Bank of Commerce Holdings
Annual Report 2023

Plain-text annual report

Annual Financial Report 2023 BANK OF CYPRUS HOLDINGS GROUP Annual Financial Report for the year ended 31 December 2023 Annual Financial Report 2023 Contents Page Board of Directors and Executives Forward Looking Statements and Notes Directors' Report of Bank of Cyprus Holdings Public Limited Company Risk and Capital Management Report ESG Disclosures Annual Corporate Governance Report 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 Bank of Cyprus Holdings Public Limited Company Alternative Performance Measures Disclosures Additional Information – EU Taxonomy Disclosure Tables 1 2 3 50 89 158 233 432 444 464 480 BANK OF CYPRUS HOLDINGS GROUP Board of Directors and Executives as at 28 March 2024 Annual Financial Report 2023 Board of Directors of Bank of Cyprus Holdings Public Limited Company Efstratios-Georgios Arapoglou CHAIRMAN Executive Committee Lyn Grobler VICE-CHAIRPERSON Panicos Nicolaou Constantine Iordanou Eliza Livadiotou Monique Hemerijck Adrian John Lewis Panicos Nicolaou CHIEF EXECUTIVE OFFICER Dr. Charis Pouangare DEPUTY CHIEF EXECUTIVE OFFICER & CHIEF OF BUSINESS Eliza Livadiotou EXECUTIVE DIRECTOR FINANCE Demetris Th. Demetriou CHIEF RISK OFFICER Irene Gregoriou EXECUTIVE DIRECTOR PEOPLE & CHANGE George Kousis EXECUTIVE DIRECTOR TECHNOLOGY & OPERATIONS Company Secretary Legal Advisers as to matters of Irish Law Legal Advisers as to matters of English and US Law Legal Advisers as to matters of Cypriot Law Statutory Auditors Registered Office Katia Santis Arthur Cox Sidley Austin LLP Chryssafinis & Polyviou LLC PricewaterhouseCoopers One Spencer Dock North Wall Quay Dublin 1 D01 X9R7 Ireland 10 Earlsfort Terrace Dublin 2 D02 T380 Ireland 1 BANK OF CYPRUS HOLDINGS GROUP Forward Looking Statements and Notes Annual Financial Report 2023 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 Group's (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, 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 rate fluctuations, legislative, fiscal and regulatory developments and information technology, litigation and other operational risks, adverse market conditions, the impact of outbreaks, epidemics or pandemics, and geopolitical developments as well as uncertainty over the scope of actions that may be required by us, governments and other to achieve goals relating to climate, environmental and social matters, as well as the evolving nature of underlying science and industry and governmental standards and regulations. This creates significantly greater uncertainty about forward-looking statements. 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. Further, forward-looking statements may be affected by changes in reporting frameworks and accounting standards, including practices with regard to the interpretation and application thereof and emerging and developing ESG reporting standards. The forward-looking statements made in this document are only applicable as at 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's (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 are directly able to influence or are relevant for an assessment of the 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 performance measures in this document are not a substitute for IFRS measures and readers should consider the IFRS measures as the key measures of the 31 December position. Refer to ‘Alternative Performance Measures Disclosures’ on pages 464 to 479 of the Annual Financial Report for the year ended 31 December 2023 for further information and calculations of non-IFRS performance measures included throughout this document and their reconciliation to the most directly comparable IFRS measures included in the Consolidated Financial Statements. The Annual Financial Report for the year ended 31 December 2023 is available on the Group’s website www.bankofcyprus.com (Group/Investor Relations) (the Group's website). The Annual Financial Report 2023 is originally issued in English. The Greek translation of the Annual Financial Report 2023 will be available on the Group’s website by 5 April 2024. In case of a difference or inconsistency between the English document and the Greek document, the English document prevails. 2 DIRECTORS’ REPORT FOR THE YEAR 2023 3 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 The Board of Directors submits to the shareholders of Bank of Cyprus Holdings Public Company Ltd (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 2023. 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 2023. Activities The Company is the holding company of the Group and of Bank of Cyprus Public Company Ltd (‘BOC PCL’ or the ‘Bank’). The principal activities of BOC PCL and its subsidiary companies involve the provision of banking, financial, and insurance services and the management and disposal of property predominately acquired in exchange of debt. All Group companies and branches are set out in Note 50 to the Consolidated Financial Statements. The Group has established branches in Greece. There were no acquisitions of subsidiaries and no material disposals of subsidiaries during the year ended 31 December 2023. Information on Group companies and acquisitions and disposals during the year are detailed in Note 50 to the Consolidated Financial Statements. 4 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Group financial results on the underlying basis Commentary on underlying basