three
scenarios; base, adverse and favourable. The base scenario focuses on the following variables, which are
based on the specific facts and circumstances of each customer: the operational cash flows, the timing of
recovery of collaterals and the haircuts from the realisation of collateral. The base scenario is used to derive
additional scenarios for either better or worse cases. Under the adverse scenario operational cash flows are
decreased by 50%, applied haircuts on real estate collateral are increased by 50% and the timing of
recovery of collaterals is increased by 1 year with reference to the baseline scenario. Under the favourable
scenario, applied haircuts are decreased by 5%, with no change in the recovery period with reference to the
baseline scenario. Assumptions used in estimating expected future cash flows (including cash flows that
may result from the realisation of collateral) reflect current and expected future economic conditions and
are generally consistent with those used in the Stage 3 collectively assessed exposures. In the case of loans
held for sale the Group has taken into consideration the timing of expected sale and the estimated sale
proceeds in determining the ECL. Amounts previously written off which are expected to be recovered
through sale are presented in 'Recoveries of loans and advances to customers previously written off' in
(Note 17).
For the calculation of expected credit losses three scenarios were used; base, adverse and favourable with
50%, 30% and 20% probability respectively.
Any positive cumulative average future change in forecasted property values was capped to zero for 2018
and 2017. This applies to all scenarios.
The above assumptions are also influenced by the ongoing regulatory dialogue BOC PCL 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 the 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 credit losses of loans and advances.
Sensitivity analysis
The Group has performed sensitivity analysis relating to the loan portfolio in Cyprus, which represents 99%
of the total loan portfolio of the Group (excluding the loans and advances to customers classified as held for
sale) with reference date 31 December 2018.
The Group uses three different economic scenarios in the ECL calculation: a base, an adverse and a
favourable scenario with weights 50%, 30% and 20% respectively. The same scenarios determined at 31
December 2018 were used for the scenarios determined on 1 January 2018 (the transition date to IFRS 9).
The Group has altered the weights of the economic scenarios and changed the collateral realisation periods
and the impact on the ECL, for both individually and collectively assessed ECL calculations, as at 31
December 2018 is presented in the table below:
214
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.9
customers held for sale (continued)
Credit losses of loans and advances to customers, including loans and advances to
Increase the adverse weight by 5% and decrease the favourable weight by 5%
Decrease the adverse weight by 5% and increase the favourable weight by 5%
Increase the expected recovery period by 1 year
Decrease the expected recovery period by 1 year
Increase the collateral realisation haircut by 5%
Decrease the collateral realisation haircut by 5%
Increase in the PDs of stages 1&2 by 20%
Decrease in the PDs of stages 1&2 by 20%
Increase/(decrease)
on ECL for loans and
advances to
customers at
amortised cost
€000
4,963
(4,956)
50,898
(49,821)
89,682
(81,862)
12,733
(11,126)
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 2017. The impact on the provisions for
impairment of loans and advances is presented below:
Increase the timing of recovery from collaterals by 1 year for all customers
Decrease the timing of recovery from collaterals by 1 year for all customers
Increase haircuts by 5% on all customers
Decrease haircuts by 5% on all customers
Increase the average expected recovery period by 1 year and decrease of haircuts
by 5% on all customers
Decrease the average expected recovery period by 1 year and increase of haircuts
by 5% on all customers
Increase/(decrease)
on provisions for
impairment of loans
and advances
€000
120,700
(121,875)
179,447
(169,291)
(47,199)
59,748
The comparative information is not comparable to current period information since the assumptions used,
are different under IAS 39 compared to those of IFRS 9.
215
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.10
Collateral and other credit enhancements obtained
The carrying value of assets obtained during 2018 and 2017 by taking possession of collateral held as
security, was as follows:
Residential property
Commercial and other property
2018
€000
66,893
329,363
396,256
2017
€000
77,932
444,536
522,468
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 2018 amounted to
€1,684,606 thousand (2017: €1,611,091 thousand).
The disposals of repossessed assets during 2018 amounted to €173,080 thousand (2017: €247,030
thousand).
46.11
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 with 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.
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 categorise the facility as credit impaired
as by themselves they do not necessarily indicate credit distress affecting payment ability such that would
require the facility to be classified as NPE.
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 restructuring solutions, which are suitable for the borrower and acceptable for the
Group.
216
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.11
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;
that is forbearance of the arrears and capitalisation 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.
Long-term restructuring solutions can include the following:
Interest rate reduction: permanent or temporary reduction of interest rate (fixed or variable) into a
fair and sustainable rate.
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.
217
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.11
Forbearance (continued)
Stage 2 and Stage 3 loans after fair value adjustment on initial recognition that were forborne during the
year amounted to €480,437 thousand. Their related modification loss amounted to €7,009 thousand.
Facilities that have cured since their modification and are classified as Stage 1 at 31 December 2018
amount to €31,138 thousand and their corresponding ECL amount to €220 thousand.
Facilities that reverted to Stage 2 and Stage 3 having once cured amount to €165,379 thousand and their
corresponding ECL amounts to €6,495 thousand at 31 December 2018.
46.12 Rescheduled loans and advances to customers
The below table presents the movement of the Group’s rescheduled loans and advances to customers
measured at amortised cost including those classified as held for sale (by geography). The rescheduled
loans related to loans and advances classified as held for sale amounts to €1,412,802 thousand.
2018
1 January
Rescheduled loans measured at FVPL on adoption of IFRS 9
Change in the basis of calculation of
gross carrying value (IFRS 9 Grossing up adjustment)
Restated balance at 1 January
Transfer between geographical areas
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
€000
6,272,946
(341,765)
Other
countries
€000
Total
€000
99,068
6,372,014
-
(341,765)
416,093
3,678
419,771
6,347,274
102,746
6,450,020
6,254
240,660
(6,254)
-
220
240,880
(1,472,701)
(98)
(1,472,799)
(727,759)
(31,932)
(759,691)
166,922
919
167,841
5,820
(16,795)
(10,975)
4,566,470
48,806
4,615,276
2017
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
Cyprus
€000
7,401,870
United
Kingdom
€000
Other
countries
€000
Total
€000
90,323
163,111
7,655,304
402,521
89
3,424
406,034
(1,326,918)
(79,147)
(60,032)
(1,466,097)
(461,468)
278,858
(21,917)
6,272,946
(2)
16
(1,393)
9,886
(13,076)
(474,546)
1,382
280,256
(5,627)
(28,937)
89,182
6,372,014
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 EBA Final draft Implementing Technical
Standards (ITS) on supervisory reporting and non-performing exposures.
218
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.12 Rescheduled loans and advances to customers (continued)
The below tables present the Group’s rescheduled loans and advances to customers by industry sector,
geography and credit quality classification excluding those classified as held for sale, as well as impairment
provisions and tangible collateral held for rescheduled loans.
Credit quality
2018
Stage 1
Stage 2
Stage 3
POCI
2017
Neither past due nor impaired
Past due but not impaired
Impaired
31 December
Fair value of collateral
2018
Stage 1
Stage 2
Stage 3
POCI
31 December
2017
Neither past due nor impaired
Past due but not impaired
Impaired
31 December
Cyprus
€000
508,664
376,794
2,001,947
266,263
Other
countries
€000
120
24
Total
€000
508,784
376,818
48,662
2,050,609
-
266,263
3,153,668
48,806
3,202,474
Cyprus
€000
3,158,894
1,218,160
1,895,892
6,272,946
United
Kingdom
€000
Other
countries
€000
Total
€000
5,383
2,354
2,149
9,886
79
-
3,164,356
1,220,514
89,103
1,987,144
89,182
6,372,014
Cyprus
€000
480,611
327,142
1,631,012
248,691
Other
countries
€000
101
21
Total
€000
480,712
327,163
11,204
1,642,216
-
248,691
2,687,456
11,326
2,698,782
Cyprus
€000
2,818,937
1,020,063
1,437,734
5,276,734
United
Kingdom
€000
Other
countries
€000
Total
€000
5,345
2,353
1,131
8,829
93
-
2,824,375
1,022,416
24,448
1,463,313
24,541
5,310,104
The fair value of collateral presented above has been computed based on the extent that the collateral
mitigates credit risk.
219
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.12 Rescheduled loans and advances to customers (continued)
Credit risk concentration
2018
By economic activity
Trade
Manufacturing
Hotels and catering
Construction
Real estate
Private individuals
Professional and other services
Other sectors
2018
By business line
Corporate
SMEs
Retail
- housing
- consumer, credit cards and other
Restructuring
- corporate
- SMEs
- retail housing
- retail other
Recoveries
- corporate
- SMEs
- retail housing
- retail other
International banking services
Wealth management
Cyprus
€000
245,919
84,267
123,596
373,539
221,011
1,761,663
249,607
94,066
Other
countries
€000
20,430
2,729
1
532
13,186
Total
€000
266,349
86,996
123,597
374,071
234,197
166
1,761,829
11,761
1
261,368
94,067
3,153,668
48,806
3,202,474
337,316
207,000
568,879
172,559
353,210
363,465
382,478
177,241
64,698
139,309
222,244
117,573
43,698
3,998
45,192
3,466
382,508
210,466
-
124
24
-
-
-
-
-
-
-
-
-
568,879
172,683
353,234
363,465
382,478
177,241
64,698
139,309
222,244
117,573
43,698
3,998
3,153,668
48,806
3,202,474
220
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.12 Rescheduled loans and advances to customers (continued)
2018
By business line
Corporate
SMEs
Retail
- housing
- consumer, credit cards and
other
Restructuring
Stage 1
€000
Stage 2
€000
Stage 3
€000
POCI
€000
98,485
67,513
154,531
63,170
126,186
75,310
3,306
4,473
Total
€000
382,508
210,466
246,922
45,090
271,988
4,879
568,879
46,012
17,148
107,184
2,339
172,683
- corporate
- SMEs
- retail housing
- retail other
Recoveries
- corporate
- SMEs
- retail housing
- retail other
7,903
31,579
3,800
1,468
44,505
27,729
871
153
-
-
-
-
-
-
-
-
International banking services
Wealth management
4,174
928
23,621
-
236,389
281,415
369,482
171,789
49,759
102,355
165,738
76,716
14,185
2,113
64,437
22,742
8,325
3,831
14,939
36,954
56,506
40,857
1,718
957
353,234
363,465
382,478
177,241
64,698
139,309
222,244
117,573
43,698
3,998
508,784
376,818
2,050,609
266,263
3,202,474
2017
By economic activity
Trade
Manufacturing
Hotels and catering
Construction
Real estate
Private individuals
Professional and other services
Other sectors
Cyprus
€000
607,700
201,377
429,520
1,222,591
862,508
2,221,465
359,970
367,815
United
Kingdom
€000
Other
countries
€000
Total
€000
640,095
213,857
431,762
31,950
12,436
-
20,145
1,242,736
5,401
872,746
-
2,223,058
18,912
338
379,607
368,153
445
44
2,242
-
4,837
1,593
725
-
6,272,946
9,886
89,182
6,372,014
221
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.12 Rescheduled loans and advances to customers (continued)
2017
By business line
Corporate
SMEs
Retail
- housing
- consumer, credit cards and other
Restructuring
- major corporate
- corporate
- SMEs
- retail housing
- retail other
Recoveries
- corporate
- SMEs
- retail housing
- retail other
International banking services
Wealth management
ECL allowances
2018
Stage 1
Stage 2
Stage 3
POCI
2017
Individual impairment
Collective impairment
Cyprus
€000
United
Kingdom
€000
Other
countries
€000
795,714
344,957
958,415
290,308
934,096
624,602
739,537
301,111
122,749
569,287
226,158
171,234
139,851
53,103
1,824
3,867
4,550
-
1,469
-
-
-
-
-
-
-
-
-
-
-
80,900
4,670
-
-
79
-
-
-
-
3,533
-
-
-
-
-
Total
€000
880,481
354,177
958,415
291,777
934,175
624,602
739,537
301,111
122,749
572,820
226,158
171,234
139,851
53,103
1,824
6,272,946
9,886
89,182
6,372,014
Cyprus
€000
4,122
8,613
589,372
85,412
687,519
Other
countries
€000
-
-
7,513
-
7,513
United
Kingdom
€000
Other
countries
€000
1,054
242
1,296
66,510
-
Total
€000
4,122
8,613
596,885
85,412
695,032
Total
€000
865,539
594,317
66,510
1,459,856
Cyprus
€000
797,975
594,075
1,392,050
222
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.13
customers - analysis by rating agency designation
Credit quality of Group assets exposed to credit risk other than loans and advances to
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 Investors Service
rating as follows:
Aaa - Aa3
A1 - A3
Baa1 - Baa3
Ba1 - Ba3
B1 - B3
Caa - C
Unrated
Other receivables from banks
2018
€000
182,968
100,478
68,666
2017
€000
745,330
560,059
132,610
4,472,223
2,870,600
8,621
20,973
38,147
37,224
655
18,399
58,406
56,603
4,929,300
4,442,662
Band Ba1-Ba3 above includes an amount of €162,675 thousand which relates to obligatory deposits for
liquidity purposes with the CBC (2017: €153,733 thousand). As at 31 December 2018, no bank balances
are impaired (2017: €33,004 thousand, with cumulative impairment loss of €24,998 thousand).
All balances with central banks and loans and advances to banks are classified as Stage 1 (Note 20).
223
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
46.
Risk management - Credit risk (continued)
46.13
customers - analysis by rating agency designation (continued)
Credit quality of Group assets exposed to credit risk other than loans and advances to
Debt securities
Investments in debt securities are analysed as follows:
Moody's rating
Aaa - Aa3
A1 - A3
Baa1 - Baa3
Ba1 - Ba3
Unrated
Issued by:
- Cyprus government
- Other governments
- Banks and other corporations
Classified as:
Investments mandatorily measured at FVPL
Investments at FVOCI
Investments at amortised cost
Available-for-sale investments
Loans and receivables
Aaa - Aa3
A1 - A3
Baa1 - Baa3
Ba1 - Ba3
Unrated
FVOCI
Stage 1
€000
Stage 1
€000
Amortised cost
Stage 2
€000
486,385
337,100
1,876
946
322,020
8,521
11,560
25,055
70,841
-
819,748
444,556
-
-
-
48,292
37,531
85,823
47.
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, property 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.
224
2018
€000
823,485
27,005
26,001
441,700
46,552
2017
€000
437,857
-
12,306
514,306
500
1,364,743
964,969
441,757
423,675
499,311
1,364,743
14,616
819,748
530,379
-
-
1,364,743
514,306
304,441
146,222
964,969
14,577
-
-
901,734
48,658
964,969
Total
€000
337,100
11,560
25,055
119,133
37,531
530,379
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
47.
Risk management - Market risk (continued)
Interest rate risk
Interest rate risk refers to the current or prospective risk to Group's capital and earnings arising from
adverse movements in interest rates that affect the Group's banking book positions.
Interest rate risk is measured mainly using the impact on net interest income and impact on economic
value. In addition to the above measures, interest rate risk is also measured using interest rate risk gap
analysis where the assets, liabilities and off balance sheet items, are classified according to their remaining
repricing period. Items that are not sensitive to rate changes are recognised as non-rate sensitive (NRS)
items. The present value of 1 basis point (PV01) is also calculated.
Interest rate risk is managed through a Year 1 Interest Rate Effect (IRE) limit on the maximum reduction of
net interest income under the various interest rate shock scenarios. Limits are set as a percentage of the
Group capital and as a percentage of the net interest income (when positive). There are different limits for
the Euro and the US Dollar.
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 using the assumption of the
prevailing market risk policy for the current and the comparative year.
Currency
All
Interest Rate Scenario
Parallel up
All
All
All
All
All
Euro
Euro
Euro
Euro
Euro
Euro
US Dollar
US Dollar
US Dollar
US Dollar
US Dollar
US Dollar
Parallel down
Steepening
Flattening
Short up
Short down
Parallel up
Parallel down
Steepening
Flattening
Short up
Short down
Parallel up
Parallel down
Steepening
Flattening
Short up
Short down
Impact on Net Interest
Income in €000
2018
(50 bps for
Euro and 60
bps for US
Dollar)
2017
(60 bps for
Euro and US
Dollar)
32,640
(29,712)
(25,455)
27,170
31,590
24,470
(29,886)
(25,031)
22,895
25,603
(29,590)
(29,352)
32,247
(28,001)
(23,917)
26,894
31,211
24,280
(28,458)
(22,935)
22,499
25,378
(27,743)
(27,188)
393
(1,711)
(1,538)
276
379
190
(1,428)
(2,096)
396
225
(1,847)
(2,164)
The table below sets out the impact on the Group’s equity, from reasonably possible changes in the interest
rates under various interest rate scenarios for the Euro and the US Dollar in line with the EBA guidelines:
225
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
47.
Risk management - Market risk (continued)
Currency
All
Interest Rate Scenario
Parallel up
All
All
All
All
All
Euro
Euro
Euro
Euro
Euro
Euro
US Dollar
US Dollar
US Dollar
US Dollar
US Dollar
US Dollar
Parallel down
Steepening
Flattening
Short up
Short down
Parallel up
Parallel down
Steepening
Flattening
Short up
Short down
Parallel up
Parallel down
Steepening
Flattening
Short up
Short down
Impact on Equity in €000
2018
(50 bps for
Euro and 60
bps for US
Dollar)
2017
(60 bps for
Euro and US
Dollar)
(62,222)
39,961
(37,309)
11,001
(31,449)
15,908
(63,551)
87,037
(36,216)
21,382
(32,584)
38,322
2,659
(3,558)
(1,093)
620
2,271
(73,930)
8,815
(84,428)
27,502
(12,685)
4,837
(75,866)
26,724
(81,121)
52,012
(14,551)
19,263
3,872
(4,547)
(3,307)
2,991
3,733
(3,253)
(4,795)
The aggregation of the impact on equity was performed as per the EBA guidelines by adding the negative
and 50% of the positive impact of each scenario.
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 at FVOCI.
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.
Parallel change in interest rates
((increase)/decrease in net
interest income)
2018
+0.6% for US Dollar
+0.5% for Euro
+1.0% for British Pound
-0.6% for US Dollar
-0.5% for Euro
-1.0% for British Pound
Impact on
profit/(loss) before
tax
€000
Impact on equity
€000
(400)
(1,126)
9,997
1,126
226
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
47.
Risk management - Market risk (continued)
Parallel change in interest rates
((increase)/decrease in net
interest income)
2017
+0.4% for Swiss Franc
+0.2% for Japanese Yen
+0.6% for all other currencies
-0.3% for Swiss Franc
-0.2% for Japanese Yen
-0.6% for all other countries
Currency risk
Impact on
profit/(loss) before
tax
Impact on equity
€000
€000
364
(364)
(3,155)
3,155
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.
The Group does not maintain a currency trading book.
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.
227
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
47.
Risk management - Market risk (continued)
2018
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
2017
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
profit/(loss) after tax
€000
Impact on equity
€000
+10
+20
+10
+10
+20
+10
+10
-10
-20
-10
-10
-20
-10
-10
+10
+25
+10
+20
+20
+10
+10
-10
-25
-10
-20
-20
-10
-10
2,071
2,049
-
1,138
671
119
(74)
(1,695)
(1,366)
-
(931)
(448)
(97)
60
1,110
2,714
(419)
3,803
868
195
(18)
(908)
(1,628)
343
(2,535)
(578)
(160)
14
-
18,060
(667)
-
(2,472)
-
-
-
(12,040)
546
-
1,648
-
-
-
22,323
(407)
-
(34,079)
-
-
-
(13,394)
333
-
22,719
-
-
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.
228
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
47.
Risk management - Market risk (continued)
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 FVOCI
affect the equity of the Group.
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.
2018
Cyprus Stock Exchange
Athens Exchange
Other stock exchanges and
unlisted
Cyprus Stock Exchange
Athens Exchange
Other stock exchanges and
unlisted
2017
Cyprus Stock Exchange
Athens Exchange
Other stock exchanges and
unlisted
Cyprus Stock Exchange
Athens Exchange
Other stock exchanges and
unlisted
Change in index
%
Impact on
profit/(loss) before
tax
€000
Impact on equity
€000
+25
+25
+20
-25
-25
-20
+25
+25
+20
-25
-25
-20
574
95
1,007
(574)
(95)
997
-
1,695
(997)
-
(1,007)
(1,695)
1,477
-
1,144
(1,483)
(5)
(1,390)
1,288
99
4,206
(1,282)
(93)
(3,960)
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 Investors Service rating of the debt
securities portfolio of the Group as at 31 December 2018 was A1 (2017: Baa1). The average rating
excluding the Cyprus Government bonds for 31 December 2018 was Aa1 (2017: Aa1).
Changes in the prices of debt securities classified as investments at FVPL, affect the profit or loss of the
Group, whereas changes in the value of debt securities classified as FVOCI affect the equity of the Group.
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.
229
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
47.
Risk management - Market risk (continued)
2018
+1.5% for Aa3 and above rated bonds
+3.5% for A3 and above rated bonds
+5.5% for Baa3 and above rated bonds
+7.8% for Cyprus Government bonds
-1.5% for Aa3 and above rated bonds
-3.5% for A3 and above rated bonds
-5.5% for Baa3 and above rated bonds
-7.8% for Cyprus Government bonds
2017
+3% for A3 and above rated bonds
+10% for below A3 rated bonds
-3% for A3 and above rated bonds
-10% for below A3 rated bonds
Impact on
profit/(loss) before
tax
€000
Impact on equity
€000
1,476
774
-
42
(1,476)
(774)
-
(42)
7,320
167
51
24,808
(7,320)
(167)
(51)
(24,808)
Impact on
profit/(loss) before
tax
€000
Impact on equity
€000
1,385
607
(1,385)
(607)
13,038
45,667
(13,038)
(45,667)
Other non-equity instruments price risk
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 other non-equity investments held, as a result of reasonably possible changes in the relevant
stock exchange indices.
Change in index
2018
Other (non-equity instruments)
Other (non-equity instruments)
%
+25
-25
48.
Risk management - Liquidity risk and funding
Impact on
profit/(loss) before
tax
€000
Impact on equity
€000
3,388
(3,388)
-
-
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.
230
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
48.
Risk management - Liquidity risk and funding (continued)
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.
The ALCO is responsible for setting the policies for the effective management and monitoring of liquidity
across the Group.
Group Treasury is responsible for liquidity management at Group level to ensure compliance with internal
and regulatory liquidity policies and provide direction as to the actions to be taken regarding liquidity needs.
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 ensure a comfortable liquidity position.
Liquidity is also monitored daily by Market Risk, which is an independent department responsible for
monitoring compliance with both internal policies and limits, and with the limits set by the regulatory
authorities. Market Risk reports to ALCO the regulatory liquidity position of the Group, 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)
(ii)
(iii)
(iv)
(v)
(vi)
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.
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.
Recovery Plan: the Group has developed a Recovery Plan (RP). The key objectives of the RP are to
set key Recovery and Early Warning Indicators so as to monitor these consistently and to set in
advance a range of recovery options to enable the Group to be adequately prepared to respond to
stressed conditions and restore the Group’s position.
Monitoring process
Daily
The daily monitoring of customer flows and the stock of highly liquid assets is important to safeguard and
ensure the uninterrupted operations of the Group’s activities. Market Risk prepared 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. This report was
abolished in June 2018. However, for better monitoring of the liquidity buffer, a new daily report was
introduced analysing the internal liquidity buffer and comparing it to the previous day’s buffer. This report is
made available to Group Treasury and Group Finance. In addition, Group Treasury monitors daily and
intraday the customer inflows and outflows in the main currencies used by the Group.
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 BOC PCL to survive a two-week stress period, and
adequate capacity to raise funding under a three month period, under all scenarios.
231
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
48.
Risk management - Liquidity risk and funding (continued)
The liquidity buffer is made up of: 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 unencumbered/available liquid bonds. The majority of these bonds
are High Quality Liquid Assets (HQLA) as per the LCR definitions and/or ECB Eligible 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 prepared weekly reports of Euro and foreign currency liquidity mismatch, which also disclosed
the level of the liquidity ratios which were submitted to the CBC. Given these ratios were abolished on the 1
January 2018, CBC abolished these reports on the 15 June 2018 and replaced them with a new one
indicating the level of Liquid Assets including Credit Institutions Money Market Placements as per LCR
definitions.
Monthly
Market Risk prepares reports monitoring compliance with internal and regulatory liquidity ratios
requirements, 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 the percentage of instant access deposits 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 BOC PCL, data on monthly customer flows, as well as other important
developments related to liquidity.
Quarterly
The results of the stress testing scenarios prepared daily are reported to ALCO and Board Risk Committee
quarterly. Market Risk reports the Net Stable Funding Ratio (NSFR) to the CBC/ECB quarterly as well as
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 (LCP) for handling liquidity difficulties. The LCP details the steps to be taken in the event
that liquidity problems arise, which escalate to a special meeting of the extended ALCO. The LCP sets out
the members of this Committee and a series of the possible actions that can be taken. This LCP, as well as
the Group’s Liquidity Policy, is reviewed by ALCO at least annually, during the ILAAP review. The ALCO
submits the updated Liquidity Policy with its recommendations to the Board through the Board Risk
Committee for approval. The approved Liquidity Policy is notified to the SSM.
Liquidity ratios
The Group LCR presented in the table below, is calculated based on the Delegated Regulation (EU) 2015/61.
It is designed to establish a minimum level of high-quality liquid assets sufficient to meet an acute stress
lasting for 30 calendar days. As from 1 January 2018, the minimum requirement is 100%.
232
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
48.
Risk management - Liquidity risk and funding (continued)
The Group’s LCR ratio (unaudited) was as follows:
End of reporting year
Average monthly ratio
Highest monthly ratio
Lowest monthly ratio
2018
%
231
213
231
197
2017
%
190
120
190
58
In December 2017, the CBC introduced a macroprudential measure in the form of a liquidity add-on that
was imposed on top of the LCR of BOC PCL and which became effective on 1 January 2018. The objective of
the measure has been to ensure that there will be a gradual release of the excess liquidity in the Cyprus
banking system arising from the lower liquidity requirements under the LCR compared to the ones under
the local regulatory liquidity requirements previously in place. The add-on applied stricter outflow and inflow
rates on some of the parameters used in the calculation of the LCR, as well as additional liquidity
requirements in the form of outflow rates on items that were not subject to any outflow rates under the
LCR. The measure was implemented in two stages. The first stage required stricter outflow and inflow rates
which were applicable from 1 January 2018 until 30 June 2018. The second stage required more relaxed
outflow and inflow rates compared to the initial ones, and were applicable from 1 July 2018 until 31
December 2018. Specifically, there was a reduction of 50% of the LCR add-on rates as from 1 July 2018.
The additional liquidity requirement was implemented up to 31 December 2018. As at 31 December 2018,
BOC PCL was in compliance with the LCR add-on requirement.
Main sources of funding
During 2018, the Group’s main sources of funding were its deposit base and central bank funding, through
the Eurosystem monetary policy operations.
As at 31 December 2018, ECB funding was at €830 million in the form of 4-Year TLTRO II. As at 31
December 2017, ECB funding was at €930 million of which €100 million was from the weekly MRO and €830
million was from the 4-year TLTRO II.
Funding to subsidiaries
The funding provided by BOC PCL to its subsidiaries for liquidity purposes is repayable as per the terms of
the respective agreements.
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 BOC PCL, 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.
Collateral requirements
The carrying values of the Group's encumbered assets as at 31 December 2018 and 2017 are summarised
below:
Cash and other liquid assets
Investments
Loans and advances
233
2018
€000
118,627
737,587
2017
€000
120,525
317,167
2,528,241
3,137,586
3,384,455
3,575,278
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
48.
Risk management - Liquidity risk and funding (continued)
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,
supplementary assets for the covered bond and with the ECB.
Loans and advances indicated as encumbered as at 31 December 2018 and 31 December 2017 are mainly
used as collateral for funding from ECB and the covered bond.
Loans and advances to customers include mortgage loans of a nominal amount €1,009 million as at 31
December 2018 (2017: €1,001 million) in Cyprus, pledged as collateral for the covered bond issued by BOC
PCL in 2011 under its Covered Bond Programme. Furthermore as at 31 December 2018 housing loans of a
nominal amount €1,543 million (2017: €1,273 million) in Cyprus are pledged as collateral for the funding
from the ECB (Note 31). As at 31 December 2018, no loans were pledged as collateral for deposits of the
Republic of Cyprus (2017: €715 million) (Note 31).
BOC PCL maintains a Covered Bond Programme set up under the Cyprus Covered Bonds legislation and the
Covered Bonds Directive of the CBC. Under the Covered Bond Programme, BOC PCL has in issue covered
bonds of €650 million secured by residential mortgages originated in Cyprus. On 6 June 2018, the terms of
the covered bonds have been amended to extend the maturity date to 12 December 2021 and set the
interest rate to 3 months Euribor plus 2.50% on a quarterly basis. The covered bonds are traded on the
Luxemburg Bourse. The covered bonds have a conditional Pass-Through structure. All the bonds are held
by BOC PCL. The credit rating of the covered bonds 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.
The Republic of Cyprus was upgraded to investment grade (BBB-) by S&P Global Ratings in September 2018
and by Fitch Ratings in October 2018. The Cyprus Government bonds became ECB eligible in September
2018.
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.
234
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
48.
Risk management - Liquidity risk and funding (continued)
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.
Subordinated loan stock is classified in the relevant time band according to the remaining contractual
maturity, ignoring the call date.
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.
235
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
48.
Risk management - Liquidity risk and funding (continued)
2018
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
Financial assets classified as
held for sale
Other assets
Financial liabilities
Deposits by banks
Funding from central banks
Repurchase agreements
Customer deposits
Subordinated loan stock
Fair value of net settled
derivative liabilities
Other liabilities
Net financial
(liabilities)/assets
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
4,541,876
27,022
38,972
87
2,534
4,610,491
357,944
102,129
8,347
2,175
367
105,874
-
472,532
-
39,138
9,031
152,473
2,356,405
200,730
742,393
3,181,229
4,441,029 10,921,786
3,764
3,683
823,140
28,055
376
-
14,453
30,637
8
108,969
71,658
9,623
20,606
822,333
75,722
75,854
-
24,754
427,233
1,362,218
169,135
1,154,108
212
144,381
8,216,996
283,740
971,990
4,320,843
5,049,174 18,842,743
121,497
30,083
22,015
439
269,787
-
-
-
-
-
90,174
9,894,848
2,834,384
4,138,620
23,125
-
9,343
181,706
188
4,741
-
2,929
2,065
830,000
172,803
8,870
92,500
443,821
830,000
262,977
16,876,722
-
-
-
319,375
435,000
14,907
11,616
-
-
38,983
188,512
10,230,519
2,869,396
4,255,803
1,119,519
600,778 19,076,015
(2,013,523) (2,585,656) (3,283,813)
3,201,324
4,448,396
(233,272)
236
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
48.
Risk management - Liquidity risk and funding (continued)
2017
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
Financial liabilities
Deposits by banks
Funding from central banks
Repurchase agreements
Customer deposits
Subordinated loan stock
Fair value of net settled
derivative liabilities
Other liabilities
Net financial
(liabilities)/assets
2018
Gross settled derivatives
Financial assets
Contractual amounts
receivable
Contractual amounts payable
Financial liabilities
Contractual amounts
receivable
Contractual amounts payable
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
3,321,403
29,667
34,371
8,493
-
3,393,934
1,053,565
123,539
4,775
4,541
3,573
110,476
20,244
1,192,633
-
2,290
12,287
142,657
4,273,947
269,251
852,799
3,933,785
5,272,672 14,602,454
1,414
20,464
24,216
69
-
13,420
11
10,480
7,821
16,369
609,319
53,864
164
337,692
6,152
18,027
977,955
105,473
8,818,548
321,723
909,055
4,734,596
5,649,211 20,433,133
140,361
26,145
460
141,554
196,211
100,000
-
-
-
-
-
9,595,209
3,173,297
4,530,788
23,125
14,039
87,689
-
-
992
16,666
252
29,929
830,000
267,524
641,855
126,303
23,789
4,820
-
10,908
504,731
930,000
278,432
5,320 17,946,469
362,125
511,553
11,898
2,410
50,970
141,514
10,016,273
3,331,316
4,587,114
1,894,751
534,215 20,363,669
(1,197,725) (3,009,593) (3,678,059)
2,839,845
5,114,996
69,464
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
241,235
32,188
(237,967)
(31,933)
3,268
255
997,856
37,174
(1,006,555)
(37,284)
(8,699)
(110)
448
(446)
2
446
(445)
1
-
-
-
-
-
-
-
-
-
-
-
-
273,871
(270,346)
3,525
1,035,476
(1,044,284)
(8,808)
237
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
48.
Risk management - Liquidity risk and funding (continued)
2018
Contingent liabilities and
commitments
Contingent liabilities
Acceptances and
endorsements
Guarantees
Commitments
Documentary credits
Undrawn formal standby
facilities, credit lines and
other commitments to lend
2017
Gross settled derivatives
Financial assets
Contractual amounts
receivable
Contractual amounts payable
Financial liabilities
Contractual amounts
receivable
Contractual amounts payable
2017
Contingent liabilities and
commitments
Contingent liabilities
Acceptances and
endorsements
Guarantees
Commitments
Documentary credits
Undrawn formal standby
facilities, credit lines and
other commitments to lend
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
1,985
3,008
568
-
-
5,561
115,174
116,697
258,603
206,044
52,187
748,705
5,085
10,649
5,993
885
1,685
24,297
2,063,972
-
-
-
-
2,063,972
2,186,216
130,354
265,164
206,929
53,872
2,842,535
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
403,689
(402,221)
1,468
6,552
(6,465)
87
919,721
181,629
(933,009)
(182,582)
(13,288)
(953)
1,966
(1,956)
10
1,106
(1,107)
(1)
-
-
-
-
-
-
-
-
-
-
-
-
412,207
(410,642)
1,565
1,102,456
(1,116,698)
(14,242)
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
2,849
4,155
1,363
-
-
8,367
132,897
134,166
242,944
167,153
91,005
768,165
3,382
5,447
17,931
505
2,365
29,630
2,215,856
17,322
-
-
-
2,233,178
2,354,984
161,090
262,238
167,658
93,370
3,039,340
49.
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.
238
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
49.
Risk management - Insurance risk (continued)
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 of 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:
Changes in embedded value
Change in interest rates +0.25%
Change in expenses +10%
Change in lapsation rates +10%
Change in mortality rates +10%
2018
€000
2017
€000
76
(2,523)
(902)
(7,727)
271
(2,014)
(1,069)
(6,272)
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.
239
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
49.
Risk management - Insurance risk (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
General insurance business is concentrated in Cyprus and the main claims during 2018 and 2017 related to
fire and natural forces and other damage to property, motor vehicle liability and general liability.
Risks under these policies are usually covered for a period of 12 months, with the exception of the goods in
transit class that covers shorter periods and the contractors all risks class that covers longer periods.
The liabilities for outstanding claims arising from insurance contracts issued by the Group are calculated
based on experts’ estimates and facts known at the balance sheet 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 claims handling costs, inflation and claim numbers for each accident
year. Also external factors that may affect the estimate of claims, such as recent court rulings and the
introduction of new legislation are taken into consideration.
The 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 court cases, is very
difficult to be quantified. Furthermore, the delays that arise between the occurrence of a claim and its
subsequent notification and eventual settlement increase the uncertainty over the cost of claims at the
reporting date.
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.
50.
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 shareholders’ value.
The Group follows the EU Regulations, primarily the CRR and CRD IV and any other decisions or circulars
issued by the regulators, ECB and CBC with respect to the capital adequacy calculations.
The Group and BOC PCL have complied with the minimum capital requirements (Pillar I and Pillar II).
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.
240
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
50.
Capital management (continued)
The Pillar 3 Disclosures Report (unaudited) of the Group required with respect to the requirements of the
Capital Requirements Regulation
the Group’s website
www.bankofcyprus.com (Investor Relations).
(EU) No 575/2013
is published on
51.
Related party transactions
Related parties of the Group include associates and joint ventures, key management personnel, Board of
Directors and their connected persons.
(a)
Transactions with subsidiary
The Company is the holding company of the Group. The Company enters into transactions with its
subsidiary in the normal course of business. Balances and transactions between the Company and its
subsidiaries are disclosed in Note 16 of the Company’s financial statements. Transactions with the
subsidiaries have been eliminated on consolidation.
(b)
Associates
The Group provides to and receives from its associates certain banking and financial services. These are not
material to the Group and all the transactions are made on normal business terms as for comparable
transactions with customers of a similar standing. Additional information is disclosed in Note 54.
(c)
Compensation of the Board of Directors and key management personnel
The following disclosures are made in accordance with the provisions of IAS 24 Related Party Disclosures
and sections 305 and 306 of the Companies Act 2014, in respect of the compensation of the Board of
Directors and key management personnel.
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
Employer's contributions
Retirement benefit plan costs
Total other key management personnel emoluments
Total
2018
€000
2017
€000
2,453
98
216
2,767
970
3,737
3,070
192
127
3,389
7,126
2,300
91
202
2,593
882
3,475
3,150
202
189
3,541
7,016
Other key management personnel emoluments include an amount of €572 thousand which relates to
emoluments of key management personnel of Bank of Cyprus UK Limited, which was disposed in November
2018.
241
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
51.
Related party transactions (continued)
Fees and benefits are included for the period that they serve as members of the Board of Directors.
The retirement benefit plan costs relate to contributions paid for defined contribution 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)
2018
€000
2017
€000
2,256
197
2,453
2,104
196
2,300
The retirement benefit plan costs for 2018 amounting to €216 thousand (2017: €202 thousand) relate to:
Mr John Patrick Hourican €198 thousand (2017: €184 thousand) and Dr Christodoulos Patsalides €18
thousand (2017: €18 thousand).
Non-executive Directors
Josef Ackermann
Wilbur L. Ross Jr.
Arne Berggren
Maksim Goldman
Michalis Spanos
Ioannis Zographakis
Marios Kalochoritis
Michael Heger
Lyn Grobler
Anat Bar-Gera
Pola Hadjisotiriou
Maria Philippou
2018
€000
2017
€000
150
-
115
120
100
135
-
110
90
85
36
29
970
150
20
115
120
100
135
45
110
72
15
-
-
882
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.
242
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
51.
Related party transactions (continued)
(d)
Transactions with Directors and key management personnel
The table below shows the deposits and other credit balances held by the directors and their connected
persons, who were in office during the year:
Deposits at 31 December
- members of the Board of Directors and other key
management personnel
- connected persons
Interest expense on deposits for the year
2018
€000
2017
€000
1,575
3,122
4,697
41
2,737
3,088
5,825
64
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 expense is disclosed for the period during which they were members of the Board of Directors or
served as key management personnel.
Loans to Directors
The following information is presented in accordance with the Companies Act 2014. For the purposes of the
Companies Acts disclosures, ‘Directors’ means the current Board of Directors of the Company and any past
directors who were members of the Board of Directors of the Company during the relevant period.
All transactions with members of the Board of Directors and their connected persons are made on normal
business terms as for comparable transactions, including interest rates, with customers of a similar credit
standing. A number of loans and advances have been extended to other key management personnel on the
same terms as those applicable to the rest of the Group’s employees and their connected persons on the
same terms as those of customers.
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.
Directors: There were 12 Directors in office during the year (2017: 12 Directors), 3 of whom availed of
credit facilities (2017: 4 Directors). The balances outstanding are disclosed below.
Key management personnel: There were 13 key management personnel in office during the year (2017: 13
key management personnel), 11 of whom availed of credit facilities (2017: 11 key management personnel).
All of the key management personnel who availed of credit facilities had balances outstanding at 31
December 2018 (2017:10 key management personnel).
Where no amount is shown in the tables below, this indicates a credit balance, a balance of nil, or a balance
of less than €500.
The value of arrangements at the beginning and end of the current and preceding financial years as stated
below in accordance with section 307 of the Companies Act 2014, expressed as a percentage of the net
assets of the Group at the beginning and end of the current and preceding financial years is less than 1%.
Details of transactions with key management personnel, and their connected persons where indicated, for
the years ended 31 December 2018 and 2017 are as follows:
243
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
51.
Related party transactions (continued)
Current Directors
Christodoulos
Patsalides
2018
Loans
Overdrafts/
credit cards
2017
Loans
Overdrafts/
credit cards
Michael
Spanos
2018
Overdrafts/
credit cards
2017
Overdrafts/
credit cards
Ioannis
Zographakis
2018
Overdrafts/
credit cards
2017
Overdrafts/
credit cards
John Patrick
Hourican
2018
Overdrafts/
credit cards
2017
Overdrafts/
credit cards
Balance as at 1
January
Amounts
advanced
during the year
Amounts
repaid during
the year
Balance as at
31 December
Aggregate
maximum
amount
outstanding
during the
year
Unused credit
facilities
€000
€000
€000
€000
€000
€000
238
23
261
263
46
309
-
n/a
-
n/a
33
n/a
33
n/a
2
n/a
n/a
-
-
-
-
-
-
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
244
212
44
256
238
23
261
2
4
4
-
-
-
-
236
51
287
261
56
317
3
4
4
4
5
-
28
-
14
14
-
34
34
8
9
6
6
10
-
-
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
51.
Related party transactions (continued)
Connected persons of the Board of Directors
The balances included in the table above include principal and interest. Also, amounts advanced and repaid
are not shown for overdraft and credit card facilities as these are revolving in nature. The aggregate
maximum amount outstanding includes credit card exposures at the maximum statement balance.
No other Directors had any loan facilities or overdraft/credit card balances with the Group during the year
ended 31 December 2018 (2017: nil).
No impairment charges or provisions have been recognised during the year ended 31 December 2018 and
2017 in respect of the above loans and facilities. All interest that has fallen due on these loans or facilities
has been paid.
No Directors resigned during 2018 or 2017.
The aggregate of loans to connected person of Directors in office at 31 December 2018, as defined in
section 220 of the Companies Act 2014, are as follows (aggregate of 1 person; 2017: 1 person):
Balance as at 1
January
Amounts
advanced
during the year
Amounts
repaid during
the year
Balance as at
31 December
€000
€000
€000
€000
Aggregate
maximum
amount
outstanding
during the
year
€000
1
5
n/a
n/a
n/a
n/a
6
1
8
6
2018
Persons connected to
Michael Spanos
Overdrafts/credit cards
2017
Overdrafts/credit cards
The balances included in the table above include principal and interest. Also, amounts advanced and repaid
are not shown for overdraft and credit card facilities as these are revolving in nature. The aggregate
maximum amount outstanding includes credit card exposures at the maximum statement balance.
No impairment charges or provisions have been recognised during the year ended 31 December 2018 and
2017 in respect of the above loans and facilities. All interest that has fallen due on these loans or facilities
has been paid.
Key management personnel in office during the year (and their connected persons)
Balance as at 1
January
Amounts
advanced
during the year
Amounts
repaid during
the year
Balance as at
31 December
€000
€000
€000
€000
Aggregate
maximum
amount
outstanding
during the
year
€000
2,549
335
2,884
-
n/a
403
n/a
2,230
361
2,591
2,546
508
3,054
2018
Loans
Overdrafts/credit cards
245
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
51.
Related party transactions (continued)
Balance as at 1
January
Amounts
advanced
during the year
Amounts
repaid during
the year
Balance as at
31 December
€000
€000
€000
€000
Aggregate
maximum
amount
outstanding
during the
year
€000
2,565
389
2,954
147
n/a
241
n/a
2,549
335
2,884
2,692
491
3,183
2017
Loans
Overdrafts/credit cards
The balances included in the table above include principal and interest. Also, amounts advanced and repaid
are not shown for overdraft and credit card facilities as these are revolving in nature. The aggregate
maximum amount outstanding includes credit card exposures at the maximum statement balance.
No impairment charges or provisions have been recognised during the year ended 31 December 2018 and
2017 in respect of the above loans and facilities. All interest that has fallen due on these loans or facilities
has been paid.
Aggregate amounts outstanding at year end and additional transactions
2018
2017
Number of directors
2018
€000
2017
€000
Loans and advances as at 31 December
- Board of Directors
- key management personnel
Connected persons
Interest income for the year
Commission income for the year
Insurance premium income for the year
Subscriptions and insurance expenses
for the year
Accruals and other liabilities as at 31
December with entity providing key
management personnel services
Staff costs consultancy and restructuring
expenses with entity providing key
management personnel services
12
12
10
13
260
2,216
381
2,857
81
9
133
633
263
2,473
414
3,150
85
10
112
422
5,108
6,217
14,629
17,627
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 €37 thousand (2017: €76 thousand).
246
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
51.
Related party transactions (continued)
There were also contingent liabilities and commitments to other key management personnel and their
connected persons amounting to €402 thousand (2017: €431 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
2018 amounted to €532 thousand (2017: €663 thousand).
At 31 December 2018 the Group has a deposit of €4,086 thousand (2017: €5,419 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.
During the year ended 31 December 2018 premiums of €45 thousand (2017: €32 thousand) and claims of
€19 thousand (2017: €17 thousand) were paid between the members of the Board of Directors of the
Company and their connected persons and the insurance subsidiaries of the Group.
Additionally, during the year ended 31 December 2017, BOC PCL has signed an agreement to rent property
owned by connected persons to the director Mr Michalis Spanos (resigned on 21 January 2019) covering the
period from 1 June 2017 to 31 May 2027 but the contract is expected to be terminated on 1 September
2019. The monthly rental expense amounts to €4 thousand commencing from June 2018. The rental
expense for the Group during 2018 amounted to €30 thousand.
There were no other transactions during the years ended 31 December 2018 and 2017 with connected
persons of the current members of the Board of Directors or with any members who resigned during the
two years.
247
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
52.
Group companies
The main subsidiary companies and branches included in the consolidated financial statements of the
Group, their registered office, their activities and the percentage held by the Company (directly or
indirectly) as at 31 December 2018 are:
Company
Registered office
Activities
Percentage
holding
(%)
Bank of Cyprus Holdings Public Limited
Company
Bank of Cyprus Public Company Ltd
10 Earlsfort Terrace, Dublin 2, D02
T380, Ireland
51 Stassinos Street, Ayia Paraskevi,
Strovolos, CY-2002, Nicosia Cyprus
The Cyprus Investment and Securities
Corporation Ltd (CISCO)
154 Limassol Avenue, CY-2025,
Strovolos, Nicosia, Cyprus
General Insurance of Cyprus Ltd
EuroLife Ltd
Kermia Ltd
Kermia Properties & Investments Ltd
Global Balanced Fund of Funds Salamis
Variable Capital Investment Company
PLC (formerly Cytrustees Investment
Public Company Ltd)
LCP Holdings and Investments Public
Ltd
2-4 Themistokli Dervis Street, CY-1066,
Nicosia, Cyprus
4 Evrou Street, CY-2003, Strovolos,
Nicosia, Cyprus
51 Stassinos Street, Ayia Paraskevi,
Strovolos, CY-2002, Nicosia Cyprus
51 Stassinos Street, Ayia Paraskevi,
Strovolos, CY-2002, Nicosia Cyprus
154 Limassol Avenue, CY-2025
Strovolos, Nicosia, Cyprus
UCITS Fund
26 Vyronos Street, CY-1096 Nicosia,
Cyprus
JCC Payment Systems Ltd
1 Stadiou Street, Nisou, CY-2571 Cyprus
CLR Investment Fund Public Ltd
Auction Yard Ltd
BOC Secretarial Company Ltd
S.Z. Eliades Leisure Ltd
26 Vyronos Street, CY-1096 Nicosia,
Cyprus
51 Stassinos Street, Ayia Paraskevi,
Strovolos,CY-2002, Nicosia Cyprus
51 Stassinos Street, Ayia Paraskevi,
Strovolos,CY-2002, Nicosia Cyprus
51 Stassinos Street, Ayia Paraskevi,
Strovolos,CY-2002, Nicosia Cyprus
BOC Asset Management Ltd
154 Limassol Avenue, CY-2025,
Strovolos, Nicosia, Cyprus
Cyreit Variable Capital Investment
Company PLC (Cyreit)
51 Stassinos Street, Ayia Paraskevi,
Strovolos,CY-2002, Nicosia Cyprus
Bank of Cyprus Public Company Ltd
(branch of BOC PCL)
192 Alexandras Avenue, 11521 Athens,
Greece
BOC Asset Management Romania S.A.
Calea Dorobonti 187B, Sector 1,
Bucharest, Romania
MC Investment Assets Management LLC 19-1 Zvezdnyi building, Moscow, Russia
Fortuna Astrum Ltd
Internacionalniti Brigada 69, 11104,
Grad Beograd, Serbia
248
Holding company
Commercial bank
Investment
banking, asset
management and
brokerage
General insurance
Life insurance
Property trading
and development
Property trading
and development
Holding company
Card processing
transaction services
Investment
company
Auction company
Secretarial services
Land development
and operation of a
golf resort
Management
administration and
safekeeping of
UCITS Units
Real estate
investment fund
Administration of
guarantees and
holding of real
estate properties
Collection of the
existing portfolio of
receivables,
including third party
collections
Problem asset
management
company
Problem asset
management
company
n/a
100
100
100
100
100
100
60
67
75
20
100
100
70
100
88
n/a
100
100
100
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
52.
Group companies (continued)
In addition to the above companies, at 31 December 2018 BOC PCL had 100% shareholding in the
companies listed below whose activity is the ownership and management of immovable property:
Cyprus: Belvesi Properties Ltd, Hamura Properties Ltd, Legamon Properties Ltd, Asendo Properties Ltd,
Domilas Properties Ltd, Gylito Properties Ltd, Lamezoco Properties Ltd, Noleta Properties Ltd, Tolmeco
Properties Ltd, Arlona Properties Ltd, Dilero Properties Ltd, Ensolo Properties Ltd, Folimo Properties Ltd,
Pelika Properties Ltd, Timeland Properties Ltd, Cobhan Properties Ltd, Bramwell Properties Ltd, Birkdale
Properties Ltd, Innerwick Properties Ltd, Ramendi Properties Ltd, Ligisimo Properties Ltd, Nalmosa
Properties Ltd, Emovera Properties Ltd, Estaga Properties Ltd, Skellom Properties Ltd, Blodar Properties Ltd,
Spaceglowing 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, Thryan Properties Ltd, Otoba Properties Ltd,
Edoric Properties Ltd, Canosa Properties Ltd, Kernland Properties Ltd, Jobelis Properties Ltd, Melsolia
Properties Ltd, Koralmon 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, Wingstreet Properties Ltd, Nolory Properties Ltd, Lynoco Properties Ltd, Fitrus Properties Ltd,
Lisbo Properties Ltd, Mantinec Properties Ltd, Syniga Properties Ltd, Colar Properties Ltd, Irisa Properties
Ltd, Provezaco Properties Ltd, Hillbay Properties Ltd, Ofraco Properties Ltd, Forenaco Properties Ltd, Hovita
Properties Ltd, Badrul Properties Ltd, Citlali Properties Ltd, Astromeria Properties Ltd, Orzo Properties Ltd,
Regetona Properties Ltd, Arcandello Properties Ltd, Camela Properties Ltd, Subworld Properties Ltd,
Jongeling Properties Ltd, Introserve Properties Ltd, Cereas Properties Ltd, Fareland Properties Ltd,
Sindelaco Properties Ltd, Barosca Properties Ltd, Fogland Properties Ltd, Tebasco Properties Ltd, Dolapo
Properties Ltd, Homirova Properties Ltd, Valecross Properties Ltd, Altco Properties Ltd, Marisaco Properties
Ltd, Olivero Properties Ltd, Jaselo Properties Ltd, Elosa Properties Ltd, Garveno Properties Ltd, Flona
Properties Ltd, Toreva Properties Ltd, Resoma Properties Ltd, Mostero Properties Ltd, Helal Properties Ltd,
Yossi Properties Ltd, Gozala Properties Ltd, Pendalo Properties Ltd, Frontyard Properties Ltd, Bonsova
Properties Ltd, Nasebia Properties Ltd, Garmozy Properties Ltd, Palmco Properties Ltd, Thermano Properties
Ltd, Indene Properties Ltd, Ingane Properties Ltd, Venicous Properties Ltd, Lorman Properties Ltd, Eracor
Properties Ltd, Rulemon Properties Ltd, Thelemic Properties Ltd, Maledico Properties Ltd, Dentorio
Properties Ltd, Valioco Properties Ltd, Bascone Properties Ltd, Balasec Properties Ltd, Bendolio Properties
Ltd, Diafor Properties Ltd, Kartama Properties Ltd, Paradexia Properties Ltd, Paramina Properties Ltd,
Nouralia Properties Ltd, Resocot Properties Ltd, Soblano Properties Ltd, Talamon Properties Ltd, Weinar
Properties Ltd, Zemialand Properties Ltd, Asianco Properties Ltd, Barway Properties Ltd, Cimonia Properties
Ltd, Coeval Properties Ltd, Comenal Properties Ltd, Finevo Properties Ltd, Ganina Properties Ltd, Intelamon
Properties Ltd, Kenelyne Properties Ltd, Mazima Properties Ltd, Nesia Properties Ltd, Nigora Properties Ltd,
Nivoco Properties Ltd, Riveland Properties Ltd, Rosalica Properties Ltd, Secretsky Properties Ltd, Senadaco
Properties Ltd, Tasabo Properties Ltd, Venetolio Properties Ltd, Zandexo Properties Ltd, Bokeno Properties
Ltd, Flymoon Properties Ltd, Meriaco Properties Ltd, Valecast Properties Ltd, Teresan Properties Ltd, Odolo
Properties Ltd, Prodino Properties Ltd, Racotino Properties Ltd, Rondemio Properties Ltd, Rylico Properties
Ltd, Vatino Properties Ltd, Virevo Properties Ltd, Sailoma Properties Ltd and Volparo Properties Ltd. The
registered office of the above companies is at 51 Stasinos Street, Ayia Paraskevi, Strovolos, CY-2002,
Nicosia, Cyprus, with the exception of EuroLife Properties Ltd whose registered office is at 4 Evrou Street,
Strovolos, CY-2003 Nicosia, Cyprus and Ledra Estate Ltd which is at 2-4 Themistoklis Dervis Street, CY-
1066 Nicosia, Cyprus.
Romania: Otherland Properties Dorobanti SRL, Battersee Real Estate SRL, Trecoda Real Estate SRL, Green
Hills Properties SRL, Bocaland Properties SRL, Romaland Properties SRL, Imoreth Properties SRL, Inroda
Properties SRL, Tantora Properties SRL, Zunimar Properties SRL, Allioma Properties SRL and Nikaba
Properties SRL. The registered office of the companies is at Bucharest, 42-44 George Cosbuc Street, 4th
Floor, 5th District, Romania.
Further, at 31 December 2018 BOC PCL had 100% shareholding in Obafemi Holdings Ltd, Stamoland
Properties Ltd, Unoplan Properties Ltd and Gosman Properties Ltd.
249
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
52.
Group companies (continued)
Cyreit Variable Capital Investment Company PLC was incorporated in January 2018 as an alternative
investment fund. The Fund is licensed and regulated by the Cyprus Securities and Exchange Commission.
The Group has transferred to the Cyreit, following its set-up its holding 100% in Smooland Properties Ltd,
Threefield Properties Ltd, Vameron Properties Ltd, Bascot Properties Ltd, Vanemar Properties Ltd, Consoly
Properties Ltd, Alomnia Properties Ltd, Artozaco Properties Ltd, Elizano Properties Ltd, Letimo Properties
Ltd, Allodica Properties Ltd, Wiceco Properties Ltd, Primaco Properties Ltd, Arleta Properties Ltd, Kuvena
Properties Ltd, Nuca Properties Ltd, Orleania Properties Ltd, Ravenica Properties Ltd, Rouena Properties Ltd,
Lancast Properties Ltd and Azemo Properties Ltd. As at 31 December the BOC PCL held 88% shareholding in
Cyreit therefore the indirect holding in Cyreit’s subsidiaries at 31 December 2018 is 88%.
Additionally, BOC PCL increased its controlling interest from 51% to 64% in Nicosia Mall Management
(NMM) Limited, Nicosia Mall Finance (NMF) Limited, Nicosia Mall Holdings (NMH) Limited and Nicosia Mall
Property (NMP) Ltd.
The main activities of the above companies are the holding of shares and other investments and the
provision of services except for Nicosia Mall Property (NMP) Ltd and Cyreit’s subsidiaries whose activity is
the ownership and management of immovable property. The registered office of the companies is at 51
Stasinos Street, Ayia Paraskevi, Strovolos, CY-2002, Nicosia, Cyprus.
At 31 December 2018 BOC PCL had 100% shareholding in the companies listed below which are reserved to
accept property:
Cyprus: Tavoni Properties Ltd, Amary Properties Ltd, Holstone Properties Ltd, Alepar Properties Ltd,
Calandomo Properties Ltd, Cramonco Properties Ltd, Monata Properties Ltd, Aktilo Properties Ltd, Alezia
Properties Ltd, Aparno Properties Ltd, Dorfilo Properties Ltd, Enelo Properties Ltd, Mikosa Properties Ltd,
Stormino Properties Ltd, Fodilo Properties Ltd, Jalimo Properties Ltd, Livena Properties Ltd, Molemo
Properties Ltd, Nivamo Properties Ltd, Petrassimo Properties Ltd, Sendilo Properties Ltd, Stevolo Properties
Ltd, Baleland Properties Ltd, Edilia Properties Ltd, Icazo Properties Ltd, Limoro Properties Ltd, Lomenia
Properties Ltd, Rofeno Properties Ltd, Samilo Properties Ltd, Vemoto Properties Ltd, Vertilia Properties Ltd
and Zenoplus Properties Ltd. The registered office of the companies is at 51 Stasinos Street, Ayia Paraskevi,
Strovolos, CY-2002, Nicosia, Cyprus.
Romania: Selilar Properties SRL. Its registered office is at Bucharest, 42-44 George Cosbuc Street, 4th
Floor, 5th District, Romania.
In addition, BOC PCL holds 100% of the following intermediate holding companies:
Cyprus: Otherland Properties Ltd, Battersee Properties Ltd, Trecoda Properties Ltd, Bonayia Properties Ltd,
Bocaland Properties Ltd, Commonland Properties Ltd, Romaland Properties Ltd, Fledgego Properties Ltd,
Janoland Properties Ltd, Loneland Properties Ltd, Frozenport Properties Ltd, Imoreth Properties Ltd, Inroda
Properties Ltd, Melgred Properties Ltd, Tantora Properties Ltd, Zunimar Properties Ltd, Selilar Properties
Ltd, Nikaba Properties Ltd, Allioma Properties Ltd, Landanafield Properties Ltd and Hydrobius Ltd. The
registered office of the companies is at 51 Stasinos Street, Ayia Paraskevi, Strovolos, CY-2002, Nicosia,
Cyprus.
BOC PCL also holds 100% of the following companies which are inactive:
Cyprus: Laiki Bank (Nominees) 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, Renalandia Properties Ltd, Crolandia Properties Ltd, Iperi Properties Ltd, Finerose
Properties Ltd, Fantasio Properties Ltd, Demoro Properties Ltd, Elosis Properties Ltd, Polkima Properties Ltd,
Pariza Properties Ltd, Prosilia Properties Ltd, CYCMC I Ltd, CYCMC II Ltd, CYCMC III Ltd and CYCMC IV Ltd.
The registered office of the companies is at 51 Stasinos Street, Ayia Paraskevi, Strovolos, CY-2002, Nicosia,
Cyprus.
250
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
52.
Group companies (continued)
Greece: Kyprou Zois (branch of EuroLife Ltd), Kyprou Asfalistiki (branch of General Insurance of Cyprus
Ltd), Kyprou Commercial SA and Kyprou Properties SA, whose registered office is at 192 Alexandras
Avenue, 11521 Athens, Greece.
All Group companies are accounted for as subsidiaries using the full consolidation method. All companies
listed above, except Global Balanced Fund of Funds Salamis Variable Capital Investment Company PLC and
Cyreit which are UCITS Fund and Investment Fund respectively, have share capital consisting of ordinary
shares.
Control over CLR Investment Fund Public Ltd (CLR) and its subsidiaries without substantial
shareholding
The Group considers that it exercises control over CLR and its subsidiaries (Europrofit Capital Investors
Public Limited, Axxel Ventures Limited and CLR Private Equity Limited) 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 2018, the following subsidiaries were in the process of dissolution or in the process of
being struck off: Bank of Cyprus (Channel Islands) Ltd, Bank of Cyprus Romania (Romanian branch), BC
Romanoland Properties Ltd, Blindingqueen Properties Ltd, BOC Ventures Ltd, Buchuland Properties Ltd,
Calomland Properties Ltd, Corner LLC, Diners Club (Cyprus) Ltd, Fairford Properties Ltd, Frozenport
Properties SRL, Lameland Properties Ltd, Leasing Finance LLC, Loneland Properties SRL, Melgred Properties
SRL, Mirodi Properties Ltd, Nallora Properties Ltd, Omiks Finance LLC, Pittsburg Properties Ltd, Salecom Ltd,
Sylvesta Properties Ltd, Unknownplan Properties Ltd and Kyprou Finance (NL) B.V.
In accordance with the Group’s strategy to exit from overseas non-core operations, the operations of the
branch in Romania were terminated, subject to the final completion of deregistration formalities with
respective authorities. Most of the remaining assets and liabilities of the branch in Romania with third
parties have been transferred to other entities of the Group. The gain on dissolution of the branch in
Romania amounts to €3,023 thousand.
Unknownplan Properties SRL, Buchuland Properties SRL, Janoland Properties SRL, Mirodi Properties SRL,
Nallora Properties SRL, Pittsburg Properties SRL, Samarinda Navigation Co Ltd and Blindingqueen Properties
SRL were dissolved during the year ended 31 December 2018. Nelipo Properties Ltd, Zarveto Properties Ltd,
Bigwaive Properties Ltd, Jungax Properties Ltd, Bracando Properties Ltd, Kimrar Properties Ltd, Cadomia
Properties Ltd, Desogus Properties Ltd, Ecunaland Properties Ltd, Lasmane Properties Ltd, Forsban
Properties Ltd, Zedoma Properties Ltd, Carnota Properties Ltd, Fastflow Properties Ltd, Alomco Properties
Ltd, Lozzaria Properties Ltd, Basiga Properties Ltd, Belaland Properties Ltd, Bank of Cyprus UK Ltd, BOC
Financial Services Ltd, Finacap Properties Ltd, Jomento Properties Ltd and Newington Properties Ltd were
disposed of during the year ended 31 December 2018.
Capitalisation of property revaluation reserve
During 2018 Bank of Cyprus UK Ltd proceeded with the capitalisation of its property revaluation reserve of
€7,955 thousand through the issue of shares to BOC PCL and subsequent reduction of share capital as
permitted by the relevant legislation. Similarly, other reserves of €6,059 thousand which is of similar nature
has been reclassified to accumulated losses.
53.
Acquisitions and disposals
53.1
Acquisitions during 2018
There were no acquisitions during the year ended 31 December 2018.
251
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
53.
Acquisitions and disposals (continued)
53.2
Disposals during 2018
53.2.1 Disposal of Bank of Cyprus UK Limited
In November 2018, the Group completed the sale of 100% of its subsidiary bank in the UK, Bank of Cyprus
UK Limited and its subsidiary Bank of Cyprus Financial Services Limited.
The carrying value of assets and liabilities disposed of as at the date of their disposal are presented below:
Assets
Cash and balances with central banks
Loans and advances to banks
Loans and advances to customers
Property and equipment
Intangible assets
Prepayments, accrued income and other assets
Liabilities
Deposits by banks
Customer deposits
Accruals, deferred income and other liabilities
Subordinated loan stock
Net identifiable assets sold
€000
278,250
71,932
1,827,113
17,224
1,883
23,204
2,219,606
30,869
1,990,360
29,317
35,340
2,085,886
133,720
The cash consideration amounts to €120,131 thousand comprising of €115,991 thousand base
consideration plus a purchase price adjustment of €4,140 thousand. The disposal resulted in a gain of
€3,680 thousand comprising a loss of €13,703 thousand against the book value of the assets as at the
disposal date and a gain of €17,383 thousand representing the recycling of the foreign currency translation
reserve from other comprehensive income to consolidated income statement (Note 12).
Half of the base consideration together with the purchase price adjustment was received upon completion of
the transaction and the remaining half is deferred over 24 months, without any performance conditions
attached (Note 29).
The net cash flows of Bank of Cyprus UK Limited are as follows:
Operating
Investing
Financing
Net cash (outflow)/inflow for the year
2018
€000
(119,269)
(744)
-
(120,013)
2017
€000
92,291
(1,862)
34,483
124,912
The cash and cash equivalents as at the date of disposal amounted to €321,225 thousand.
252
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
53.
Acquisitions and disposals (continued)
53.3
Acquisitions during 2017
53.3.1 Acquisition of Nicosia Mall Holdings (NMH) Limited
In the context of the loan restructuring activities, the Group acquired on 28 September 2017 51% interest
in the share capital of Nicosia Mall Holdings (NMH) Limited. Nicosia Mall Holdings (NMH) Limited is the
holding company of a group of subsidiaries involved in the construction and management of the Nicosia
Mall. The consideration for the acquisition of 51% share in Nicosia Mall Holdings (NMH) Limited amounts to
€7,500 thousand which was used to reduce part of the outstanding facilities and therefore the acquisition
did not include any cash consideration. The transaction was considered as an acquisition of an asset and
was not treated as a business combination since the Group obtained control of an input without any
process, therefore no goodwill or gain on bargain was recognised. BOC PCL has control over Nicosia Mall
Holdings (NMH) Limited.
The non-controlling interest is measured at the proportionate share of the identifiable net assets acquired.
The fair value of assets and liabilities of Nicosia Mall Holdings (NMH) Limited at the date of acquisition are
presented below:
Assets
Loans and advances to banks
Stock of property
Liabilities
Deposits by banks
Net identifiable assets acquired
No cash and cash equivalents were acquired.
53.4
Disposals during 2017
There were no material disposals during the year ended 31 December 2017.
54.
Investments in associates and joint venture
Carrying value of the investments in associates and joint venture
€000
4,011
52,758
56,769
56,769
-
2017
€000
115,770
2,343
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
114,637
118,113
Percentage
holdings
(%)
49.9
2018
€000
114,637
-
30.0
33.3
33.3
50.0
15.0
7.5
7.5
45.0
253
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
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
54.
Investments in associates and joint venture (continued)
Share of pre-tax profit/(loss) from associates
CNP Cyprus Insurance Holdings Ltd
Interfund Investments Plc
Investments in associates
2018
€000
2017
€000
9,164
(69)
9,095
8,781
176
8,957
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 BOC PCL.
The main financial highlights of the associate are as follows:
Total assets
Liabilities
Net assets, including value of in-force business
2018
€000
717,515
(487,786)
229,729
2017
€000
707,796
(475,794)
232,002
CNP Cyprus Insurance Holdings Ltd holds deposits with companies within the Group amounting to €21,055
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
2018
€000
2017
€000
5,362
129
92
1
774
139
92
-
Interfund Investments Plc
In May 2018, BOC PCL sold its holding of 23.1% in its associate Interfund Investments Plc, which is a
closed-end investment company in Cyprus, listed on the CSE. The loss of disposal amounts to €191
thousand.
Rosequeens Properties Limited and Rosequeens Properties SRL
The Group effectively owns 33.3% 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 BOC PCL 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 2018 and 2017 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 30.0% was transferred to the Group following the
acquisition of certain operations of Laiki Bank. The investment is considered to be fully impaired and its
value is restricted to zero.
254
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
54.
Investments in associates and joint venture (continued)
M.S. (Skyra) Vassas Ltd
In the context of its loan restructuring activities, the Group acquired 15.0% 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
In the context of its loan restructuring activities, the Group acquired 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
In the context of its loan restructuring activities, the Group acquired 45.0% 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 50.0% 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.
The percentage holdings are in ordinary shares or membership interests.
255
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
55.
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 2018:
Country
Cyprus
Russia
United Kingdom
Romania
Greece
Netherlands
Total
Total operating
income/(expense)
Average number of
employees
Profit/(loss)
before tax
€000
€000
Accounting tax
expense/(income)
on profit/(loss)
€000
Corporation tax
paid/(refunded)
Public subsidies
received
€000
€000
786,914
955
267
19,647
(294)
(51,699)
755,790
4,116
5
196
16
8
-
18,686
(3,110)
428
18,819
(16,186)
(51,997)
4,341
(33,360)
(1,623)
-
-
(2,281)
(1,614)
(2)
(5,520)
5,802
-
670
17
(10,412)
10
(3,913)
-
-
-
-
-
-
-
The activities of Group companies by geographical area are disclosed in Note 52.
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 2018.
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/(refunded) includes actual payments made during 2018 for corporation tax (including insurance premium taxes) and Cyprus special
defence contribution.
256
BANK OF CYPRUS HOLDINGS GROUP
Notes to the Consolidated Financial Statements
Annual Financial Report 2018
56.
Events after the reporting period
56.1
credits (DTC)
Legislative amendments for conversion of deferred tax assets (DTA) to deferred tax
On 1 March 2019 the Cyprus Parliament adopted legislative amendments on Income Tax Law ('the Law')
published on the Official Gazette of the Republic on 15 March 2019 ('the amendments').
The amendments allow for the conversion of specific deferred tax assets (DTA) into deferred tax credits
(DTC). To the extent that the DTC are not utilised they are converted into a receivable amount by the credit
institution that falls within the scope of these amendments. The law amendments cover the income tax
losses transferred from Laiki Bank to BOC PCL in March 2013 within the framework of ‘The Resolution of
Credit and Other Institutions Law’ of 2013.
Under the Law BOC PCL may, potentially and gradually, convert up to an amount of €3.3 billion tax losses
to DTC (which led to the creation of DTA amounting to €417 million), with the conversion being based on
the tax rate applicable at the time of conversion. The tax losses in excess of the €3.3 billion transferred
from Laiki Bank to BOC PCL in March 2013 cannot be utilised by the BOC PCL except in cases where there
are transfers arising due to reorganisations made prior to 1 October 2019 (subject to the prior approval of
the Minister of Finance). BOC PCL paid a consideration for the DTA as part of the consideration paid for the
acquisition of certain assets and liabilities of Laiki Bank in 2013.
The law amendment will result in improved regulatory capital treatment of the DTA, under CRR and will
increase CET1 by c. 170 bps (unaudited) on a transitional basis, as at 31 December 2018. This
improvement includes the impact from the reversal of impairment of the related DTA of €108 million
recognised in previous year, which will be reversed in 2019 Income statement.
56.2
Resignation of the Group's CEO
On 3 March 2019 the Group's CEO Mr John Patrick Hourican informed the Board of his decision to leave the
Group in September 2019.
257
Financial Statements
271
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY
Financial Statements - Contents
for the year ended 31 December 2018
Contents
Statement of Comprehensive Income
Balance Sheet
Statement of Changes in Equity
Statement of Cash Flows
Page
273
274
275
276
Notes to the Financial Statements
277-286
272
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY
Statement of Comprehensive Income
for the year ended 31 December 2018
Other income
Fee and commission expenses
Administrative and other operating expenses
Finance costs
Impairment of investment in subsidiary
Loss before income tax
Income tax
Notes
4
5
6
8
7
2018
€000
15,838
(11,215)
2017
€000
1,653
-
(2,237)
(1,602)
2,386
(22)
51
(24)
(383,131)
(545,358)
(380,767)
(545,331)
-
-
Loss and total comprehensive loss for the year
(380,767)
(545,331)
The notes on pages 277 to 286 form an integral part of these financial statements.
273
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY
Statement of Changes in Equity
for the year ended 31 December 2018
Share
capital
(Note 12)
Share
premium
(Note 12)
Retaine earnings/
(accumulated
losses)
(Note 13)
Total equity
attributable to
the owners of
the Company
Other equity
instruments
(Note 12)
Total equity
€000
€000
€000
€000
€000
€000
-
-
-
-
-
-
-
5
(25)
2,838,978
(545,331)
2,293,627
(380,767)
-
Balance at 1 January 2017
Shares repurchased and cancelled
25
(25)
-
-
Issue of new shares
44,620
2,794,358
(20)
-
-
5
(25)
2,838,978
Total comprehensive loss after tax for the year
-
-
(545,331)
(545,331)
Balance at 31 December 2017/1 January 2018
44,620
2,794,358
(545,351)
2,293,627
Total comprehensive loss after tax for the year
Elimination of share premium reserve
Issue of other equity instruments (Note 12)
-
-
-
-
(380,767)
(380,767)
(1,500,000)
1,500,000
-
-
(2,458)
(2,458)
220,000
217,542
Balance at 31 December 2018
44,620
1,294,358
571,424
1,910,402
220,000
2,130,402
The notes on pages 277 to 286 form an integral part of these financial statements.
275
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY
Statement of Cash Flows
for the year ended 31 December 2018
Cash flows from operating activities
Loss before tax
Adjustments for:
Notes
2018
€000
2017
€000
(380,767)
(545,331)
Impairment of investment in subsidiary
8
383,131
545,358
2,364
27
Changes in working capital:
Other assets
Receivables from related parties
Other payables
Net cash from operating activities
Cash flows from investing activities
Purchases of equity securities
Net cash used in investing activities
Cash flows from financing activities
(101)
(673)
699
2,289
9
(220,000)
(220,000)
Net proceeds from issuance of capital securities
12
Net cash from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents:
At beginning of the year
At end of the year
10
217,542
217,542
(169)
151
(18)
The notes on pages 277 to 286 form an integral part of these financial statements.
-
(61)
185
151
-
-
-
-
151
-
151
276
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY
Notes to the Financial Statements
1.
Corporate information
Bank of Cyprus Holdings Public Limited Company (the ‘Company’) was incorporated in the Republic of Ireland
on 11 July 2016, as a public limited company under company number 545903 in accordance with the provisions
of the Companies Act 2014 of Ireland (Companies Act 2014). Its registered office is 10 Earlsfort Terrace, Dublin
2, D02 T380, Ireland.
The Company owns 100% of the share capital of Bank of Cyprus Public Company Limited (BOC PCL) whose
principal activities involve the provision of banking, financial services, insurance services and management and
disposal of property predominately acquired in exchange of debt. The Board of Directors does not expect that
the Company’s activities will change in the foreseeable future. The Company is tax resident in Cyprus.
The Bank of Cyprus Holdings Group (the ‘Group’) comprises the Company, its subsidiary BOC PCL and the
subsidiaries of BOC PCL.
The shares of the Company are listed and trading on the London Stock Exchange (LSE) and the Cyprus Stock
Exchange (CSE).
On 18 January 2017, the Company became the sole shareholder of BOC PCL, and on 19 January 2017 the
shares of the Company were admitted to listing and trading on the LSE and the CSE.
The financial statements are available at the Company’s registered office (at 10 Earlsfort Terrace, Dublin 2, D02
T380, Ireland) and on the Group’s website www.bankofcyprus.com (Investor Relations).
Financial statements
The financial statements of the Company for the year ended 31 December 2018 were authorised for issue by a
resolution of the Board of Directors on 28 March 2019. The Company also issues consolidated financial
statements which are available at the Company’s registered office and on the Group’s website.
The financial statements have been prepared in both the English and Greek language. In case of a difference
or inconsistency between the two, the English version prevails.
2.
Summary of significant accounting policies
2.1
Basis of preparation
The financial statements have been prepared in accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union (EU) and with those parts of the Companies Act 2014 applicable to
companies reporting under IFRSs.
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 comma is used to separate thousands and a dot is used to separate
decimals.
2.2
Going concern
The going concern assessment of the Company is consistent with the going concern assessment of the Group, a
summary of which is presented in Note 3 of the consolidated financial statements of the Group for the year
ended 31 December 2018.
2.3
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 2018.
In addition the following policies are adopted:
Investment in subsidiary
The investment in subsidiary is 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 2018.
277
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY
Notes to the Financial Statements
3.
Significant accounting estimates, judgements 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 Board of Directors has made the
following judgements and estimations:
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 15.
Investment in subsidiary
The Company periodically evaluates the recoverability of investment in subsidiary whenever indicators of
impairment are present. Indicators of impairment include such items as declines in revenues, earnings or cash
flows or material adverse changes in the economic or political stability of a particular country, which may
indicate that the carrying amount of an asset is not recoverable. If facts and circumstances indicate that
investment in subsidiary may be impaired, the estimated future undiscounted cash flows associated with this
subsidiary would be compared to their carrying amounts to determine if the impairment of the investment is
necessary.
4.
Other income
Management consultancy services (Note 16 (i))
Reimbursement of expenses and fees (Note 16 (i))
2018
€000
2017
€000
1,034
14,804
15,838
940
713
1,653
278
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY
Notes to the Financial Statements
5.
Fee and commission expenses
Fee and commission expenses
2018
€000
2017
€000
11,215
-
In accordance with the purchase agreement of the Capital Securities issued in December 2018 (Note 12)
between the Company and the investors each investor paid in August and September 2018 an amount equal
to the purchase price (principal amount) of the Capital Securities it has agreed to purchase to an escrow agent
in accordance with the terms and conditions of an escrow deed. The escrow deed provided that the aggregate
purchase proceeds would be held in escrow until the issue date of the capital securities. The purchase
proceeds in respect of each investor accrued a commitment fee payable by the Company for the period during
which the money was held in escrow, at a rate that was commercially agreed between the investors and the
Company.
6.
Administrative and other operating expenses
Directors’ fees (Note 16 (iii))
Consultancy and other professional fees (Note 16 (ii))
Stock exchange fees
Audit fees
Other expenses
2018
€000
2017
€000
970
898
284
51
34
882
165
400
155
-
2,237
1,602
The consultancy and other professional fees above do not include any fees charged by the Company’s statutory
auditors.
The Company did not employ any staff during the years 2018 and 2017.
7.
Income tax
Current tax
2018
€000
2017
€000
-
-
The reconciliation between the income tax expense and the loss before tax as estimated using the current
income tax rates is set out below:
Loss before tax
2018
€000
2017
€000
(380,767)
(545,331)
Income tax at the normal tax rates in Cyprus
(47,596)
(68,166)
Income tax effect of:
- expenses not deductible for income tax purposes
- income not subject to income tax
- tax effect of losses on which deferred tax was not
recognised
49,447
(1,851)
-
-
68,258
(89)
(3)
-
Income tax in Cyprus is calculated at the rate of 12.5% on taxable income (2017: 12.5%).
279
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY
Notes to the Financial Statements
8.
Investment in subsidiary
1 January
2018
€000
2017
€000
2,293,620
-
Issue of shares due to reorganisation (Note 12)
-
2,838,978
Impairment of investment in subsidiary
31 December
(383,131)
(545,358)
1,910,489
2,293,620
The investment in subsidiary represents an 100% investment in the share capital of BOC PCL, a company
registered in Cyprus and its activities are presented in Note 1. Its registered office is at 51 Stassinos Street,
Ayia Paraskevi, Strovolos, P.O.Box 24884, 1398 Nicosia, Cyprus.
On 31 December 2018, the Company made an assessment of the carrying value of the investment in subsidiary
and as a result of that assessment an impairment of €383,131 thousand has been recognised. The impairment
losses have been primarily driven by the decrease of the equity of the subsidiary following IFRS 9 impact on
transition and 2018 loss after tax.
9.
Investments
Equity instruments at fair value through other comprehensive
income (Note 16 (v))
2018
€000
2017
€000
220,000
-
On 19 December 2018 the Company issued €220,000 thousand of Fixed Rate Reset Perpetual Additional Tier 1
Capital Secutiries (AT1) (Note 12). On the same date, the Company and BOC PCL entered into an agreement
pursuant to which the Company on-lent to BOC PCL the entire €220,000 thousand proceeds of the issue of the
AT1 (the loan, the ‘AT1 Loan’) on terms substantially identical to the terms and conditions of the AT1 issued by
the Company. The AT1 Loan constitutes an unsecured and subordinated obligation of BOC PCL. The interest is
at 12.50% and is payable semi-annually. BOC PCL may elect to cancel any interest payment for an unlimited
period, and on a non-cumulative basis, whereas it mandatorily cancels interest payment under certain
circumstances. The AT1 Loan is perpetual and has no fixed date for redemption but can be redeemed (in whole
but not in part) at BOC PCL's option on the fifth anniversary of the issue date and each subsequent fifth
anniversary. AT1 Loan has been classified as equity instruments at fair value through other comprehensive
income. No amounts have been recognised in profit and loss and other comprehensive income in respect of
these investments during the year.
The fair value of equity instruments held by the Company is determined using models for which all inputs that
have a significant effect on fair value are market observable. Equity instruments are financial instruments
whose carrying value is a reasonable approximation of fair value and they are as categorised as Level 2
instruments in fair value hieraechy. The maximum exposure to credit risk at the balance sheet date is the
carrying value of the equity instruments.
There were no transfers in and out of Level 2 during 2018.
10.
Bank balances
Cash at bank (Note 16 (iv))
-
151
Cash at bank does not earn any interest (2017: 0.02% per annum).
2018
€000
2017
€000
280
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY
Notes to the Financial Statements
10.
Bank balances (continued)
Cash at bank and bank overdrafts include the following for the purpose of statement of cash flows:
Cash at bank
Bank overdrafts (Note 16 (iv))
11.
Receivables from related parties
2018
€000
2017
€000
-
(18)
(18)
151
-
151
2018
€000
2017
€000
Receivables from related parties (Note 16 (iv))
734
61
The above balances represent the maximum exposure to credit risk at the balance sheet date.
12.
Share capital
2018
2017
Number of
shares
(thousand)
€000
Number of
shares
(thousand)
€000
10,000,000
1,000,000
10,000,000
1,000,000
446,200
44,620
446,200
44,620
Authorised
Ordinary shares of €0.10
each
Issued and fully paid
Ordinary shares of €0.10
each
The Company did not provide financial assistance permitted by section 82 of the Companies Act 2014 for the
purchase of its shares.
Authorised and issued share capital
All issued shares are fully paid and carry the same rights.
2018
There were no changes to the authorised or issued share capital during the year ended 31 December 2018.
2017
The Extraordinary General Meeting (EGM) of the shareholders of BOC PCL held on 13 December 2016 approved
a scheme of arrangement between the Company, BOC PCL and its shareholders. The scheme of arrangement
introduced the Company as the new holding company of the Group. Additionally the EGM authorised the
directors of BOC PCL to take all actions necessary or appropriate to carry the scheme of arrangement into
effect. The scheme of arrangement was sanctioned by the District Court of Nicosia on 21 December 2016.
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 on the
same date, the authorised share capital of BOC PCL which amounted to €4,767,759,272 divided into
47,677,592,720 ordinary shares with a nominal value of €0.10 each was reduced to €3,875,464,818.70 divided
into 38,754,648,453.30 ordinary shares with a nominal value of €0.10 each and its issued share capital which
amounted to €892,294,453.30 divided into 8,922,944,533 ordinary shares with a nominal value of €0.10 each
was reduced to nil by cancelling all the shares comprising the issued share capital of BOC PCL (the Existing
Shares) resulting in the creation of a capital reduction reserve in the accounts of BOC PCL, 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).
281
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY
Notes to the Financial Statements
12.
Share capital (continued)
Authorised and issued share capital (continued)
2017 (continued)
Following the reduction of the share capital of BOC PCL, the authorised share capital was increased to
€4,767,759,272 divided into 47,677,592,720 ordinary shares with a nominal value of €0.10 each through the
creation of 8,922,944,533 ordinary shares with a nominal value of €0.10 each, each of which have the same
rights and rank pari passu with the existing ordinary shares of BOC PCL. Also, the reserve arising in the books
of account of BOC PCL as a result of the cancellation of the Existing Shares was applied 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 BOC PCL, which
were issued and allotted, credited as fully paid, to the Company or its nominee(s) in accordance with the
scheme of arrangement.
As mentioned above, all of the shares comprising the issued share capital of BOC PCL were cancelled and BOC
PCL issued and allotted 8,922,944,533 new ordinary shares of nominal value €0.10 each, credited as fully paid
to the Company; and the Company issued and allotted new shares (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 Depositary Interest represents one New Share for each individual holding of 20
Existing Shares. As a result, the Company issued 446,199,933 ordinary shares with a nominal value of €0.10
each.
Share premium reserve
2018
The Annual General Meeting of the shareholders of the Company held in August 2018 approved a reduction of
up to €1.5 billion of the Company's share premium to eliminate the Company's accumulated losses and create
distributable reserves (retained earnings). This was approved by the Irish High Court pursuant to section 85(1)
of the Companies Act on 13 December 2018.
2017
Following the reorganisation of the Group on 18 January 2017 the Company became the sole shareholder of
BOC PCL and consequently the new parent of the Group. The share premium reserve was created in an amount
equal to the difference between the nominal value of the shares issued following the reorganisation and
pursuant to the terms of the scheme of arrangement and the net asset value of BOC PCL.
Share-based payments-share options
Following the incorporation of the 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 the Company. The Share Option Plan is identical to the Long Term Incentive Plan except that the number of
shares in the 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 term of the options was also extended to between 4-10 years after the grant date.
No share options were granted since the date of replacement of the Long Term Incentive Plan by the Share
Option Plan at the level of the Company. Any shares related to the Share Option Plan carry rights with regards
to control of the company that are only exercisable directly by the employee.
Other equity instruments
2018
€000
2017
€000
Reset Perpetual Additional Tier 1 Capital Securities
220,000
-
In December 2018 the Company issued €220 million Subordinated Fixed Rate Reset Perpetual Additional Tier 1
Capital Securities (AT1). AT1 constitutes an unsecured and subordinated obligation of the Company. The
coupon is at 12.50% and is payable semi-annually. The Company may elect to cancel any interest payment for
an unlimited period, and on a non-cumulative basis, whereas it mandatorily cancels interest payment under
certain circumstances. AT1 is perpetual and has no fixed date for redemption but can be redeemed (in whole
but not in part) at the Company's option on the fifth anniversary of the issue date and each subsequent fifth
anniversary. AT1 was listed on the Luxembourg Stock Exchange's Euro Multilateral Trading Facility (MTF)
market on 24 December 2018.
282
BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY
Notes to the Financial Statements
12.
Share capital (continued)
The transaction costs, directly attributable to the issuance, amounted to €2,458 thousand and have been
recognised in retained earnings. The net proceeds from the issuance after deduction of these transaction costs
amounted to €217,542 thousand, as presented in the statement of cashflows.
13.
Retained earnings/(accumulated losses)
For the purpose of dividend distribution, retained earnings determined at Company level, 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 2018 and 2017 no deemed dividend distribution was paid by the Company.
14.
Other payables
Accruals
Other payables
VAT payable
2018
€000
2017
€000
510
253
141
904
30
-
175
205
Other payables are due within 12 months from the balance sheet date.
15.
Fair value measurement
The fair value of the financial assets and financial liabilities approximates their carrying value as at 31
December 2018 and 31 December 2017.
16.
Related party transactions
The following transactions were carried out with related parties:
(i)
Other income
Management consultancy services
Reimbursement of expenses and fees
2018
€000
2017
€000
1,034
14,804
15,838
940
713
1,653
The above transactions were carried out between the Company and its subsidiary BOC PLC on an arm’s length
basis.
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Notes to the Financial Statements
16.
(ii)
Related party transactions (continued)
Administrative and other expenses
2018
€000
2017
€000
Consultancy and other professional fees
30
27
The above transactions were carried out between the Company and its subsidiary BOC PLC on an arm’s length
basis.
(iii)
Directors’ remuneration
The total directors’ fees amount to €970 thousand (2017: €882 thousand). These were reimbursed by BOC PCL
and included in other income above.
Fees are included for the period that Directors serve as members of the Board of Directors.
Non-executive Directors
Josef Ackermann
Wilbur L. Ross Jr.
Arne Berggren
Maksim Goldman
Michalis Spanos
Ioannis Zographakis
Marios Kalochoritis
Michael Heger
Lyn Grobler
Anat Bar-Gera
Pola Hadjisotiriou
Maria Philippou
2018
€000
2017
€000
150
-
115
120
100
135
-
110
90
85
36
29
970
150
20
115
120
100
135
45
110
72
15
-
-
882
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.
(iv)
Year-end balances
Receivables from related parties
BOC PCL
Bank balances
BOC PCL
Bank overdrafts
BOC PCL
2018
€000
2017
€000
734
-
18
61
151
-
The receivable from related parties relates to income outstanding from management consultancy services and
reimbursement of expenses and fees.
There were no other significant transactions with related parties of the Company and no information to be
disclosed under section 307 of the Companies Act 2014 for the years 2018 and 2017.
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Notes to the Financial Statements
16.
(v)
Related party transactions (continued)
AT1 Loan
On 19 December 2018 the Company and BOC PCL entered into an agreement pursuant to which the Company
on-lent to BOC PCL the entire €220,000 thousand proceeds of the issue of the AT1. Further details are disclosed
in Note 9.
17.
Dividend
Based on the Supervisory Review and Evaluation Process (SREP) decisions of prior years, the Company and
BOC PCL were under a regulatory prohibition for equity dividend distribution and therefore no dividends were
declared or paid during years 2018 and 2017.
Following the 2018 SREP decision, the Company and BOC PCL are still under equity dividend distribution
prohibition. This prohibition does not apply if the distribution is made via the issuance of new ordinary shares to
the shareholders which are eligible as Common Equity Tier 1 capital.
No prohibition applies to the payment of coupon on any AT1 capital instruments issued by the Company and
BOC PCL.
18.
Financial risk management
The Company is exposed to risks the most significant of which are the liquidity risk and market risk.
18.1
Liquidity risk
Liquidity risk refers to probable losses that the Company may face, in case of repayment difficulties to its cash
flow obligations. The level of operational costs is low and the Company enjoys adequate liquidity.
18.2
Market risk
Market risk is the risk of loss from adverse changes in market prices namely from changes 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.
Price risk
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 Company’s risk appetite.
Changes in the prices of equity securities that are classified as FVOCI affect the equity of the Company.
The table below shows the impact on the equity of the Company from a change in the price of the equity
instruments held, as a result of reasonably possible changes in the relevant stock exchange indices.
2018
Other stock exchanges
Change in index
Impact on equity
%
€000
+20
44,000
Other stock exchanges
-20
(44,000)
19.
Capital management
The capital management of the Company is consistent with the capital management of the Group as presented
in Note 50 of the consolidated financial statements of the Group for the year ended 31 December 2018.
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Notes to the Financial Statements
20.
Events after the reporting period
20.1
Dividends
On 14 December 2018, the Board of Directors of BOC PCL approved the declaration of a conditional interim
dividend, amounting to €135,000 thousand, in the form of scrip, through the issue of 675,000 thousand of
ordinary shares of a nominal value of €0.10 per share to be issued at a premium of €0.10 per share to the
Company, out of BOC PCL's profits for the financial year of 2016. The declaration of such dividend was
conditional and subject to lifting of regulatory restrictions. Specifically, the payment of the aforementioned
interim dividend could be effected only if the 2018 SREP decision permitted the BOC PCL to make the
distribution contemplated by such declaration. The final 2018 SREP decision, received on 27 March 2019,
allowed the payment in the form of scrip dividend. The scrip dividend was paid by BOC PCL on 27 March 2019
through the issue of 675,000 thousand of ordinary shares of a total issue price of €0.20 per share to the
Company.
20.2
Resignation of the Group's CEO
On 3 March 2019 the Group’s CEO Mr John Patrick Hourican informed the Board of his decision to leave the
Group in September 2019.
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Introduction
Good governance generates trust and engagement between a company and its stakeholders and contributes to
the company’s long term success. Accountability, integrity, transparency, fairness, equity, sustainability and
ethics are all fundamental values of good governance. The Board of Directors (the ‘Board’) of the Bank of
Cyprus Holdings Plc (the ‘Company’) is committed to the highest standards of corporate governance and aims
to ensure on an ongoing basis that the Company is a modern, transparent, competitive and sustainable
organisation. By adopting best practices in corporate governance and corporate administration, 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 (the ‘CSE Code’ available on www.cse.com.cy), as well as
the Directive on Governance and Management Arrangements of the Central Bank of Cyprus (the ‘CBC Directive
on Governance’).
The Company has also elected to apply the UK Corporate Governance Code 2016 published by the Financial
Reporting Council in the UK (the ‘UK Code’ which is available on www.frc.org.uk).
Part A
The Company has adopted both the CSE Code and the UK Code, has incorporated their provisions in the
Group’s Corporate Governance Policy and fully implements their principles. The policy together with the Board
Manual, the terms of reference of the Board committees 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 throughout 2018. The
Company applies the provisions of the Code throughout the Group. As at the date of this Report, all significant
subsidiary companies maintain an Audit Committee and a Risk Committee.
The Directors further consider that the Company has also complied with the provisions of the UK Code.
Details of how the Company has applied the provisions of the CSE Code throughout 2018 are set out in this
Corporate Governance Report and in the Remuneration Policy Report which comes next. The narrative that
follows also covers how the Company has applied the main and supporting principles and disclosure
requirements set out in the UK Code.
The Group believes that its governance framework is robust 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 Company continually monitors and reviews internally, at least once a year, 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 (the ‘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 Nominations
and Corporate Governance Committee (the ‘NCGC’), the Human Resources and Remuneration Committee (the
‘HRRC’) and the Technology Committee (the ‘TC’). Details of these committees are set out in section 5 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 Board derives its authority to act from the Articles of Association of the Company and the prevailing
companies, stock exchange and banking laws, the directives of the CBC, as well as the CSE and UK Codes. The
role of the Board and its committees is well described and analysed in the Board Manual that is annually fully
revised and incorporates all responsibilities that emanate from the regulatory framework.
1.1
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 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. The Board also ensures that its obligations towards its shareholders and other stakeholders are
understood and met.
The Board is responsible for ensuring that management maintains an appropriate system of internal controls
which provides ongoing 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.
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.
There is a clear division of responsibilities at the head of the Company between the running of the Board and
the executive responsibility for the running of the Company’s business. The day to day operations of the Group
have been delegated to management.
The Board is the decision-making body for all matters of importance because of their strategic, financial or
reputational implications or consequences. A formal schedule of matters reserved for approval by the Board
ensures that control of these key decisions is maintained by the Board. The schedule is reviewed and updated
regularly. Matters requiring Board approval include amongst others:
The Group’s long-term objectives and strategy;
The overall risk policy and risk management procedures;
The Group’s Risk Appetite Statement;
The 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;
•
•
•
Intra-group guarantees, indemnities and security;
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 establishment and oversight of policies for selecting, developing and replacing senior management
and heads of internal control functions;
The Remuneration Policy; and
The declaration of a Recovery Emergency Situation.
•
•
•
Moreover the Board is responsible for:
•
•
Overseeing the corporate governance and succession planning framework; and
Setting the right tone and promoting the appropriate culture, values and ethics of the Group;
The appointment, replacement, transfer or removal from office of the heads of internal control functions is
subject to Board approval. 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 ongoing
basis.
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1.
1.1
Board of Directors (continued)
The Role of the Board (continued)
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 46 to 49 of the Consolidated
Financial Statements and the Additional Risk and Capital Management Disclosures section of the 2018 Annual
Financial Report.
1.1.1
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 Chief Executive Officer (the
‘Group CEO’) and other senior management on strategy and developments in the operations of the Group. The
Board considers reports from each of the Board committees, while 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.
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1.
1.1
Board of Directors (continued)
The Role of the Board (continued)
1.1.1
Information and Support (continued)
The key areas of focus in 2018 for the Board, inter alia, were:
Business
environment
• Cyprus economic development;
• Quarterly economic reports;
•
Investors and stakeholder perspectives;
• Market updates and share trading activity.
Group
Strategy and
risk appetite
• Approval of the Group’s Risk Appetite Statement;
• Three-year business and capital plan;
• Acquisitions and divestments;
• Resolution Plan & Minimum Requirement for own funds and Eligible Liabilities (MREL);
• Progress of the Bank’s Digital Transformation Program;
• Review of divisional and business unit strategies;
• Succession Planning;
• Review of strategic and operational plan to address NPEs.
Business
performance
• Review of the performance of Corporate Finance projects;
• Progress of REMU;
• Progress of shipping business;
• Progress of Overseas Loan Book;
• Review and approval of Group financial performance updates, forecasts, budgets, capital
position;
• Potential AT1 issuance.
Risk
management
• Approval of Internal Capital Adequacy Assessment Process (‘ICAAP’) Report;
• Approval of Internal Liquidity Adequacy Assessment Process (‘ILAAP’) Report;
• Review of monthly risk reports;
• Approval of Annual Risk Report;
• Action Plan
implement Supervisory Review and Evaluation Process
to
(SREP)
recommendations;
• Approval of the Group Recovery Plan;
• Review of business and capital plan;
• Directors & Officers (D & O) liability insurance.
Governance
and
regulatory
compliance
• Approval of appointments to the Board and major subsidiary boards;
• Review of corporate governance matters;
• Approval of Corporate Governance Policy;
• Action Plan to implement the revised 2018 UK Corporate Governance Code;
• Approval of Group Regulatory & Ethics Compliance Department (RECD) Annual Report;
• Approval of Group Financial Crime Compliance Department (FCCD) Annual Report;
• Board performance evaluation.
1.2
Composition of the Board of Directors
As at 31 December 2018, the Board comprised of twelve Directors: the Group Chairman who was independent
on appointment, two Executive Directors and nine Non-executive Directors. The Board has determined eight of
the Non-executive Directors to be independent Non-executive Directors in accordance with the provisions of the
UK Code and the CSE Code.
The names and brief biographical details including each Director’s background, experience and independent
status are set out in section 4 of this report.
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1.
1.2
Board of Directors (continued)
Composition of the Board of Directors (continued)
The NCGC annually reviews the structure, size, 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. This includes a review of tenure and an assessment of the skills profile of the Board to ensure
that the Board and committees comprise of Directors having an all-embracing perception of the Group’s
activities and the risks associated with them. The Committee also ensures plans are in place for the selection,
appointment and orderly succession of Executive Directors and senior managers. Further, should the overall
size of the Board be altered by any appointment or resignation, a review is undertaken to ensure that the
composition remains appropriate. The Board regards its current size and composition appropriate to provide
the broad range of skills and experience necessary to govern the business effectively, while enabling full and
constructive participation by all Directors 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 Board and Executive Committee (ExCo)
members on an annual basis, whereby they are required 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 (the ‘CBC Fitness & Probity Directive’).
All changes in circumstances disclosed were assessed and their materiality determined. Following the review of
2018, no material changes were reported. The Board concluded that each of the Directors has the requisite
standard of fitness, probity and financial soundness to perform his/her functions effectively.
Executive Directors
The Group CEO and the Group Deputy CEO & Chief Operating Officer (the ‘DCEO & COO’) are employees of BOC
PCL. The Group CEO’s termination of employment is subject to six months’ notice to that effect to be given to
the Executive Director, without cause but at the sole discretion of BOC PCL. The DCEO & COO’s employment is
mainly based on the provisions of the collective agreement in place, which provides for notice or compensation
by the BOC PCL based on years of service and for a four month prior written notice by the Executive Director in
the event of a voluntary resignation.
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
and to monitor the reporting of the performance. Non-executive Directors must also 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.
1.2.1 Meetings of the Board of Directors
During 2018 the Board held 13 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 2018 the Board held an offsite
two day meeting specifically focused on strategy.
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1.
1.2
Board of Directors (continued)
Composition of the Board of Directors (continued)
1.2.1 Meetings of the Board of Directors (continued)
Board of Directors 1/1/2018-31/12/2018
Name
Josef Ackermann (Chairman)
Maksim Goldman (Vice Chairman)
Anat Bar-Gera
Arne Berggren
Lyn Grobler
Paula Hadjisotiriou1
Michael Heger
John P. Hourican
Christodoulos Patsalides
Maria Philippou2
Michael Spanos
Ioannis Zographakis
Board of
Directors
13/13
13/13
13/13
13/13
13/13
7/7
13/13
13/13
13/13
8/8
12/13
13/13
NCGC
10/10
10/10
10/10
RC
16/16
16/16
7/7
AC & RC
Joint
6/6
6/6
2/2
6/6
AC
HRRC
13/13
5/5
13/13
10/10
10/10
5/5
9/10
13/13
15/16
6/6
Total meetings3
13
13
10
10
16
6
1 Appointed on 13 August 2018
2 Appointed on 23 July 2018
3 The number of Board meetings at BOC PCL level was 20 during the year 2018. The attendance of these meetings can be
found on page 303.
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 and enable them to fully discharge their duties.
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 (the ‘CGCO’) who can provide relevant information related to Board procedures and the CSE
and UK Codes. Independent professional advice is also available to the Directors at the Group’s expense if and
when required. Committees of the Board have similar access and are provided with sufficient resources to
undertake their duties. All Directors have the benefit of directors’ and officers’ liability insurance in respect of
legal actions against them.
1.2.2
Term of Appointment, Retirement and Re-election of Directors
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 assuming a satisfactory
performance and subject to the needs of the business, shareholder re-election and continuing fitness and
probity. A Non-executive’s term of office will not extend beyond 12 years in total and any re-appointment
beyond 6 cumulative years is subject to rigorous review and takes into account the need for progressive
refreshing of the Board.
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 AGM following his/her appointment.
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1.
1.2
Board of Directors (continued)
Composition of the Board of Directors (continued)
1.2.2
Term of Appointment, Retirement and Re-election of Directors (continued)
According to the Articles of Association of the Company, all Directors retire each year and if eligible and
assuming satisfactory performance, are subject to re-election by shareholders. A rigorous review of their skills,
experience, independence and knowledge was carried out in March 2018 and the Board concluded that they
continue to be effective and make a valuable contribution to the deliberations of the Board. The following
Directors, being eligible, offered themselves for re-election and were re-elected at the Annual General Meeting
(the ‘AGM’) on 28 August 2018: Josef Ackerman, Maksim Goldman, Anat Bar-Gera, Arne Berggren, Lyn
Grobler, Michael Heger, John Patrick Hourican, Christodoulos Patsalides, Michael Spanos and Ioannis
Zographakis. Maria Philippou, appointed on 23 July 2018 and Paula Hadjisotiriou, appointed on 13 August 2018
were also elected to the Board. The names of Directors submitted for election or re-election are accompanied
by sufficient biographical and other relevant information in the AGM documentation to enable shareholders to
take an informed decision.
1.2.3
Conflicts of interest
The Board Manual documents procedures relating to Directors’ conflicts of interest, and sets 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 sets out their duty to
avoid, manage and disclose actual, potential or perceived conflicts of interest. 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 2018. All Directors and PDMRs have been informed of
their obligations under the Dealing Code in writing.
None of the Directors had, during the year or at year end, a material interest, directly or indirectly in any
contract of significance with the Group (See Note 51 of the Consolidated Financial Statements of Bank of
Cyprus Holdings).
1.2.4
Time commitment
The Board has determined the time commitment expected of Non-executive Directors to be 35-40 days per
annum. Time devoted to the Group can be considerably more when serving on Board committees.
The NCGC considers, inter alia, 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.
BOC PCL has been classified as a ‘significant institution’ under the European Union (Capital Requirements)
Regulation 2014. The CBC Fitness and Probity Directive which incorporates the provisions of Article 91 of the
European Capital Requirements Directive (‘CRD IV’) on management bodies of credit institutions, determines
that a Director cannot hold more than one of the following combinations:
•
•
One executive directorship with two non-executive directorships; or
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 ECB which supervises BOC PCL 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 four of
the Directors to hold one additional non-executive directorship to those permitted by article 91 of the CRD IV.
During the year ended 31 December 2018, all Directors were within the directorship limits set out for
‘significant institutions’.
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1.
1.2
Board of Directors (continued)
Composition of the Board of Directors (continued)
1.2.4
Time commitment (continued)
The Directors hold positions on the management bodies of other companies as noted in their biographical
details included in section 4 of this report. Such participation 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 2018, each Non-executive Director spent
at least 40 days on board-related duties. The Board considered the time commitment of all Directors and
concluded that each Director devotes the requisite time for the effective performance of his/her duties.
1.2.5 Group Chairman and Group Chief Executive Officer
The respective duties of the Chairman of the Board and the Group CEO are clear and distinct. The two roles are
segregated and they distinguish between the running of the Board and the executive responsibility for running
the Company’s business. The terms of reference of these two roles are set out in writing in the Group Board
Manual which has been approved by the Board.
The Chairman ensures the effective functioning of the Board on all aspects of its role including:
•
•
•
•
•
•
•
Providing leadership to the Board;
Ensuring that the Board determines the nature and extent of the significant risks the Group 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; and
Promoting high standards of corporate governance.
The Chairman commits a substantial amount of time to the Group. There were no material changes to the
other significant commitments of the Chairman during the year ended 31 December 2018. During the year, the
Chairman and the 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;
To execute the approved strategy;
To lead the senior management team in the day-to-day running of the business; and
To 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 is reviewed at least every three years. The last review took place in August
2018 and his contract was then extended from December 2018 until December 2020. On 3 March 2019, the
Group CEO made known his decision to leave the Group in September 2019.
1.2.6
Senior Independent Director
The Senior Independent Director (the ‘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, as well as 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.
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1.
1.3
Board of Directors (continued)
Board Balance and Independence
Both the CSE Code and the UK Code provide that at least 50% of the Board, 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 determine the independence status of each Director on appointment. In addition, a
review of the independence status of each Director takes place annually to ensure that the determination
regarding independence remains appropriate.
In 2018 the Board considered the principles relating to independence contained in the CSE Code, the UK Code
and 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 4 of this
report.
Up until 4 June 2018, Mr. Maksim Goldman, was 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 or the UK Code.
The Board comprises a majority of independent Non-executive Directors to ensure that no individual or small
group can dominate its decision making. The Board considers that each Non-executive Director brings
independent challenge and judgement to the workings of the Board, through their character, objectivity and
integrity.
A relevant ‘Confirmation of Independence’ based on the independence criteria of provision A.2.3 of the CSE
Code is signed annually by each of the independent Non-executive Directors and is submitted to the Cyprus
Stock Exchange together with the Corporate Governance Report.
1.3.1 Appointments to the Board
The Board is responsible for the appointment of Directors and recognises the need to identify the best qualified
and available people to serve on the Board. In accordance with the Board Nominations Policy and the Board
Diversity 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.
The NCGC, prior to assessing candidates, identifies the skills and experience required for the role, assesses the
time commitment involved and with due 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
carry out comprehensive due diligence. In accordance with the Board Nominations Policy, the assessment and
due diligence process is extensive and includes self-certification confirmations of probity and financial
soundness as well as external checks involving a review of various publicly available sources.
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 as well as 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 Paula Hadjisotiriou and Mrs Maria Philippou in
January 2018. Egon Zehnder, an external search consultancy firm with no other connection to the Company,
was engaged in respect of these Non-executive Director appointments.
The same firm was also engaged to identify the right candidate for the Board following the announcement of
the Chairman’s decision to retire from the Board at the upcoming AGM. On 26 February 2019 Mr. Arapoglou
was appointed to the Board subject to ECB consent. The Board intends to consider Mr. Arapoglou as a
candidate to succeed Dr Ackermann to the Chair, following the AGM of 14 May 2019.
In the meantime, Mr. Spanos resigned from the Board on 21 January 2019, and Mr. Zographakis was appointed
as Senior Independent Director on 26 February 2019. On 3 March 2019, the Group CEO made known his
decision to leave the Group in September 2019. The NCGC is currently re-assessing the composition of the
Board.
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1.
1.3
Board of Directors (continued)
Board Balance and Independence (continued)
1.3.1 Appointments to the Board (continued)
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 request from the Company Secretary. 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 SID and committee chairpersons are required to allocate
additional time in fulfilling those roles.
1.3.2 Directors’ induction and ongoing development
Full, formal and tailored induction programmes, with particular emphasis on risk management, corporate
governance 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 Directors’ 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 through presentations by
Group Business units and briefings with senior management. Dedicated training sessions also take place on
particular issues (refer to table below for 2018 training schedule) usually identified by the Directors themselves
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, during the year specialised training sessions with the contribution of
external advisors were provided, covering issues relating to the duties and responsibilities of Board members.
Training sessions for the Board members during 2018
Name
ILAAP
J. Ackermann
M. Goldman
A. Bar-Gera
A. Berggren
L. Grobler
P. Hadjisotiriou
M. Heger
J. Hourican
C. Patsalides
M. Philippou
M. Spanos
Y. Zographakis
√
√
√
√
√
N/A
√
√
√
N/A
√
√
*
√
√
√
√
√
N/A
√
√
√
N/A
√
√
**
√
√
√
√
√
√
√
√
√
√
√
√
Without
Question
√
√
√
√
√
√
√
√
√
√
√
√
GDPR
***
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
General
Banking
√
√
√
√
√
√
√
√
√
√
√
√
AML
ICAAP
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
√
* Assessment of Suitability of members of the management body
** Information Security Awareness Programme
*** Update on Competition Law
The training material is distributed to all Directors regardless of attendance. In 2018, most of the training was
in the form of e-learning sessions with an assessment quiz at the end.
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.
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1.
1.3
Board of Directors (continued)
Board Balance and Independence (continued)
1.3.2 Directors’ induction and ongoing development (continued)
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 CGCO.
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.
1.3.3
Board Performance Evaluation
The Board is committed to regular and at least annual evaluation of its effectiveness and that of its committees.
The objective of these evaluations is to review past performance with the aim of identifying any opportunities
for improvement, determining whether the Board or committee as a whole is effective in discharging its
responsibilities and, in the case of individual Directors, to determine whether each Director continues to
contribute effectively and to demonstrate commitment to the role. The internal evaluation of the performance
of the Board, its committees and individual members conducted in March 2018 by the CGCO, indicated a strong
and diverse composition of experiences that could however, be further enhanced by appointing more members
with HR background, while at the same time striving for gender diversity. The external Board performance
evaluation report in early 2018 by SpencerStuart, made several recommendations and along with the
recommendations of the internal evaluation, an action plan for the implementation of these recommendations
was set up. The assessments carried out through on-line questionnaires and interviews considered overall
performance relative to the role of the Board and its committees.
The outcome of the Board evaluation was considered by the NCGC and collectively discussed by the Board.
Several recommendations were made to enhance the Board process, although they were not material to the
effectiveness of the Board. The Board accepted them and set up an action plan to incorporate those
recommendations. Taking into account the evaluation report, the Board concluded that it continues to be
effective and that each Director continues to make a valuable contribution to the deliberations of the Board.
The Board also concluded that all the members of the Board have appropriate qualifications, broad relevant
experience and continue to be effective and demonstrate continuing commitment to the role.
The chairperson of each principal Board committee led the self-assessment process in respect of committee
performance. The process was supported by the completion of questionnaires tailored to each specific
committee. The results of this process were considered by each individual committee with conclusions and any
relevant recommendations reported to the Board. The effectiveness of each of the four principal committees
was assessed as adequate.
The SID 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.
1.3.4
Loans to Directors and Other Transactions
Details of loans to Directors and other transactions with the Group are set out in Note 51 of the Consolidated
Financial Statements for the year ended 31 December 2018.
The Banking Law currently forbids the extension of any credit to independent members of the Board, but the
CBC may exempt certain exposures 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:
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1.
1.3
Board of Directors (continued)
Board Balance and Independence (continued)
1.3.4
Loans to Directors and Other Transactions (continued)
•
•
•
•
•
•
Approval 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 Board should not exceed at any time 10%
of BOC PCL’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 BOC PCL’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 Board that does not comply with 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 complied with the relevant provisions of the CSE Code and the Banking Law as at 31
December 2018.
2.
Internal Controls
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 timely 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;
and
The appropriate information security framework for the protection of confidential information is in place.
The system of internal controls has 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 overall system of internal controls of the Group includes:
A transparent organisational structure with clear reporting lines to Senior Management and the Board;
Three lines of defence model for the management of risks across the Group;
Board and Executive Committees with clear responsibilities;
Policies and procedures;
•
•
•
•
• Monthly reporting by business lines to enable progress to be monitored, trends to be evaluated and
variances to be acted upon;
• Monthly meetings of ExCo to review performance;
•
•
A Code of Conduct setting out the standards expected of all officers and employees; and
A Whistleblowing Policy including processes and procedures to be followed for independent investigation
of concerns raised by staff.
The Board confirms that, through the AC and the RC, it has conducted reviews for the year ended 31 December
2018, regarding the effectiveness of the Group’s internal control and information 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 covered 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 (the ‘GCRO’), internal and external audit reports, as well
as regulatory reports.
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2.
Internal Controls (continued)
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. At the same time, all
members of the senior management team of the Βank provide written representations to the Group CEO on a
quarterly basis as to the effectiveness of the system of internal controls. Similar representations are given on
an annual basis by the Director Group Compliance and the GCRO.
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 2018, reasonable assurance, with emphasis on specific matters,
is provided that the system of internal controls within the Group is adequately designed and operates effectively
to address significant risks according to the risk appetite set by the Board of Directors. Emphasis is provided
on specific areas and namely on non-performing exposures (NPEs) and arrears management process, as well as
specific areas within the Information Systems and Information Security environment. More specifically, despite
the fact that steps have been taken by management for de-risking the balance sheet, as well as for addressing
high risk technology and security related weaknesses, further actions are still required.
Overall, the Board of Directors through its committees has reviewed the effectiveness of the system of internal
controls of the Group for the year ended 31 December 2018 and confirms its effectiveness. The Board also
confirms that it is not aware of any violation of the Cyprus Securities and Stock Exchange Laws and
Regulations.
The Group’s financial reporting process is controlled using documented accounting policies and procedures
supported by instructions and guidance on reporting requirements, issued to all reporting entities within the
Group in advance of each reporting period. The submission of financial information from each reporting entity
is subject to sign off by the responsible financial officer. Further analytical review procedures are performed at
Group level. The 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. 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.
Τhe Annual Report prior to its submission to the Board is reviewed and approved by the ExCo. The Board,
through the AC scrutinises and approves the financial statements, results, announcements and the Annual
Report and ensures that appropriate disclosures have been made. This governance process ensures that both
management and the Board are given sufficient opportunity to challenge the Group’s financial statements and
other significant disclosures before their publication.
2.1
Going concern
The Directors have made an assessment of the Group’s ability to continue as a going concern for a period of 12
months from the date of approval of these financial statements. The Directors believe that the Group is taking
all necessary measures to maintain its viability and the development of its business in the current economic
environment.
In making this assessment, the Directors considered the significant transactions during 2018 which have had a
positive impact on the capital position of the Group, including the disposal of BOC UK, the agreement for the
sale of non-performing loans and the issuance of €220 million Additional Tier 1 Capital Securities. The Directors
have also considered the legislative amendments on the Income Tax Law Amendment 28 (I) of 2019, enacted
on 1 March 2019, which allow for the conversion of specific deferred tax assets into deferred tax credits, the
Group’s Financial and Capital Plan and the developments in the operating environment in Cyprus (Note 4 of the
Consolidated Financial Statements).
The Group has developed a Financial and Capital Plan (the ‘Plan’), which has been approved by the Board in
February 2019. One of the most important objectives of the Plan was to ensure that the Group has sufficient
resources and capital in order to continue the balance sheet de-risking and further deal with the residual NPEs.
The IFRS9 impact on a fully phased-in basis has been considered within the Group’s capital plan.
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2.
Internal Controls (continued)
2.1
Going concern (continued)
Despite the implementation risk associated with the outcome of future events outlined in the Plan at the
reporting date, the Directors believe that there is sufficient capital throughout the period of assessment to meet
regulatory capital requirements. The Group will continue its de-risking strategy and remains focused to
implement the actions contemplated in the Plan.
The Directors, in making their assessment, have given particular attention to the regulatory requirements
relating to capital and liquidity as follows:
Non-Performing Exposures
•
•
The continued organic reduction (now achieved for fifteen consecutive quarters) of the Group’s NPEs
which have decreased from €8,804 million in December 2017 to €7,518 million at 31 December 2018
and are further reduced to €4,768 million pro forma for Project Helix (Note 4.2.2 of the Consolidated
Financial Statements); and
The reduction of NPEs has been a regulatory focus for a number of years and will continue to be so.
The Group is currently preparing an updated NPE strategy plan for the years 2019-2021 which will be
submitted to the ECB by end of June 2019. The Directors believe that the reduction of NPEs is a
significant factor with regard to the future viability of the Group as a pillar bank in Cyprus.
Capital
The Common Equity Tier 1 (CET1) ratio and the total capital ratio on a transitional basis stood at 12.1% and
14.9% respectively at 31 December 2018, higher than the minimum required ratios (Note 4.2.1 of the
Consolidated Financial Statements).
Following the Annual Supervisory Review and Evaluation Process (SREP) performed by the ECB in 2018 and
based on the final 2018 SREP decision received on 27 March 2019, the Group’s minimum phased in CET1 ratio
and Total Capital ratio remain unchanged, when ignoring the phasing-in of the Capital Conservations Buffer and
the Other Systemically Important Institution Buffer. The final 2018 SREP decision will apply from 1 April 2019.
The projected capital ratios of the Group indicate that there will be sufficient capital throughout the period of
assessment when considered in conjunction with the following items:
•
•
•
The phase-in of IFRS9. The Group has elected to apply the EU transitional arrangements for regulatory
capital purposes (EU Regulation 2017/2395) where the total impact on adoption of IFRS 9 of €308,511
thousand, on 1 January 2018 and any subsequent increase allowed by the regulation for phasing in (i.e.
increase in Stage 1 and Stage 2 allowance), will impact the capital ratios over a period of 5 years. The
impact on the regulatory capital is being phased-in based on a weighting factor until it is fully absorbed
at the end of the five years. The initial impact of IFRS 9 was phased-in by 5% on 1 January 2018
regulatory capital and increases to 15% (cumulative) on 1 January 2019;
The enactment of the Income Tax Amendment Law 28 (I) of 2019 by the Cypriot parliament in March
2019, allowing for the conversion of the Group’s deferred tax assets into deferred tax credits. This
results in a more capital efficient tax asset. The law will result in improved regulatory capital treatment
under CRR and will increase CET1 by c. 170 bps (unaudited) on a transitional basis as at 31 December
2018. This improvement includes the impact from a reversal of impairment of the related deferred tax
asset of approximately €108 million recognised during 2017 and 2018, which will be reversed in 2019
Income Statement of the Group; and
The regulatory capital position of the Group will strengthen further, upon completion of the sale of loans
and advances to customers (the ‘Helix Portfolio’ or the ‘Transaction’), largely NPEs, classified as held for
sale (Note 30 of the Consolidated Financial Statements). A significant step towards completion of the
Transaction was the ECB approval of the Significant Risk Transfer (the ‘SRT’) for regulatory capital
purposes. BOC PCL has received the SRT approval on 18 March 2019. The completion of the
Transaction remains subject to various other conditions precedent. On completion, the de-recognition
of the Helix Portfolio will have a positive impact on the Group’s CET1 ratio, of 160 basis points, resulting
from the release of risk weighted assets. Completion is currently expected to occur in the early second
quarter of 2019.
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2.
Internal Controls (continued)
2.1
Going concern (continued)
Funding and liquidity
•
•
The Group has made a significant improvement in its liquidity position and ratios; and
The Group is in compliance with the Liquidity Coverage Ratio (LCR) and is significantly above the
minimum requirements (Notes 4.2.3 and 48 of the Consolidated Financial Statements).
Based on the projections of management of the Group, it is expected that the Group will maintain compliance
with these liquidity requirements for the period of the going concern assessment.
2.2
Group Code of Conduct and Whistleblowing Policy
The Group has set out the standards that are expected from all the employees and Directors of the Group in a
Code of Conduct along with 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. Its general principles are:
•
•
•
•
Concerns in good faith, about wrongdoing or malpractice can be raised in confidence without fear of
victimisation, 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; and
The appointment of the Chairman of the AC, an independent Non-executive Director as a
Whistleblowing Champion with specific responsibilities.
Following the Group wide training on whistleblowing through a mandatory e-learning module in 2017, the focus
in 2018 was in raising awareness of the whistleblowing procedure through a formal call to action to all
employees on their obligations to speak up.
The Board and Group CEO are committed to this policy, which encourages staff to raise concerns and the Group
will continue with a number of initiatives to further increase awareness in 2019.
3.
Other matters
On 18 January 2017, the Company became the sole shareholder of BOC PCL. The owners of BOC PCL before
the reorganisation have the same absolute and relative interests in the net assets of the Group immediately
before and after the reorganisation, since the assets and liabilities of the Group and the BOC group (being BOC
PCL and its subsidiaries) are the same immediately before and after the reorganisation. Hence the Group is
considered a continuation of BOC group.
On 19 January 2017, the Company was admitted to listing and trading on the London Stock Exchange (‘LSE’)
and the CSE.
A common Board and committee structure applies with the same Directors sitting on the Board of Directors of
the Company and on the Board of Directors of BOC PCL and on the committees of each of the two Boards.
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3.
Other matters (continued)
The table below show attendance of the Directors on the meetings of BOC PCL throughout 2018.
Board of Directors of BOC PCL 1/1/2018-31/12/2018
Name
Josef Ackermann (Chairman)
Maksim Goldman (Vice Chairman)
Anat Bar-Gera
Arne Berggren
Lyn Grobler
Paula Hadjisotiriou1
Michael Heger
John P. Hourican
Christodoulos Patsalides
Maria Philippou2
Michael Spanos
Ioannis Zographakis
Board of
Directors
20/20
20/20
20/20
20/20
20/20
8/8
20/20
20/20
20/20
9/9
17/20
20/20
AC
HRRC
NCGC
RC
AC & RC
Joint
10/10
10/10
10/10
16/17
7/7
17/17
7/7
7/7
2/2
7/7
13/13
5/5
13/13
10/10
10/10
5/5
9/10
TC
9/9
9/9
9/9
13/13
17/17
7/7
9/9
Total meetings
20
13
10
10
17
7
9
1 Appointed on 13 August 2018
2 Appointed on 23 July 2018
3.1
Company Secretary
The Board appointed Mrs Katia Santis as the Company Secretary.
3.2
Group Internal Auditor
The Board appointed Mr. George Zornas as the Group Internal Audit Director.
3.3
Corporate Governance Compliance Officer
The Board appointed Mr. Marios Skandalis as Corporate Governance Compliance Officer (CGCO).
4.
4.1
Members of the Board of Directors
Non-Executive Directors
Josef Ackermann (Chairman)
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.
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. He also served as
Vice-Chairman of the Foundation Board of the World Economic Forum. Dr Ackermann is 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.
He 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.
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4.
4.1
Members of the Board of Directors
Non-Executive Directors
Josef Ackermann (Chairman) (continued)
Dr. Ackermann has extensive experience in 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 of BOC PCL in November 2014
and the Board in October 2016
Independent:
On an on-going basis
Maksim Goldman (Vice Chairman)
Investor AB
Honorary Chairman of the St. Gallen Foundation for
International Studies
Honorary Senate Member of the Foundation Lindau
Nobel Prize winners 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
Mr. Goldman served as Director of Strategic Projects at Renova Group until 4 June 2018 where he was
responsible for coordinating the business development of various significant assets under management of the
Group. Previously, Mr. Goldman had served as Deputy Chief Investment Officer of Renova Group, responsible
for implementing the investment policy and support of key mergers and acquisitions transactions. From 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 from 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 of BOC PCL in November 2014
and the Board in October 2016
External Appointment:
Stentex s.a.r.L
Independent:
No
Committee Membership:
Member of the Risk Committee
Member of the Nominations and Corporate Governance
Committee
Efstratios-Georgios (Takis) Arapoglou
Mr. Arapoglou is an expert financial consultant. He has served as Chairman and CEO of the National Bank of
Greece Group, Chairman of the Hellenic Banks Association, Member of the Board of Eurobank and has held
senior management positions with Citibank and Chase Manhattan in the UK and with American Express in
Greece. Currently, Mr. Arapoglou is Chairman of the Board of Titan Cement, an international cement company
listed on the Athens Stock Exchange and of Tsakos Energy Navigation, a shipping company listed on the New
York Stock Exchange.
Mr. Arapoglou holds an MSc in Finance and Management from the University of Brunel, London, a BSc in Naval
Architecture and Ocean Engineering from the University of Glasgow and a BA in Mathematics and Physics from
the University of Athens.
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4.
4.1
Members of the Board of Directors
Non-Executive Directors
Efstratios-Georgios (Takis) Arapoglou (continued)
He has extensive experience in international capital markets and in corporate, commercial and investment
banking in South East Europe, the UK, the Middle East and Africa.
Term of Office:
External Appointment:
Appointed to the Board of BOC PCL
and the Board in February 2019
(subject to ECB consent)
Independent:
Yes
Chairman of the Board of Tsakos Energy Navigation
Chairman of the Board of Titan Cement SA
EFG Hermes Holding SAE
Credit Libanais SAL
Bank Alfalah Ltd
Committee Membership:
Arne Berggren (Chairman of the Risk Committee)
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 of BOC PCL in November 2014
and the Board in October 2016
External Appointment:
Eusticon AB
Pireaus Bank Group
Independent:
Yes
Anat Bar-Gera
Committee Membership:
Chairman of the Risk Committee
Member of the Audit Committee
Since 2015, Mrs Bar-Gera is the Chairwoman of Cyverse, a leading Switzerland-based cybersecurity company
established with the aim of providing access to the most advanced cybersecurity solutions coming out of Israel
and the Silicon Valley. Mrs Bar-Gera is currently a member of the expert network of the World Economic Forum
and a former member of the Global Agenda Council on the future of the internet, of the World Economic Forum.
Prior to this and for more than 20 years, Mrs Bar-Gera co-founded, scaled and exited a number of telecom and
internet international companies operating primarily across Europe and Africa. In 1988, she joined UBS in
Switzerland as an Associate in the M&As department, where she initiated and executed pan-European deals
especially in the high-tech area.
Mrs Bar-Gera graduated from INSEAD, France with an MBA and from the Hebrew University, Israel, with a
Bachelor of Laws (LL.B.).
Mrs Bar-Gera has significant experience in start-ups and cybersecurity and benefits from oversight experience
in a number of external directorships.
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4.
4.1
Members of the Board of Directors (continued)
Non-Executive Directors (continued)
Anat Bar-Gera (continued)
Term of Office:
External Appointment:
Appointed to the Board of BOC PCL
and the Board in October 2017
Independent:
Yes
Cyverse AG
Swiss Mobile Data
Expert Network of the World Economic Forum
Committee Membership:
Member of the Human Resources and Remuneration
Committee
Member of the Technology Committee
Lyn Grobler (Chairperson of Technology Committee)
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:
External Appointment:
Appointed to the Board of BOC PCL
and the Board in February 2017
Independent:
Yes
Technology Advisory Board at Board Intelligence Ltd
Hyperion Services Ltd
Howden Broking Group
Hyperion & Partners Ltd
Committee Membership:
Chairperson of the Technology Committee
Member of the Nominations and Corporate Governance
Committee
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4.1
Members of the Board of Directors (continued)
Non-Executive Directors (continued)
Paula Hadjisotiriou
Mrs Hadjisotiriou is an experienced executive with a long career in senior management roles in financial
institutions. She started her accountancy career at Howard, Wade & Jacob before moving to Pricewaterhouse
Coopers. Following a eight-year tenor at the Latsis Group of Companies as Deputy General Manager of Internal
Audit, she embarked between 1990-2015 on a career in banking, at first with Eurobank Ergasias S.A as Group
Chief Financial Officer and then with National Bank of Greece as Deputy Chief Executive Officer & Chief Financial
Officer. Currently Mrs Hadjisotiriou serves as an advisor to the Latsis Group of Companies in the UK.
She is a Chartered Accountant and a member of the Institute of Chartered Accountants of England and Wales
(ICAEW).
Mrs Hadjisotiriou has significant experience in financial institutions and benefits from oversight experience in a
number of external directorships.
Term of Office:
External Appointment:
Appointed to the Board of BOC PCL
and the Board in August 2018
None
Independent:
Yes
Committee Membership:
Member of the Audit Committee
Member of the Risk Committee
Michael Heger (Chairman of the Human Resources and Remuneration Committee)
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. In 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.
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4.
4.1
Members of the Board of Directors (continued)
Non-Executive Directors (continued)
Michael Heger (Chairman of the Human Resources and Remuneration Committee) (continued)
Term of Office:
External Appointment:
Appointed to
to the Board of BOC PCL in June 2016
and the Board in October 2016
None
Independent:
Yes
Maria Philippou
Committee Membership:
Member of the Human Resources and Remuneration
Committee (Chairman since 21 January 2019)
Member of the Audit Committee
Member of the Technology Committee
Mrs Philippou started her career as an HR Consultant with KPMG Greece, before moving to the Lambrakis Press
Group as HR Generalist. Having spent three years with Eurobank Ergasias S.A as Compensation & Benefits
Manager, in 2006 she moved to the Coca Cola Company Group, progressing through various roles such as
Rewards Manager and HR Business & Strategic Partner to her current position as Global Talent & Development
Director.
Mrs Philippou holds a degree in Business Administration from Nottingham Trent University and a Master of
Science in Human Resources Management form Brunel University.
Mrs Philippou is an experienced executive in human resources and brings valuable skills to the Board in people
management.
Term of Office:
External Appointment:
Appointed to the Board of BOC PCL
and the Board in July 2018
None
Independent:
Yes
Committee Membership:
Member of the Human Resources and Remuneration
Committee
Michael Spanos (Senior Independent Director)
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). He 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.
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.
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4.
4.1
Members of the Board of Directors (continued)
Non-Executive Directors (continued)
Michael Spanos (Senior Independent Director) (continued)
Term of Office:
Appointed
the Board of BOC PCL in November 2014
and the Board in October 2016
(resigned on 21 January 2019)
Independent:
Yes
External Appointment:
M.S. Business Power Ltd
Green Dot (Cyprus) Ltd
Lanitis Bros Ltd
Committee Membership:
Chairman of the Human Resources and Remuneration
Committee (up to 21 January 2019)
Ioannis Zographakis (Chairman of the Audit Committee)
Mr. Zographakis is a senior Executive with a broad and diverse international experience in the banking industry.
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 served as 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. 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 in 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 of BOC PCL in September 2013
and the Board in October 2016
National Bank of Greece
A. Eternity Capital Management Ltd
Independent:
Yes
4.2
Executive Directors
John Patrick Hourican (Group CEO)
Committee Membership:
Chairman of the Audit Committee
Member of the Risk Committee
Member of the Technology Committee
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 Price Waterhouse in Ireland.
Ηe 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.
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4.
4.2
Members of the Board of Directors (continued)
Executive Directors (continued)
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 RBS.
Term of Office:
Appointed
to the Board of BOC PCL in December 2013
and the Board in July 2016
External Appointment:
Atradius N.V.
Independent:
No
Committee Membership:
None
Christodoulos Patsalides (DCEO & COO)
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 Group 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 of BOC PCL in November 2014
and the Board in July 2016
Chairman of the Association of Cyprus Banks
European Banking Federation
Cyprus Anti-Cancer Society
Independent:
No
Committee Membership:
None
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5.
Board Committees
BOCH PLC
Board of Directors
Group Nominations &
Corporate Governance
Committee
Group Human Resources
& Remuneration
Committee
(NCGC)
(HRRC)
Group Audit Committee
(AC)
Group Risk
Committee
(RC)
Group Technology
Committee
(TC)
Recommends the
appointment of new
Directors
Considers succession
plans for the Chairman
and the Group CEO
Reviews the composiiton
of the Board
Oversees the annual
Board performance
evaluation
Oversees the corporate
governance
arrangements of the
Group
Sets overarching
principles and
parameters and
governance framework
of the Group's
remuneration policy
Considers and approves
remuneration for
executive directors and
senior executives
Oversees employee
share schemes
Reviews accounting
policies and financial
reports
Monitors the internal
control environment and
information systems
Considers the adequacy
and scope of the internal
and external audit and
effectiveness of the
compliance function
Reviews and monitors the
Group's whistleblowing
policies
Monitors and
recommends
financial and
operational risk
apetite
Monitors the
financial and
operational risk
profile, including
performance
against Risk
Appetite
Reviews limits for
types of financial
and operational
risk
Reviews and
approves the
Group's technology
planning and
strategy
Reviews and
approve s
technology
investments
Monitors and
evaluates existing
and future trends in
technology that may
affect the Group
In order to exercise proper oversight of risk and control and pursuant to authority granted under the Articles of
Association, the Board has delegated certain responsibilities to committees of the Board. The principal
committees are the AC, the RC, the NCGC and the HRRC. The key roles of the Board committees are described
above. Further information of the work of these committees follows in the section below. 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) and are available on the Group’s website (www.bankofcyprus.com) or
by request to the Company Secretary. Each committee reviews its terms of reference annually.
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 RC and the AC.
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. This linkage is important between the committees given that it is
impractical for independent Non-executive Directors to be members of all the committees.
In addition to the principal committees, the Board in 2017 set up a Technology Committee to drive the digital
transformation of BOC PCL. The Committee is comprised of four Non-executive members and is chaired by Mrs
Lyn Grobler whose extensive knowledge and experience in IT will be instrumental to the digital transformation
of BOC PCL.
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5.
5.1
Board Committees
Nominations and Corporate Governance Committee
As at 31 December 2018 the NCGC comprised three Non-executive Directors, two of whom independent. Its
composition is fully compliant with the CSE Code, the UK Code and the CBC Governance Directive. The
Chairman of the Board chairs the Committee, except when the NCGC is dealing with the appointment of a
successor to the role of Chairperson.
Biographical details, including each member’s background, experience and independence status are set out in
section 4 of this report.
The Committee met 10 times in 2018. The Chairman and members of the Committee together with their
attendance at meetings are shown below. The Group CEO is invited to attend meetings. The NCGC meets
annually with no management present.
Member attendance in 2018:
NCGC meetings* in 2018
Josef Ackermann (Chairman)
Maksim Goldman
Lyn Grobler
10/10
10/10
10/10
* The number of committee meetings at BOC PCL level were 10 during 2018. The attendance of these meetings can be
found on page 303.
The key responsibilities of the NCGC are set out in its terms of reference, which are available on the Group’s
website (www.bankofcyprus.com) and are reviewed annually and approved by the Board.
The role of the Committee is to ensure that the Board is comprised of members who are best able to discharge
the duties and responsibilities of Directors and to support and advise the Board in relation to:
•
•
•
•
•
Board recruitment (including regularly reviewing, reporting on and taking into account, when making
further appointments, the composition and effectiveness of the Board);
Vice-Chairperson, Director and CEO development (under the overall responsibility and supervision of
the Chairperson of the Board);
Chairperson development (under the overall responsibility and supervision of the SID);
The ongoing evaluation of the structure, size, composition and performance of the Board, its
committees and individual Directors; and
Succession planning for Directors and senior management.
The Committee also:
•
•
•
•
Oversees the adoption of appropriate internal policies on the assessment of the fitness & probity of
members of the Group ExCo, other senior managers and Heads of the internal control functions;
Keeps the Board’s governance arrangements under review and makes appropriate recommendations to
the Board to ensure that such arrangements are consistent with best corporate governance standards
and practices in place;
Considers and authorises a situation in which a Director has, or could have, a direct or indirect interest
that conflicts, or possibly may conflict with the interests of the Group, and decides on remedial action to
eliminate such conflict or seeks to terminate the situation giving rise to it; and
Oversees the corporate governance arrangements of material subsidiaries and reviews the evaluation of
board performance of the subsidiary boards.
The matters considered and the actions taken by the NCGC during the year are set out in the following table.
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5.
5.1
Board Committees (continued)
Nominations and Corporate Governance Committee (continued)
Matters considered and action taken by the NCGC in 2018
Board and Committee
size and composition
• Review of:
o Board and Board Committee structure, size and composition;
o Skills, knowledge and expertise;
o Independence of Non-executive members;
o Succession plans taking into account the skills profile and the action plan to
achieve the diversity target set for 2020; and
o The annual Board Performance evaluation including its committees and
individual Directors.
• Approval of follow-up actions from the externally conducted review by
SpencerStuart.
• Assessment of the fitness & probity and recommendation for appointment of
nominated directors.
Corporate Governance
•
Review and approval of revisions to:
o The Board Manual and its Appendices;
o Three corporate governance policies:
The Group Fitness & Probity of Directors, Managers and Key Function
Holders;
The Group Nominations Policy; and
The Group Diversity Policy.
o The 2018 Action Plan for corporate governance compliance.
Review and recommendation for approval to the Board the Group Corporate
Governance Policy;
Review of the Annual Corporate Governance Report;
Review of the quarterly Corporate Governance reports;
Approval of the action plan to implement the revised UK Code;
Approval of the report on compliance with the CSE Code and the UK Code;
Review of potential conflicts of interest with Directors’ other appointments.
Carry out the performance appraisal of the Executive Directors.
Review of board composition and succession planning for BOC UK Board;
Review and approval of the revision of the Corporate Governance Guidelines for
Group Subsidiaries;
Approval of the revised Framework Agreement with BOC UK and the action plan
to implement it;
Consideration of the 2018 Priorities of the Prudential Regulation Authority (PRA)
of the UK.
•
•
•
•
•
•
•
•
•
•
•
Executive performance
review
Subsidiary corporate
governance
Discussions were held on the matter of succession planning. Job specifications were prepared to be available
for the external consultants who would assist in the search for potential candidates for the positions of CEO and
Chairperson. Interviews were carried out once a shortlist was prepared.
The Committee also resolved to set up an action plan that would lead to compliance with the revised UK Code.
The chairman of the Committee reported to the Board after each meeting to ensure all Directors were fully
informed of the Committee’s activities.
5.1.1 Diversity
The Group recognises the importance of ensuring that there is diversity on the Board and is committed to this
respect. In reviewing Board composition 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.
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5.
5.1
Board Committees (continued)
Nominations and Corporate Governance Committee (continued)
5.1.1 Diversity (continued)
The Group’s approach to Board diversity is set out in full in the Board Diversity Policy which can be found online
at https://www.bankofcyprus.com/en-GB/who-we-are/corporate-governance/. The Policy recognises that a
truly diverse Board will include and make good use of the differences in skills, experience, background, race,
gender and other distinctions brought by each Director, with such differences being considered in determining
the optimum composition of the Board.
Non-executive members of the Board possess a wide range of skills, knowledge and extensive experience
acquired from executive and/or non-executive appointments as directors of other companies 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 2018, the NCGC determined that the skills profile of the Board, either academically or
through professional experience was appropriate and relevant to the business of the Group including inter alia,
banking, insurance, manufacturing, audit and accounting, economics, risk management, dealing with
competent authorities, strategy and business models, legal and consultancy services, Information Technology
and cyber-security and human resource management.
Directors bring their individual knowledge, skills and experience to bear in discussions on the major challenges
facing the Group. The participation of Executives on the Board enhances the banking expertise of the Board
and ensures that the Board is provided with direct, precise and up-to-date information about significant issues
concerning the Group.
During 2018, the NCGC reviewed the Board Diversity Policy which aims to achieve gender diversity by 2020
with appointments based on merits in the context of the skills and experience required. The Group having
recognised the benefits of a diverse Board is aiming to achieve and maintain 40% female representation by the
end of 2020 and is implementing an action plan approved by the NCGC describing all key intervening
milestones leading to the accomplishment of this target. On July 23 2018, the Board appointed Mrs Maria
Philippou to the Board and on 13 August 2018 appointed Mrs Paula Hadjisotiriou thereby achieving diversity of
33.3%.
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.
5.2
Human Resources and Remuneration Committee
On 31 December 2018, the Committee comprised of 4 independent Non-executive members. During 2018 the
HRRC was chaired by the SID and its composition complied with the requirements of the CSE Code, the UK
Code and the CBC Governance Directive. The Board considers that at least one member of the Committee
possesses appropriate knowledge and expertise on Human Resources (‘HR’) and remuneration issues. The
diverse backgrounds of the members of the Committee provide a balanced and independent view on
remuneration matters.
Maria Philippou was appointed to the Board and the Committee on the 23 July 2018. The Chairman of the
Committee resigned on 21 January 2019 and was replaced by Dr Michael Heger who has been a member of the
Committee since his appointment to the Board in 9 June 2016.
Biographical details, including each member’s background, experience and independence status are set out in
section 4 of this report.
The Committee held 10 meetings in 2018. The Chairman and members of the Committee together with their
attendance at meetings are shown below. The Group CEO and the Director of Human Resources are invited to
attend meetings as appropriate.
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5.
5.2
Board Committees (continued)
Human Resources and Remuneration Committee (continued)
Member attendance in 2018:
HRRC meetings* in 2018:
Michael Spanos (Chairman)
Michael Heger
Anat Bar-Gera
Maria Philippou (appointed 23 July 2018)
9/10
10/10
10/10
5/5
* The number of committee meetings at BOC PCL level were 10 during 2018. The attendance of these meetings can be
found on page 303.
The key responsibilities of the HRRC are set out in its terms of reference, which are available on the Group’s
website (www.bankofcyprus.com) and are reviewed annually and approved by the Board.
The role of the Committee is:
•
•
•
•
•
•
To ensure that the Group is equipped with the human capital at the right size and with the right skill
mix necessary for the achievement of its strategic goals. It is imperative for the Group to employ the
appropriate forward-looking, commercially minded, human resources that would promote digital
transformation and continuous innovation;
To ensure that the Group is equipped with the organisational capital to be able to effect continuous
improvement and elicit the right behaviour which would lead to the desired outcome;
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 and benefits policies across the
Group and exercise oversight for such issues;
To consider the remuneration arrangements of the executive Directors of the Group, other senior
managers and the employee Remuneration Policy bearing in mind the European Banking Authority
(‘EBA’) Guidelines on remuneration policies and practices, the CBC Governance Directive and the CSE
Code.
The HRRC oversees the HR initiatives that foster employee engagement such as the application of a holistic
internal communication programme, the implementation of an employee wellbeing /care programme and the
application of fair and transparent recognition initiatives across the Group.
The Committee 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 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 currently pertinent to the banking sector and the Group in particular.
The remuneration of Non-executive Directors is determined and approved by the Board. Neither the Chairman
nor any Director participates in decisions relating to their own personal remuneration.
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5.
5.2
Board Committees (continued)
Human Resources and Remuneration Committee (continued)
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 CSE Code and concern possible plans for the compensation of
members of the Board in the form of shares, share warrants or share options.
Matters considered and action taken by the HRRC in 2018
Annual Remuneration
Review
• Annual review and approval of the Remuneration Policy;
•
The performance appraisals and remuneration of Senior Management.
Disclosure and
governance
Human resources
review
• Review of the Remuneration Policy Report in the Annual Report;
• Review of the Terms of Reference of the Committee;
• Committee self-assessment;
• Review of the External Recruitment Policy;
• Review of the Remuneration package of the CEO;
• Update on the Exit Policy;
• Review of the Internal Transfer Policy;
• Update on Disciplinary process, Exits and Care Leave and Financial Aid.
• Review of the training plan of staff for the year;
• Close monitoring of the progress of the negotiations with the labour union and
the mediation process with the Ministry of Labour with regards to the renewal of
the 2018 Collective Agreement and recommendation to the Board on the
approval of the renewal of 2018 Collective Agreement;
• Review of the 2018 Group Staff Opinions Survey results and action plans;
• Update on mini survey results on modernisation agenda;
• Review of the 2017 Management Practices Survey;
• Review of the Performance Appraisal statistics;
• Monitor of the BOC PCL’s head count and payroll cost evolution;
• Review of Internal Communication Reports and Annual Communication Plan;
• Update on the Staff Acknowledgement Scheme 2018;
• Update on the results of the extreme Business Continuity Plan (BCP);
• Update on the work of the Change Working Group.
Priorities for the HRRC in 2018 were the action plan of the HR to promote Employee engagement and
encourage two-way open communication. Finally the Committee was kept informed and updated on the
discussions for the renewal of the Collective Agreement and other matters with the labour union.
The Chairman of the Committee reported to the Board after each meeting to ensure all Directors were fully
informed of the Committee’s activities.
Further information on the role of the Committee is presented in the Remuneration Policy Report, on page 325
of this report.
5.3
Audit Committee
As at 31 December 2018, the AC comprised four independent Non-executive Directors. The Board considers
that the AC’s members as a whole have experience of the banking and financial services sector. The Board
further believes that Ioannis Zographakis and Paula Hadjisotiriou can be regarded as having recent and
relevant financial experience for the purposes of the UK Code and can be regarded as an Audit Committee
financial expert.
Biographical details, including each member’s background, experience and independence status are set out in
section 4 of this report.
The Committee held 13 meetings during 2018. The Chairman and members of the Committee together with
their attendance at meetings are shown below. Arne Berggren is the Chairman of the RC and Ioannis
Zographakis and Paula Hadjisotiriou are members of the RC. Michael Heger is a member of the HRRC. Such
common membership facilitates effective governance across all finance and risk issues. Agendas can be aligned
and overlap of responsibilities can be avoided.
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5.
5.3
Board Committees (continued)
Audit Committee (continued)
Member attendance in 2018:
AC meetings* in 2018
Ioannis Zographakis (Chairman)
Arne Berggren
Michael Heger
13/13
13/13
13/13
Paula Hadjisotiriou (since 13 August 2018)
5/5
* The number of committee meetings at BOC PCL level were 13 during 2018. The attendance of these meetings can be
found on page 303.
The key responsibilities of the AC are set out in its terms of reference, which are available on the Group’s
website (www.bankofcyprus.com) and are reviewed annually and approved by the Board.
The role of the Committee, inter alia, is:
•
•
•
•
•
•
•
•
To review and monitor the effectiveness of the Group’s system of internal controls;
To assess the integrity of the Group's financial statements and related announcements;
To advise the Board on appointment of the external auditors and be responsible for oversight and
remuneration of the external auditor, including monitoring their independence and objectivity;
To review the Group’s and 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;
To assist the Board in meeting its obligations under relevant stock exchange listing rules and other
applicable laws and regulations;
To monitor and review the effectiveness of the Group’s internal audit function and its operations;
and to make recommendations to the Board on such matters.
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 AC considered the following key significant accounting and other related issues in its review of the financial
statements for the year ended 31 December 2018. In addressing these issues, the AC considered the
appropriateness of management’s judgements and estimates and where appropriate, discussed those
judgements and estimates with the external auditors:
Internal Controls and
Risk Management
• Annual review of the effectiveness of the Group’s internal controls;
• Review of the Group Financial Crime Compliance Department (‘FCCD’) Annual
Report, the Group FCCD Risk Management Report, the Regulatory & Ethics
Compliance Department (‘RECD’) Annual Report;
• Review of the quarterly reports of the FCCD and RECD;
• Quarterly updating on outstanding operational risk
findings monitoring
Dashboard;
• Review of the General Data Protection Regulation (‘GDPR’) status reports;
• Review of the Annual Information Security Assessment Report.
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5.
5.3
Board Committees (continued)
Audit Committee (continued)
External Reporting
Internal Auditors
External Auditors
Governance
Compliance
• Review and recommendation for approval of the annual and interim reporting;
• Review and approval of the quarterly financial results;
• Review and approval of the Group’s existing accounting policies;
• Approval of new and significant changes in existing policies;
• Endorsement of the Going concern assessment for the purposes of the basis of
preparation of the financial statements.
• Review of the Group Internal Audit’s (‘GIA’) Triennial Audit Plan;
• Approval of the revised GIA policies and procedures/charter;
• Review of the independence of the GIA Division and the GIA Director;
• Update on the Quality Assurance;
• Appraisal of the GIA Director;
• Review of the self-assessment of GIA conformance with IIA standards and the
Code of Ethics;
• Review of the Audit Opinion in GIA Report;
• Approval of the GIA budget;
• Review of the GIA quarterly activity reports;
• Update on complaints received through the whistleblowing line.
• Discussion of the results of the audit of the financial statements;
• Assessment of the independence of the external auditors;
• Update on the internal and external mechanisms to support the assessment of
the independence of the external auditors;
• Approval of audit, tax compliance and other assurance fees for the year;
• Approval of permissible non-audit services assigned to the auditors;
• Update on the 2018 External Audit Plan.
• Review of the revised Terms of Reference of the AC;
• Approval of the Annual Corporate Governance Report;
• Approval of the Directors’ Compliance Statement;
• Self-Assessment of the AC.
• Review and approval of the FCCD Action Plan, the RECD Action Plan;
• Review and approval of the Anti-Money Laundering (‘AML’) risk appetite
statement, AML Policy, Customer Acceptance Policy and Sanctions Policy;
• Consideration of major compliance issues and reports submitted to it by the
Group Compliance Division;
• Review and approval of the various regulatory & ethics compliance policies;
• Update on important forthcoming regulatory developments;
• Appraisal of the Director Group Compliance;
• Review of the Data Privacy compliance function and the overall function of the
Data Protection Officer (DPO).
In assisting the Board to monitor the integrity of the financial statements, the AC has reviewed the Annual
Report 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 judgements and estimates made by the Group.
The Committee advised the 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. The Committee considered for disclosure
all material relevant issues that have concerned management and the Group statutory auditors during the year.
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5.
5.3
Board Committees (continued)
Audit Committee (continued)
The AC considered among others, the following significant issues in its review of the financial statements for the
year ended 31 December 2018. In addressing these issues, the Committee discussed key areas of
management’s judgements and estimates with the external auditors, Ernst & Young Chartered Accountants
(‘EY’); 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, the recoverability of deferred tax asset and litigation and claims. The AC also 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.
•
•
•
•
Loan impairment
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 loans and advances; interest income recognition, and the disclosures relating to
provisions and contingent liabilities for litigation and regulatory claims.
Deferred Tax assets
The Committee discussed the extent of deferred tax assets to be recognised and in particular
management’s projections for future taxable profits against which those losses may be utilised in the
future. 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.
Going concern
Further the AC considered management’s assessment of the appropriateness of preparing the financial
statements of the Group on a going concern basis. The considerations assessed by the AC are also set
out in Note 3 of the Consolidated Financial Statements.
Litigation and claims
The AC considered the results / findings of the work carried out by external consultants on complaints
and legal cases to assess the adequacy of the Bank’s capital held against legal risk.
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 as well as the Group Chief Risk Officer.
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
regularly attended the Committee’s meetings. The Committee has regular discussions with the external
auditors, the Group Internal Audit Director and the Director of Group Compliance and discusses issues without
the presence of the management.
Other responsibilities
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 Annual Corporate Governance Report, but the
AC retains its duty to review and approve the Annual Corporate Governance Report.
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5.
5.3
Board Committees (continued)
Audit Committee (continued)
The Chairman of the Committee continues to hold the role of Whistleblower’s Champion and continues to have
specific responsibility for the integrity, independence and effectiveness of the Group’s policies and procedures
on whistleblowing, including the procedures for protecting employees who raise concerns from detrimental
treatment. He has also been named as the designated Board member responsible for the implementation of
the AML Law and relevant Directives.
The Chairman of the Committee reported to the Board after each meeting to ensure all Directors were fully
informed of the Committee’s activities.
The Committee’s performance during 2018 was assessed as part of an internal committee effectiveness review.
The conclusion drawn was that the Committee is regarded as operating effectively and the Board takes
assurance from the quality of the Committee’s work.
5.3.1
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. The
Committee received reports over the course of 2018 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 and mitigating actions taken
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, replacement, transfer or removal 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 were
reviewed by the AC.
5.3.2 Arrangements relating to the external auditors
The AC is responsible for overseeing all matters relating to the relationship between the Group and its statutory
auditors, including the external audit plan, terms of engagement, audit and non-audit fee arrangements,
interim findings and audit finding reports. The AC also meets semi-annually with the auditors without
management present.
The Group is committed to ensuring the independence and objectivity of the external auditors and on an annual
basis the AC formally reviews the effectiveness, independence and performance of the external auditors. This
process is supported by tailored questionnaires completed by the AC members and relevant senior
management personnel. The responses received are collated and presented to the AC for discussion.
The objectivity and independence of the external auditors is safeguarded and effectiveness of the external audit
process assessed through monitoring of their relationship with the Group by the AC, including the monitoring of
the balance between audit and permissible non-audit services. As an additional check on independence the AC
has developed and implemented a Group Policy on the Provision of Non-Audit Services by the Group’s statutory
auditors in line with the EU Directive and related regulation.
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5.
5.3
Board Committees (continued)
Audit Committee (continued)
5.3.2 Arrangements relating to the external auditor (continued)
The Group policy ensures, among other things, that auditor objectivity and independence are not compromised.
Under this policy, a key procedural control requires that any engagement of the external auditors for services
must be approved in advance by the AC. The AC monitors compliance with the Group Policy and receives
reports on the performance of such services.
The external auditors provide 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, to confirm their
independence and refers this analysis to the Board.
Information on fees paid in respect of audit and non-audit services, along with details of non-audit services
provided during the year are set out in Note 16 of the Consolidated Financial Statements.
The European Directive which was enacted into national law in May 2017 in Cyprus and in June 2016 in Ireland
on statutory audits covers mandatory audit firm rotation, additional restrictions on the provision of non-audit
services, further requirements on audit committee oversight of the performance of the audit and new
requirements regarding auditor reporting. Following a transparent and competitive tender process, including
presentations from all candidate firms and discussions with management, the AC recommended to the Board
the appointment of the audit firm of PricewaterhouseCoopers (‘PwC’) for accounting periods commencing 1
January 2019 and the AC also examined the process followed to ascertain the independence of the new
statutory auditors.
5.4
Risk Committee
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 RC on 31 December 2018 comprised four Non-executive Directors most of whom independent. The Board
considers that the RC, as a whole, possesses adequate knowledge, skills and expertise to fully understand and
monitor the risk strategy and the risk appetite of the Group.
Biographical details, including each member’s background, experience and independence status, are set out in
section 4 of this report.
The Committee held 16 meetings during 2018. The Chairman and members of the Committee together with
their attendance at meetings are shown below.
Member attendance in 2018:
RC meetings* in 2018
Arne Berggren (Chairman)
Maksim Goldman
Ioannis Zographakis
Paula Hadjisotiriou (since 13 August 2018)
16/16
16/16
15/16
7/7
* The number of committee meetings at BOC PCL level were 17 during 2018. The attendance of these meetings can be
found on page 303.
To ensure coordination with the work of the AC, Mr. Zographakis is the Chairman of the AC while Mr. Berggren
and Mrs Hadjisotiriou are members of the AC. Mr Goldman is also a member of the NCGC. Such common
membership facilitates effective governance across all finance and risk issues. Agendas can be aligned and
overlap of responsibilities can be avoided.
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5.
5.4
Board Committees (continued)
Risk Committee (continued)
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);
and
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 46 to 49 of the Consolidated
Financial Statements and the Additional Risk and Capital Management Disclosures section of the 2018 Annual
Financial Report.
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. The Committee also reviewed and
challenged the approach and the assumptions of the ICAAP and ILAAP. A more granular approach to legal risk
in terms of ICAAP was requested and reviewed.
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 concentrated on the transition from non-
performing to performing status as well as Information Security Control maturity assessment. Further the
Committee discussed and approved, or recommended for approval a large number of restructurings and
contractual or non-contractual write-offs.
The RC discussed and approved the RC calendar for 2018 and undertook the following key activities:
Risk
Management
Strategy
and
• Recommendation of the Risk Appetite Statement and approved the Group Risk
Framework and Policy;
• Review of top and emerging risks;
• Approval of risk-related limits;
• Review of Alignment of Risk appetite and Group strategy;
• Review of monthly reports from the GCRO including a risk map;
• Review of Shipping Loans;
• NPE strategy for the years 2018-2020;
•
Loan syndication strategy to facilitate diversification of risk.
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5.
5.4
Board Committees (continued)
Risk Committee (continued)
Operational Risk
• Approval of the operational risk framework;
• Review of IT risk and cybercrime and model risk;
• Consideration of business continuity, information security, cybersecurity etc.
Credit Risk
• Review of the Group’s asset quality while reviewing the assessment of
impairment provisions;
• Approval of the non-performing loans strategy and operating plan;
• Recommendation for approval of the Group Credit Policy;
• Review of the Group Country Risk Policy and limits;
• Approval/recommendation of a large number of restructurings and contractual or
non-contractual write-offs.
Market / Liquidity Risk
• Recommendation of the Group Market Risk Policy and review of controls on
Other Risk
Governance
discretionary risk and stress testing;
• Recommendation of the Group Funding and Liquidity Policy and management
strategy including the Contingency Funding Plan and the Group Liquidity Stress
Testing Position;
• Approval of the Liquidity Adequacy Statement;
• Monitor the activities and decisions of ALCO through a review of its minutes.
• Review of Reputational Risk;
• Review of regulatory communication;
• Review of other Risk related policies such as Concentration Risk Policy, Asset
Acquisition and Disposal Policy;
• Approval of the Capital Adequacy Statement;
• Review and approval of the Recovery Plan.
• Review of the terms of reference of the RC.
• Review of the effectiveness of the Committee.
• Appraisal of the Group Chief Risk Officer and the Information Security Manager.
• Review of the reports of material subsidiaries.
• Update on Group Regulatory/Supervisory Activity.
The Chairman of the Committee reported to the Board after each meeting to ensure all Directors were fully
informed of the Committee’s activities.
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 2018 Annual Financial Report of the
Group, after the Corporate Governance Report. Information on the remuneration of the members of the Board
for the year 2018 is disclosed in Note 51 of the Consolidated Financial Statements of the Group, as well as in
the Remuneration Policy Report.
7.
Shareholder Relations
Mrs Annita Pavlou, Manager Investor Relations Department, has been appointed by the Board as Investor
Relations Officer, responsible for the communication between shareholders and the Group since 30 August
2016. Information concerning the Group is provided to shareholders, prospective investors, brokers and
analysts in a prompt and unbiased manner free of charge.
The Group uses its website (www.bankofcyprus.com) to provide shareholders and potential investors with
recent and relevant financial information, including the annual, the mid-year financial report and quarterly
results, announcements and presentations.
The Investor Relations section of the Group’s website is updated with all announcements published on the LSE
and CSE as these are made. It also contains contact details for the Investor Relations Department.
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7.
Shareholder Relations (continued)
Directors receive an investor relations update from management at all scheduled Board meetings. This update
typically includes market updates, share price and valuation analysis, updates on analysts’ reports and share
register analysis.
One of the responsibilities of the Chairman of the Board is to ensure that the views, issues and concerns of
shareholders are effectively communicated to the Board and to ensure that Directors develop an understanding
of the views of major investors. The SID, Mr. Ioannis Zographakis, 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 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.
Under the Irish Companies Act 2014, one or more members holding at least 3% of the issued share capital of
the Company, representing at least 3% of the total voting rights of all the members who have a right to vote at
the meeting to which the request for inclusion of the item relates, has the right to: (a) put an item on the
agenda of the AGM provided that the item has been accompanied by stated grounds justifying its inclusion or a
draft resolution to be adopted; and (b) to table a draft resolution for an item on the agenda of a general
meeting. Such a request must have been received by the Company at least 42 days prior to the relevant
meeting.
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
2018 the following were the major shareholders in Bank of Cyprus Holdings Public Limited Company:
•
•
•
•
•
•
•
Lamesa Investments Limited
European Bank for Reconstruction and Development
Cyprus Popular Bank Public Co Ltd
TD Asset Management
Eaton Vance
Senvest Management LLC
Osome Investments Ltd
9.27%
5.02%
4.81%
4.01%
3.82%
3.67%
3.03%
The AGM was held on 28 August 2018 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 2018 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
London and Cyprus Stock Exchanges.
The AGM of the Company in 2019 is scheduled to be held on 14 May 2019.
324
BANK OF CYPRUS HOLDINGS GROUP
Annual Corporate Governance Report 2018
Remuneration Policy Report for the year 2018
Annual Financial Report 2018
Remuneration Policy Report for the year 2018
1.
Introduction
In accordance with the provisions of the CSE Code published by the CSE (4th Edition (Revised) April 2014) and in
particular Annex 1 of the CSE Code, the HRRC prepares the Annual Board of Directors’ Remuneration Policy Report
which is ratified by the Board and submitted to the shareholders’ AGM as part of the Annual Report of the Group.
The Board of Directors Remuneration Policy Report for the year 2018 was ratified by the Board on 28 March 2019.
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
interests of the Group’s shareholders.
2.
Human Resources and Remuneration Committee
The Committee’s primary role is to ensure that staff members contribute to sustainable growth by staying ahead
of challenges and opportunities.
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’ AGM. The Committee also reviews the related party
transactions note (Note 51) of the Consolidated Financial Statements of the Group and the Remuneration Policy
Report itself.
2.1
Terms of Reference of the Human Resources and Remuneration Committee
The role of the Committee is:
•
•
•
•
•
To ensure that the Group is equipped with the human capital at the right size and with the right skill mix
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 and elicit the right behaviour which would lead to the desired outcome.
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 consider, agree and recommend to the Board 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 Εxecutive Directors of the Group, Senior Management
and the Group Remuneration policy bearing in mind the EBA Guidelines on remuneration policies and
practices, the CBC Governance Directive, the CSE Code and the UK Code.
The Committee reviews the implementation and effectiveness of the Remuneration Policy and ensures this is in
compliance with the Remuneration Framework of 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 judgement 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 Senior
Management throughout the Group.
325
BANK OF CYPRUS GROUP
Annual Corporate Governance Report 2018
Remuneration Report for the year 2018
Annual Financial Report 2018
Remuneration Policy Report for the year 2018 (continued)
2.
2.1
Human Resources and Remuneration Committee (continued)
Terms of Reference of the Human Resources and Remuneration Committee (continued)
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 Group’s strategic priorities.
The Committee reviews and approves the content of any resolutions submitted for approval at the AGM 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.
Senior Management
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’ appraisals are 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 AGM to answer any questions regarding the
Remuneration Policy of the Group.
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 talent required for the efficient operation of the
Company. Part of the remuneration of Executive Directors should be determined in such a way as to link rewards
to corporate and individual performance. Resolution, or any other authority allowing, variable pay should be
linked to 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.
3.2
EBA Guidelines
The EBA Guidelines aim to ensure that an institution’s remuneration policies and practices are consistent with and
promote sound and effective risk management. The Group seeks to ensure it implements remuneration policies
which are in compliance with regulatory guidelines, while at the same time operating under legal and regulatory
constraints.
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
Material Risk Takers. The list was approved by the Board in December 2017 and was applicable for 2018.
326
BANK OF CYPRUS GROUP
Annual Corporate Governance Report 2018
Remuneration Report for the year 2018
Annual Financial Report 2018
Remuneration Policy Report for the year 2018 (continued)
4.
4.1
Remuneration
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 28 August 2018 approved the same levels of remuneration as those
approved by the shareholders’ AGM on 29 August 2017. They also approved remuneration for the members and
Chairperson of the Technology Committee established in February 2017.
The Committee proposes fees payable to the Chairman and the Vice Chairman, 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, the Vice Chairman of €80,000, the SID 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, the Nominations and Corporate Governance Committee (NCGC) and the
Technology Committee (TC) receive annual fees of €30,000 each. Each member of the HRRC and the TC 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. The Group CEO
and the Group Deputy CEO & Chief Operating Officer (‘DCEO & COO’) are employees of BOC PCL.
Contracts of Employment
The employment contract of the Group CEO, Mr. John Patrick Hourican, has been extended up to 31 December
2020. On 3 March 2019, the Group CEO made known his decision to leave the Group in September 2019.
No amount of variable remuneration has been paid during 2018 and 2017. In line with the 2016 and 2017 SREP
decisions, the variable pay is capped at 10% of consolidated net revenues.
Service Termination Agreements
The service contract of the Group CEO includes a clause for termination, by service of six months’ notice to that
effect upon the Executive Director, without cause but at BOC PCL’s sole discretion. In such a case, BOC PCL 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 by
the BOC PCL based on years of service and for a four month prior written notice by the Executive director in the
event of a voluntary resignation.
Bonus
No bonus was recommended by the Company’s Board for Executive Directors for 2018.
327
BANK OF CYPRUS GROUP
Annual Corporate Governance Report 2018
Remuneration Report for the year 2018
Annual Financial Report 2018
Remuneration Policy Report for the year 2018 (continued)
4.
4.2
Remuneration (continued)
Remuneration and Other Benefits of Executive Directors (continued)
Retirement Benefit Schemes
The Group CEO participates in a defined contribution plan largely on the same basis as other employees. The
DCEO & COO participates in a defined contribution plan on the same basis as other employees.
The main characteristics of the retirement benefit schemes are presented in Note 15 of the Consolidated Financial
Statements for the year ended 2018.
Share Options
No share options were granted to the Executive Directors during 2018.
Other Benefits
Other benefits provided to the Executive Directors include other benefits provided to staff, medical fund
contributions and life insurance. The Group CEO is provided with other benefits related to his relocation and
residence in Cyprus. The relevant costs for the Executive Directors are disclosed in Note 51 of the Consolidated
Financial Statements for the year ended 2018.
The Group CEO, Mr Hourican, receives and retains fees relative to his appointment as a Non-executive on the
Board of Atradius N.V. of €50,000.
328
BANK OF CYPRUS GROUP
Annual Corporate Governance Report 2018
Remuneration Report for the year 2018
Annual Financial Report 2018
5.
Information Regarding the Remuneration of Directors for Year 2018
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
Arne Berggren
Anat Bar-Gera
Lyn Grobler
Paula Hadjisotiriou
Michael Heger
Maria Philippou
Michael Spanos
Ioannis Zographakis
2,338,672
211,861
-
-
2,338,672
211,861
-
-
-
-
-
-
150,000
120,000
115,000
85,000
90,000
36,519
150,000
120,000
115,000
85,000
90,000
36,519
110,000
110,000
28,656
100,000
135,000
28,656
100,000
135,000
2,550,533
970,175
3,520,708
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,338,672
198,000
211,861
17,599
150,000
120,000
115,000
85,000
90,000
36,519
110,000
28,656
100,000
135,000
-
-
-
-
-
-
-
3,520,708
215,599
* Includes employers’ contributions excluding contributions to retirement benefits.
28 March 2019
329
Additional Risk and Capital Management
Disclosures
2018
330
BANK OF CYPRUS HOLDINGS GROUP Annual Financial Report 2018
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 44 of the
Consolidated Financial Statements for the year ended 31 December 2018, 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 and European Central Bank’s (ECB) Guidance to Banks on Non-Performing
loans (which was published in March 2017), Non-Performing Exposures (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 the Capital Requirements Regulation
(CRR) (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.
The extension of forbearance measures does not lead to the recognition of impairment or default.
NPEs may cease to be considered as non-performing only when all of the following conditions are met:
(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.
(iv) No unlikely-to-Pay criteria exist for the debtor.
(v)
The debtor has made post-forbearance payments of a not-insignificant amount of capital (different
capital thresholds exist according to the facility type).
331
BANK OF CYPRUS HOLDINGS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2018
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 2018
Loans and advances to customers
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
Loans and advances to customers
classified as held for sale
Total on-balance sheet
Of which exposures with
forbearance measures
Group gross
customer
loans and
advances1
Of which
NPEs
€000
€000
Total exposures
with
forbearance
measures
€000
70,638
167,910
6,331,381
3
21,338
1,941,479
1,595
28,028
1,682,997
Total provision
for impairment
and fair value
adjustment on
initial
recognition
€000
Of which
NPEs
€000
Of which exposures with
forbearance measures
Total
exposures with
forbearance
measures
€000
Of which on
NPEs
€000
3,681
13,378
947,857
-
8,471
864,983
468
3,374
367,235
-
2,076
347,924
Of which on
NPEs
€000
-
5,621
1,042,164
4,573,824
1,488,289
1,108,153
793,579
759,484
692,343
280,675
266,736
4,473,159
1,284,145
1,124,078
742,839
569,351
501,842
231,694
216,486
972,059
1,431,706
382,697
522,151
1,005,691
96,702
1,140,596
428,828
1,352,501
6,588,202
406,226
134,950
398,753
2,805,496
1,924,928
1,486,583
184,282
254,823
58,563
174,269
74,884
201,036
1,271,429
1,208,624
481,701
471,184
5,022,617
2,112,152
1,552,445
1,180,705
828,205
774,656
336,651
327,956
891,964
397,747
234,572
195,422
225,505
221,996
13,158,131
4,768,316
3,637,548
2,534,368
2,236,345
2,082,078
79,417
852,778
77,930
821,184
2,851,113
2,749,301
1,492,083
1,437,851
1,697,005
1,646,091
825,977
797,692
16,009,244
7,517,617
5,129,631
3,972,219
3,933,350
3,728,169
1,678,755
1,618,876
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.
332
BANK OF CYPRUS HOLDINGS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2018
1.
Credit risk (continued)
31 December 2017
General governments
Other financial corporations
Non-financial corporations
Of which: Small and Medium sized
Enterprises4
Of which: Commercial real estate4
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
loans4
Of which: Credit for consumption4
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
advances3
Of which
NPEs
€000
88,780
387,169
10,586,922
€000
2,618
264,809
5,187,722
Of which exposures with
forbearance measures
Total exposures
with
forbearance
measures
€000
4,263
202,501
4,025,293
Of which on
NPEs
€000
2,358
180,836
2,851,028
Total provision
for impairment
and fair value
adjustment on
initial
recognition
€000
2,098
97,237
2,702,685
Of which
NPEs
€000
1,128
95,696
2,604,430
Of which exposures with
forbearance measures
Total
exposures with
forbearance
measures
€000
Of which on
NPEs
€000
1,367
41,254
1,228,304
1,061
40,532
1,181,589
8,695,078
4,843,832
3,630,398
2,661,059
2,464,383
2,378,953
1,089,330
1,049,587
8,002,352
4,153,585
3,497,693
2,431,002
2,037,490
1,952,487
1,013,916
973,244
2,303,375
1,973,382
1,743,627
876,763
1,314,939
420,392
2,768,637
648,131
1,578,458
7,691,844
1,028,638
342,666
775,636
3,348,567
2,452,419
1,700,494
893,938
495,099
222,789
518,261
172,232
400,366
1,350,241
1,287,442
500,603
480,676
5,254,483
2,294,294
1,918,345
1,277,136
732,039
684,818
307,742
292,726
1,000,327
504,304
285,386
221,049
275,873
266,760
84,288
80,526
18,754,715
8,803,716
6,684,476
4,734,716
4,152,261
3,988,696
1,771,528
1,703,858
3 Excluding loans and advances to central banks and credit institutions.
4 The analysis shown in lines ‘non financial corporations’ and ‘households’ is non-additive across categories as certain customers could be in both categories.
333
BANK OF CYPRUS HOLDINGS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2018
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 Bank of Cyprus Holdings Group (the
Group) for further collateral or liquidity requirements. The total encumbered assets of the Group amounted to
€3,384,455 thousand as at 31 December 2018 (2017: €3,575,278 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 potentially pledged and those that are not readily available to be pledged. As at 31 December 2018,
the Group held €12,518,132 thousand (2017: €14,909,010 thousand) of unencumbered assets that can be
potentially pledged and can be used to support potential liquidity funding needs and €4,878,219 thousand
(2017: €3,748,804 thousand) of unencumbered assets that are not readily available to be pledged for funding
requirements in their current form.
Loans and advances indicated as encumbered as at 31 December 2018 and 31 December 2017 are mainly
used as collateral for funding from the ECB and the covered bond.
Loans and advances to customers include mortgage loans of a nominal amount €1,009 million (31 December
2017: €1,001 million) in Cyprus, pledged as collateral for the covered bond issued by BOC PCL in 2011 under
its Covered Bond Programme. Furthermore, as at 31 December 2018 housing loans of a nominal amount
€1,543 million (31 December 2017: €1,273 million) in Cyprus are pledged as collateral for the funding from
the ECB (Note 31 of the Consolidated Financial Statements for the year ended 31 December 2018). As at 31
December 2018, no loans and advances to customers were pledged as collateral for deposits of the Republic
of Cyprus (31 December 2017: €715 million).
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:
Total
€000
5,083,023
1,514,691
10,921,786
31 December 2018
Encumbered
Unencumbered
Pledged as
collateral
€000
Which can
potentially be
pledged
€000
Which are not
readily available
to be pledged
€000
Cash and bank placements
Investments
Loans and advances to customers
Non-current assets held for sale
Property
118,627
737,587
2,528,241
-
-
4,326,166
742,152
5,708,960
638,230
34,952
2,684,585
-
1,470,038
1,470,038
1,740,854
50,414
1,791,268
Total on-balance sheet
3,384,455
12,518,132
4,878,219
20,780,806
31 December 2017
Cash and bank placements
Investments
Loans and advances to customers
Non-current assets held for sale
Property
120,525
317,167
3,137,586
-
-
4,135,621
726,963
8,278,614
330,421
76,482
3,186,254
4,586,567
1,120,612
14,602,454
-
6,500
6,500
1,767,812
149,147
1,916,959
Total on-balance sheet
3,575,278
14,909,010
3,748,804
22,233,092
334
BANK OF CYPRUS HOLDINGS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2018
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.
These are mainly pledged for the funding facilities of the Central Banks (ECB and CBC) (Note 31 of the
Consolidated Financial Statements for the year ended 31 December 2018), for the covered bond and for
deposits of the Republic of Cyprus. Investments are mainly used as collateral for repurchase transactions with
commercial banks as well as supplementary assets for the covered bond (Note 48 of the Consolidated
Financial Statements for the year ended 31 December 2018). 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 and for other
operational purposes.
BOC PCL maintains a Covered Bond Programme set up under the Cyprus Covered Bonds legislation and the
Covered Bonds Directive of CBC. Under the Covered Bond Programme, BOC PCL has in issue covered bonds of
€650 million secured by residential mortgages originated in Cyprus. On 6 June 2018, the terms of the covered
bond have been amended to extend the maturity date to 12 December 2021, and set the interest rate to 3
months Euribor plus 2.50% on a quarterly basis. The covered bonds are traded on the Luxemburg Bourse.
The covered bonds have a conditional Pass-Through structure. All the bonds are held by BOC PCL. The credit
rating of the covered bonds 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.
The Republic of Cyprus was upgraded to investment grade (BBB-) by S&P Global Ratings in September 2018
and by Fitch Ratings in October 2018. The Cyprus Government bonds became ECB eligible in September 2018.
Unencumbered assets which can potentially be pledged include Cyprus loans and advances which are less
than 90 days past due and are expected to be eligible for ELA funding, as well as loans of overseas
subsidiaries and branches which are available to be 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 not
readily available to be pledged.
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.
335
BANK OF CYPRUS HOLDINGS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2018
2.
Liquidity risk and funding (continued)
2.1
Encumbered and unencumbered assets (continued)
The carrying and fair value of the encumbered and unencumbered investments of the Group as at 31
December 2018 and 2017 are as follows:
31 December 2018
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
-
-
737,587
739,222
149,948
627,156
149,948
633,773
Total investments
737,587
739,222
777,104
783,721
31 December 2017
Equity securities
Debt securities
1,740
1,740
315,427
315,425
153,903
649,542
153,903
655,990
Total investments
317,167
317,165
803,445
809,893
2.2
Liquidity regulation
The Group has to comply with provisions on the Liquidity Coverage Ratio (LCR) under CRD IV/CRR (as
supplemented by the Commission Delegated Regulation (EU) No 2015/61 which prescribes the criteria for
liquid assets and methods of calculation as from 1 October 2015 and the Commission Implementing
Regulation (EU) No 2016/322 which prescribes supervisory reporting requirements and applied from 10
September 2016). It also monitors its position against the Net Stable Funding Ratio (NSFR) as proposed under
Basel III. 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.
In October 2014, the Basel Committee on Banking Supervision proposed the methodology for calculating the
NSFR. It is noted that the NSFR did not become effective on 1 January 2018 as opposed to what was
expected.
As at 31 December 2018 the Group was in compliance with all regulatory liquidity requirements. As at 31
December 2018 the LCR stood at 231% for the Group (compared to 190% at 31 December 2017) and was in
compliance with the minimum regulatory requirement of 100% applicable as from 1 January 2018. As at 31
December 2018 the Group’s NSFR, on the basis of the Basel ΙΙΙ standards, was 119% (compared to 111% at
31 December 2017).
On 1 January 2018, the local regulatory requirements, set by the CBC, were abolished as per Article 412(5) of
EU Regulation No 575/2013.
In December 2017, the CBC introduced a macroprudential measure in the form of a liquidity add-on that was
imposed on top of the LCR of BOC PCL and which became effective on 1 January 2018. The objective of the
measure was to ensure that there would be a gradual release of the excess liquidity in the Cyprus banking
system arising from the lower liquidity requirements under the LCR compared to the ones under the local
regulatory liquidity requirements previously in place. The add-on applied stricter outflow and inflow rates on
some of the parameters used in the calculation of the LCR, as well as additional liquidity requirements in the
form of outflow rates on items that are not subject to any outflow rates under the LCR. The measure was
implemented in two stages. The first stage required stricter outflow and inflow rates which were applicable
from 1 January 2018 until 30 June 2018.
336
BANK OF CYPRUS HOLDINGS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2018
2.
Liquidity risk and funding (continued)
2.2
Liquidity regulation (continued)
The second stage required more relaxed outflow and inflow rates compared to the initial ones, and were
applicable from 1 July 2018 until 31 December 2018. Specifically, there was a reduction of 50% of the LCR
add-on rates as from 1 July 2018.
The additional liquidity requirement was applicable up to 31 December 2018. As at 31 December 2018, the
Group and BOC PCL were in compliance with both the LCR and the LCR add-on.
2.3
Liquidity reserves
The below table sets out the Group’s liquidity reserves:
31 December 2018
31 December 2017
Composition of the
liquidity reserves
Liquidity
reserves
Liquidity reserves as
per LCR Delegated
Reg (EU)
2015/61 LCR eligible
Level 2A
Level 1
Liquidity
reserves
Liquidity reserves as per
LCR Delegated Reg (EU)
2015/61 LCR eligible
Level 1
Level 2A
Cash and balances with
central banks
Nostro and overnight
placements with banks
Other placements with
banks
Liquid investments
€000
€000
€000
€000
€000
€000
4,447,511 4,447,511
281,383
-
-
-
-
-
-
3,239,985
2,896,935
676,431
283,735
-
-
-
-
-
881,091
929,380
93,165
591,565
548,706
69,782
Available ECB Buffer
108,374
-
-
2,151
-
-
Total
5,718,359 5,376,891
93,165
4,793,867
3,445,641
69,782
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. The Liquidity Reserves exclude Local Law
Government of Cyprus issues amounting to €48 million. Going forward, Local Law Government of Cyprus
issues will be included in the Liquidity Reserves given that they are now ECB eligible.
Liquidity Investments include an amount of €405 million bonds that were part of the ECB pool at year end.
Given that these bonds were not utilized and as per LCR Delegate Regulation (EU) 2015/61, these bonds are
considered liquid, even though in section 2.1. Encumbered and Unencumbered assets they are indicated as
encumbered.
Under the 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.
As at 31 December 2018, ECB funding was at €830 million in the form of 4-year TLTRO II. 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. The interest rate applicable to the amount borrowed by BOC PCL under the
TLTRO II transactions, in total €830 million, will be 0% as eligible net lending in the pre-specified period did
not exceed the benchmark.
337
BANK OF CYPRUS HOLDINGS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2018
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 that the impact on the Group’s profitability and
corporate objectives is contained.
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, Information
Security and 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.
During 2018, ongoing activities/initiatives towards further enhancement of Operational Risk Management
involved-inter alia-the following: (i) enhancement to the operational risk database, (ii) plan finalisation for the
implementation of Phase II (Cards & ATMs), of the Fraud Risk Management System, (iii) setting up of a new
fraud alerts investigation team, (iv) deployment of a Business continuity Management System Software tool,
(v) implementation of rigorous monitoring of the progress on agreed action plans for risk mitigation, with
strict criteria for adherence to agreed deadlines, (vi) enhancements incorporated to the RCA Methodology,
(vii) enhancement the ICAAP and stress testing processes with emphasis on legal risk.
Operational risk loss events are classified and recorded in the Group’s internal loss database (a new improved
system was launched in 2016 providing for the integration of all risk-control data under the same system) to
enable risk identification, corrective action and statistical analysis. During the year ended 31 December 2018,
239 loss events with gross loss equal to or greater than €1,000 each were recorded (2017: 282).
The Group strives to continuously enhance its risk control culture and increase awareness of its employees on
operational risk issues through ongoing staff training. Further to classroom/workshop type of training offered,
e-learning sessions to all staff also ran in 2018 on Business Continuity Risk awareness and Conduct Risk
awareness, while more e-learning sessions on Operational Risk Management concepts and tools are planned
to run on an on-going basis.
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.
338
BANK OF CYPRUS HOLDINGS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2018
3.
Other risks (continued)
3.2
Regulatory risk
The Group’s operations are supervised by the ECB as a supervisory body for all the banks in the Eurozone
area (referred to as the Single Supervisory Mechanism, SSM). The ECB exercises its supervisory
responsibilities in cooperation with the national central banks which together constitute the Eurosystem, the
central banking system of the Eurozone. As such, in Cyprus the ECB cooperates with the CBC, as the
Company is considered as an Other Systemically Important Institution (O-SII) for the purposes of the ECB
Regulation.
The overseas subsidiaries and branches of the Group are also supervised by the ECB and 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/non-implementation of regulatory requirements and any
adverse regulatory and governmental developments.
The implementation of SSM recommendations as well as Supervisory Review and Evaluation Process
(SREP) prudential requirements, may impact the Group and the Group’s strategy.
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 is exposed to tax risk and failure to manage such risk may adversely impact the Group.
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
(DGSD) 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.
339
BANK OF CYPRUS HOLDINGS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2018
3.
Other risks (continued)
3.2
Regulatory risk (continued)
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 required capital which should be maintained by insurance companies in order to
ensure they meet the solvency 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 2018.
The Cyprus Investment and Securities Corporation Ltd (CISCO) and BOC Asset Management Ltd (BOCAM) are
members of the Investor Compensation Fund (ICF) for clients of Investment firms. The ICF 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. In 2017 Law 144(I)/2007 was
replaced by Law 87(I)/2017. The powers and functions of the ICF are regulated by the provisions of the
Directive 144-2007-15 of the Cyprus Securities and Exchange Commission (CySEC) for the Continuance of the
Operation and the Operation of the IF Investor Compensation Fund. The ICF is administered by a five member
Administrative Committee, comprised of two members designated by CySEC and CSE, two members elected
by the General Meeting of the members of the Fund and one member designated by the Minister of Finance.
Both CISCO and BOCAM are 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 under the
Investment Firms (IF) Law 2002, as amended. It is governed by the establishment and operation regulations
of an Investor Compensation Fund for Clients of Banks Regulations of 2004 and 2007. Such a Fund is
administered by a five member Management Committee, comprised of the Governor and the Senior Manager
of the Banking Supervision and Regulation Division of CBC and three other members appointed by the
Governor of CBC. The Company is obligated to contribute annually an amount of up to 0.01% of the eligible
funds and financial instruments of the Company's clients.
Regulation (EU) No. 2016/679 of 27 April 2016 on the protection of natural persons with regard to the
processing of personal data and on the free movement of such data (also known as the EU General Data
Protection Regulation or the “GDPR”) directly applies in all EU member states (including Cyprus) from 25 May
2018. The GDPR introduces new obligations on data controllers and enhanced rights for data subjects. The
requirements of the GDPR affect the Group’s ability to collect, record, store, retain and use personal data as
well as transfers of personal data to countries that do not have adequate data protection laws. The
implementation of the GDPR required substantial amendments to the Group’s procedures, systems and
policies.
340
BANK OF CYPRUS HOLDINGS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2018
3.
Other risks (continued)
3.2
Regulatory risk (continued)
Directive (EU) 2015/2366 on payment services (the “PSD II”) was enacted into the Law on the Provision and
Use of Payment Services and Access to Payment Systems (Law No. 31(I)/2018). The Company is fully
compliant with this Law, by duly amending the agreement and relative terms and conditions applied to the
payment services offered by the Company to its clients.
Directive (EU) 2014/65/EU and Regulation (EU) No. 600/2014 on markets in financial instruments (the “MiFID
II and MiFIR”) was transposed into national law with the enactment of the Law on the provision of investment
services, the exercise of investment activities and the operation of regulated markets (Law No. 87(I)/2017).
This new legislative framework strengthens investor protection and improves the functioning of financial
markets. The implementation of MiFID II and MiFIR required substantial amendments to the Group’s
procedures, systems and policies.
A package of new laws and legislative amendments have been enacted in the course of 2018 with the purpose
of facilitating transactions aimed at reducing the non-performing exposures (“NPE transactions”) of banks in
Cyprus:
A new Securitisation Law (Law No. 88(I)/2018) was introduced regulating the securitisation
transactions.
The Sale of Credit Facilities Law (Law No. 169(I)/2015) has been amended in order to, amongst
others, make clear that, with the sale of a credit facility, the automatic transfer of mortgages and
securities registered at the LRO and/or the Registrar of Companies, as well as the transfer of
recoveries and of judgements, legal and foreclosure proceedings is achieved.
The Immovable Property (Transfer and Mortgage) Law (Law No. 9(I)/1965) was also amended with
the aim of improving the foreclosure procedure, in order to minimize and/or avoid any impediments or
undue delays and make the whole procedure more efficient.
Certain tax laws (Transfer Fees Law, Income Tax Law, Defence Tax Law, Stamp Duty Law and Capital
Gains Tax Law) were amended:
o
o
in order to capture, in the relevant exemptions for fees and taxes in cases of restructuring, not
only banks but also CyCACs (credit acquiring companies under the Sale of Credit Facilities
Law) and
for the extension of the tax exemptions that banks currently benefit from when entering into
debt for asset swaps (DFAS) with the debtholders to direct disposals by the debtholders to any
third party in the open market.
3.3
Intensity of competition
The Group faces intense competition in the markets in which it operates in the Cyprus economy. Competition
primarily originates from other commercial banks, branches and subsidiaries of foreign banks, and insurance
companies offering savings and investment products.
During 2016 the Group’s market share in deposits increased significantly and continued to increase in 2017
and 2018 as well. 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 40 of the Consolidated Financial Statements for the year ended 31 December 2018) 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.
341
BANK OF CYPRUS HOLDINGS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2018
3.
Other risks (continued)
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 with a large and expanding export sector. Exports of goods and services have
been about 66% of Gross Domestic Product (GDP) in 2017 and the first three quarters of 2018. As a result the
Cyprus economy is exposed to developments outside its borders, particularly in Russia, the UK and Greece.
Cyprus is also exposed to developments in the European Union and the Eurozone that might impact bond
markets and interest rates as well as to developments in the global economy at large, including trade.
According to the IMF, the global economy is slowing in 2019-20 (World Economic Outlook Update, January
2019). For a second time the IMF lowered its forecast for global growth and growth within the Eurozone
(especially for Germany and Italy) in its January update compared to its October forecast.
In the UK uncertainty over Brexit has risen. Parliament rejected the Withdrawal Agreement the government
negotiated with the EU when first put to a vote in January and then again in March. Subsequently at an EU
summit the EU leaders agreed to extend Brexit past March 29 but on an if-then basis. If the UK government
succeeds in getting the withdrawal agreement approved by Parliament before April 12, the extension will last
until May 22. If Parliament rejects the Withdrawal Agreement the extension will last until April12. At this point
the UK can ask for a longer extension to which the EU will likely agree to avoid a no-deal Brexit. A longer
extension however, will require the UK to participate in European Parliament elections.
Cyprus has close trade and investment links with the UK making its economy vulnerable to the impact of the
exit of UK from the EU (Brexit) on the UK economy. According to the European Commission (European
Economic Forecast, winter 2019, interim), UK’s GDP growth is currently subdued and expected to remain so in
2019-20 rising by 1.3% in each year compared with 1.4% in 2018 and 1.7% in 2017. Business investment
growth is likely to remain constrained. The net trade contribution to growth is projected to decrease in line
with a moderation in external demand. Weaker demand in the UK and the depreciation of sterling against the
euro following the referendum in 2016 affected the competitiveness of Cypriot exports to the UK. Exports of
goods to the UK were about 8% of total exports of goods on average in the three years to 2016 and 5.7% in
2017. Tourist arrivals from the UK accounted for about 34% of total arrivals in 2017-18. A decline in tourist
arrivals from the UK and a drop in their spending will need to be mitigated by increasing arrivals and revenues
from other countries.
Italy is in a fragile economic situation which can potentially lead to instability in the Eurozone at large. Italy
faces a combination of a stagnant economy and a high public debt which reached 132% of GDP in 2018. The
result is domestic banks with a significant quantity of non-performing loans and significant quantities of
government bonds. Bond yields will be subject to sustained upward pressures as the ECB’s ended its
Quantitative Easing programme at the end of December 2018. Italy’s inherent fragility makes it vulnerable to
external shocks related to Brexit and slow global trade.
The German economy is also slowing down, expected to grow by 1.1% in 2019 according to the European
Commission. Germany is heavily dependent on exports. Germany remains particularly vulnerable to trade
tensions between the US and Europe. The imposition of tariffs on auto exports from the EU to the US and
Europe’s retaliation constitute a significant risk.
Cyprus is less exposed to Greece than it was prior to the crisis in 2013. Greece’s departure from the Eurozone
is no longer a short-term risk. The outlook appears positive and the European Commission projects growth of
2.2% and 2.3% in 2019 and 2020 respectively (European Economic Forecast, winter 2019, interim).However,
the indirect effects of a disorderly debt default in Greece could be severe if it damages confidence in the wider
euro area.
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 neighbouring
countries and/or other overseas areas may adversely affect the Cyprus economy.
342
BANK OF CYPRUS HOLDINGS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2018
3.
Other risks (continued)
3.5
Political risk (continued)
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.
Further restrictions on Russia may seriously affect business and professional services in Cyprus linked with
Russia. The economic situation in Russia has been gradually improving driven by the stabilisation in oil prices,
the return of foreign direct investment and booms in certain sectors, for example agriculture. After dropping
by 0.2% in 2016, real GDP recovered by 1.5% in 2017 and 2018 and expected to increase by 1.6% in 2019
and 1.7% in 2020 according to the IMF (World Economic Outlook Update, January 2019).
Political risk remains at an elevated level for two reasons: the de facto division of the island and the potential
for tension with Turkey over hydrocarbons explorations in Cyprus’ Exclusive Economic Zone (EEZ). However,
given that economic relations between Cyprus and Turkey are not significant the impact of such tensions may
be expected to be low provided that these tensions do not lead to prolonged political instability in Cyprus.
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 shareholders’ value.
With the exception of certain specified provisions, the CRR and Capital Requirements Directive IV (CRD IV)
came into effect on 1 January 2014. The CRR and CRD IV transposed the new capital, liquidity and leverage
standards of Basel III into the European Union’s legal framework. CRR establishes the prudential requirements
for capital, liquidity and leverage for credit institutions and investment firms. It is directly applicable in 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, member states were required to
transpose the CRD IV into national laws and it allowed 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,
which will be largely fully effective in 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 supersede the national discretions unless they are stricter than the EU Regulation
2016/445.
The CET1 ratio of the Group at 31 December 2018 stands at 12.1% and the total capital ratio at 14.9% on a
transitional basis.
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).
343
BANK OF CYPRUS HOLDINGS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2018
4.
Capital management (continued)
Following the annual Supervisory Review and Evaluation Process (SREP) performed by the ECB in 2018 and
based on the final 2018 SREP decision received on 27 March 2019, the Group’s minimum phased-in CET1
capital ratio and Total capital ratio remain unchanged when ignoring the phasing-in of the Capital
Conservation Buffer (CCB) and the Other Systemically Important Institution Buffer. The Group’s phased-in
CET1 capital ratio requirement will be 10.5%, comprising of a 4.5% Pillar I requirement, a 3.0% Pillar II
requirement, the CCB of 2.5% and the Other Systemically Important Institution Buffer of 0.5%. The Group’s
Total capital ratio requirement will be 14.0%, comprising of a 8.0% Pillar I requirement, a 3.0% Pillar II
requirement, the Capital Conservation Buffer of 2.5% and the Other Systemically Important Institution Buffer
of 0.5%. The final 2018 SREP decision will apply from 1 April 2019.
The Group’s minimum phased-in CET1 capital ratio for 2018 was 9.375%, comprising of a 4.50% Pillar I
requirement, a 3.00% Pillar II requirement and the CCB of 1.875%. The Group’s minimum phased-in CET1
capital ratio requirement for 2017 was 9.50%, comprising of a 4.50% Pillar I requirement, a 3.75% Pillar II
requirement and the CCB of 1.25%. The ECB had also provided non-public guidance for an additional Pillar II
CET1 buffer.
The overall Total Capital Ratio Requirement for 2018 was 12.875% comprising of 8.00% Pillar I requirement
(of which up to 1.50% can be in the form of Additional Tier 1 capital and up to 2.00% in the form of Tier 2
capital), a 3.00% Pillar II requirement (in the form of CET1) and the CCB of 1.875% applicable as from 1
January 2018. The overall Total Capital Ratio Requirement for 2017 was 13.00%, comprising of a Pillar I
requirement of 8.00%, a Pillar II requirement of 3.75% and the CCB of 1.25% applicable for 2017.
The above minimum ratios apply for both, BOC PCL and the Group. BOC PCL is 100% subsidiary of the
Company and its principal activities are the provision of banking, financial services and management and
disposal of property predominately acquired in exchange of debt.
The capital position of the Group and BOC PCL at 31 December 2018 exceeds both their Pillar I and their Pillar
II add-on capital requirements. However, the 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 the above 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 for all the countries in the European Economic Area (EEA) by their
local competent authorities ahead of the beginning of each quarter. The CBC has set the level of the CCyB for
Cyprus at 0% for the years of 2018 and 2017 and the six months up to June 2019.
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 2.0%. 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.
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%.
344
BANK OF CYPRUS HOLDINGS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2018
4.
Capital management (continued)
The Bank Recovery and Resolution Directive (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 a
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 Group’s MREL has not yet been finalised, BOC PCL is monitoring developments in this area very closely.
The Group’s overseas banking subsidiaries complied with the regulatory capital requirements of the local
regulators in the countries in which they operate in 2017. 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 capital position of the Group and the BOC PCL under CRD IV/CRR basis (after applying the transitional
arrangements) is presented below:
Regulatory capital
Group
BOC PCL
31 December
2018
€000
31 December
2017
€000
31 December
2018
€000
31 December
2017
€000
Transitional Common Equity Tier 1
(CET1)5,6
Transitional Additional Tier 1 capital (AT1)
Tier 2 capital (T2)
1,864,000
2,184,152
1,861,098
2,022,949
220,000
212,000
-
266,174
220,000
250,000
-
255,026
Transitional total regulatory capital6
2,296,000
2,450,326
2,331,098
2,277,975
Risk weighted assets – credit risk7
13,832,589
15,538,637
13,820,385
14,491,974
Risk weighted assets – market risk
2,182
4,731
-
2,448
Risk weighted assets – operational risk
1,538,588
1,717,125
1,411,788
1,613,463
Total risk weighted assets
15,373,359
17,260,493
15,232,173
16,107,885
Transitional Common Equity Tier 1 ratio
Transitional total capital ratio
12.1
14.9
12.7
14.2
12.2
15.3
12.6
14.1
%
%
%
%
IFRS 9 and Deferred Tax Asset
fully loaded
Group
BOC PCL
31 December
2018
€000
31 December
2017
€000
31 December
2018
€000
31 December
2017
€000
Common Equity Tier 1 ratio (%)
Total capital ratio (%)
10.1
13.2
n/a
n/a
10.2
13.4
n/a
n/a
During the year ended 31 December 2018, the CET1 was negatively affected by the phased-in of transitional
adjustments, mainly deferred tax asset and the adoption of IFRS 9, the reduction in value of the DTA and the
loss from Helix recognised during the period.
On 1 March 2019 the Cyprus Parliament adopted legislative amendments allowing for the conversion of
deferred tax assets into deferred tax credits for regulatory purposes, under the CRR. The law amendment
increases CET1 by c.170 bps on a transitional basis as at 31 December 2018. For more details refer to Note
56.1 of the Consolidated Financial Statements.
5 CET1 inlcudes regulatory deductions, primarily comprising deferred tax assets and intangible assets amounting to €206,391 thousand and €135,205 thousand as at
31 December 2018 and 31 December 2017 respectively.
6 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.
7 Includes Credit Valuation Adjustmnets (CVA).
345
BANK OF CYPRUS HOLDINGS GROUP
Additional Risk and Capital Management Disclosures
(Unaudited)
Annual Financial Report 2018
4.
Capital management (continued)
The Group has elected to apply the EU transitional arrangements for regulatory capital purposes (EU
Regulation 2017/2395) where the impact on the impairment amount from the initial application of IFRS 9 on
the capital ratios will be phased-in gradually. The amount that will be added each year will decrease based on
a weighting factor until the impact of IFRS 9 is fully absorbed at the end of the five years.
The RWAs were negatively affected by the change in the default definition. According to the EBA guidelines
that govern the CRR default definition, issued in January 2017, the default definition will gradually evolve to
align with the NPE definition by 1 January 2021. The Group, in line with regulatory discussions, early adopted
changes that almost aligned the EBA CRR definition with the NPE definition as from 1 January 2018. The
RWAs were positively affected by the Group’s ongoing efforts for risk weighted assets optimization.
As a result of the above, the CET1 ratio decreased by 60 bps during the period.
5.
Internal Capital Adequacy Assessment Process (ICAAP), Internal Liquidity Assessment
Process (ILAAP), Pillar II and Supervisory Review and Evaluation Process (SREP) and ECB
2018 Stress Test
The Group prepares the ICAAP and ILAAP reports annually. Both reports for 2018 are in progress and will be
submitted to the ECB in April 2019 once approved by the Board of Directors.
The Group also undertakes a quarterly review of its ICAAP results (as at the end of June and as at the end of
September) considering the latest actual and forecasted information. During the quarterly review, the Group’s
risk profile and risk management policies and processes are reviewed and any changes since the annual ICAAP
exercise are taken into consideration. The ICAAP process demonstrates that the Group has sufficient capital
under both the base case and stress scenarios.
The Group also undertakes a quarterly review for the ILAAP through quarterly stress tests submitted to the
Assets and Liabilities Committee (ALCO) and Board Risk Committee. 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 Group’s
ILAAP analysis demonstrates that the volume and capacity of liquidity resources available to the Group are
adequate.
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-ons capital requirements are a point-in-time assessment and therefore subject to change over
time.
ECB 2018 Stress Test
The EBA in cooperation with the European Systemic Risk Board (ESRB) initiated the 2018 EU-wide stress tests
to assess the resilience of financial institutions to adverse market developments which was completed in the
fourth quarter of 2018.
346
BANK OF CYPRUS HOLDINGS GROUP
Definitions and explanations on Alternative Performance Measures Disclosures
Accumulated
expected credit
losses on loans and
advances to
customers
Expected credit losses to cover credit risk on loans and advances to customers
comprise: (i) allowance for ECL of loans and advances to customers, (ii) the fair
value adjustment on initial recognition of loans and advances to customers, (iii)
provisions
liabilities and
commitments) disclosed on the balance sheet within other liabilities and (iv)
accumulated fair value adjustments on loans and advances to customers
classified at FVPL.
for off-balance sheet exposures
(contingent
Cost to income ratio Cost-to-income ratio is calculated as the total staff costs, special levy on deposits
on credit institutions in Cyprus and other operating expenses (excluding advisory
and other restructuring costs) and (reversals of provisions)/provisions for
litigation and regulatory matters) divided by total income.
Expected credit
losses (cost of risk)
Expected credit loss (cost of risk) is calculated as the loan provisions charge (as
defined) divided by average gross loans and advances to customers (as defined)
(the average balance calculated as the average of the opening and closing
balance).
Expected credit
losses coverage
ratio for NPEs
Gross loans and
advances to
customers
Expected credit losses coverage ratio for NPEs is calculated as the accumulated
expected credit losses (as defined) over NPEs (as defined).
Comprises: (i) gross loans and advances to customers measured at amortised
cost before fair value adjustment on initial recognition (including loans and
advances to customers classified as non-current assets held for sale) and (ii)
loans and advances to customers measured at FVPL, including accumulated fair
value adjustments.
Interest earning
assets
Interest earning assets is the sum of: cash and balances with central banks,
loans and advances to banks, net loans and advances to customers and
investments (excluding equities and mutual funds).
Leverage ratio
The leverage ratio is calculated as the tangible total equity (including Other
equity instruments) to total assets as presented on the balance sheet.
Loan provisions
charge
Loan provisions charge comprises of: (i) credit losses to cover credit risk on loans
and advances to customers, (ii) net gains on derecognition of financial assets
measured at amortised cost and (iii) net gains on loans and advances to
customers at FVPL.
Net fee and
commission income
over total income
Fee and commission income less fee and commission expense divided by total
income (as defined).
Net Interest Margin Net interest margin is calculated as the net interest income (annualised) divided
by the average interest earning assets.
Net loans to
deposits ratio
Net loans to deposits ratio is calculated as the net loans and advances to
customers divided by customer deposits. Where applicable, loans and deposits
held for sale are added to the numerator and denominator respectively.
New loan
originations in
Directors’ Report
New lending includes the average YTD change (if positive) for credit cards and
overdraft facilities.
347
BANK OF CYPRUS HOLDINGS GROUP
Definitions and explanations on Alternative Performance Measures Disclosures
Non-performing
exposures (NPEs)
The Group in line with the European Banking Authority (EBA) standards and
European Central Bank’s (ECB) Guidance to Banks on Non-Performing Loans
(which was published in March 2017), NPEs are defined as those exposures that
satisfy one of the following conditions:
(i)
The borrower 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 the
Capital Requirement Regulation (CRR), which would also trigger a default
under specific credit adjustment, distress restructuring and obligor
bankruptcy.
(iii) Material exposures as set by the Central Bank of Cyprus (CBC), which are
more than 90 days past due.
(iv) Performing forborne exposures under probation for which additional
(v)
forbearance measures are extended.
Performing forborne exposures under probation that present more than 30
days past due within the probation period.
When a specific part of the 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 specific part of the exposure is classified
as non-performing.
NPE ratio
NPE ratio is NPEs (as defined) divided by gross loans and advances to customers
(as defined).
Operating profit
return on average
assets
Total income
Operating profit return on average assets is calculated as the annualised
operating profit divided by the average of total assets for the relevant period.
Comprises total of net interest income, net fee and commission income, net
foreign exchange gains, net gains on financial instrument transactions and
disposal/dissolution of subsidiaries and associates (excluding net gains on loans and
advances to customers at FVPL), insurance income net of claims and commissions,
net gains/(losses) from revaluation and disposal of investment properties, net gains
on disposal of stock of property and other income.
The alternative performance measures described above, have been introduced since 1 January 2018
upon the adoption of IFRS 9 and replaced the alternative performance measures used as at 31
December 2017 which are listed below:
• Accumulated provisions
•
•
•
•
•
Provisioning coverage ratio for 90+ DPD
Provisioning coverage ratio for NPEs
Provisioning charge (cost of risk)
Loans in arrears for more than 90 days (90+ DPD)
Loans in arrears for more than 90 days (90+ DPD) ratio
348
BANK OF CYPRUS HOLDINGS GROUP
Definitions and explanations on Alternative Performance Measures Disclosures
Reconciliation of Gross loans
31 December
2018
31 December
2017
€000
€000
Gross loans as per Directors’ Report
15,900,427
18,754,715
Adjustments:
Fair value adjustment on initial recognition (Note 46)*
(322,375)
(668,485)
Loans and advances to customers classified as non-current assets held
for sale (Note 46)
Fair value adjustment on initial recognition on loans and advances to
customers classified as non-current assets held for sale (Note 46)
Reclassification between gross loans and accumulated expected credit
losses on loans and advances to customers classified as held for sale
Loans and advances to customers measured at fair value through profit
and loss (Note 24)
Gross loans as per the Consolidated Financial Statements (Note
24)
(2,711,960)
(139,153)
99,000
(395,572)
-
-
-
-
12,430,367
18,086,230
* Including fair value adjustment on initial recognition of loans and advances to customers measured at fair value
through profit and loss amounting to €60,326 thousand.
Reconciliation of accumulated expected credit losses on loans
and advances to customers (ECL)
ECL as per Directors’ Report
Adjustments:
31 December
2018
31 December
2017
€000
€000
3,852,218
4,204,248
Fair value adjustment on initial recognition (Note 46)*
(322,375)
(668,485)
Loans and advances to customers classified as non-current assets held
for sale (Note 46)
Fair value adjustment on initial recognition on loans and advances to
customers classified as non-current assets held for sale (Note 46)
Reclassification between gross loans and accumulated expected credit
losses on loans and advances to customers classified as held for sale
(1,557,852)
(139,153)
99,000
-
-
-
Provisions for financial guarantees and commitments (Note 35)
(27,685)
(51,987)
Allowance for accumulated ECL as per the Consolidated Financial
Statements (Note 24)
1,904,153
3,483,776
* Including fair value adjustment on initial recognition of loans and advances to customers measured at fair value
through profit and loss amounting to €60,326 thousand.
Reconciliation of NPEs
NPEs as per Directors’ Report
Adjustments:
31 December
2018
€000
7,418,613
Loans and advances to customers classified as non-current assets held for sale
(2,749,300)
Reclassification between gross loans and accumulated expected credit losses on loans and
advances to customers classified as held for sale
99,000
Loans and advances to customers measured at fair value through profit and loss (Stage 3)
(160,907)
POCI (Stage 3)
Stage 3 loans and advances to customers as per the Consolidated Financial
Statements (Note 46)
(691,815)
3,915,591
349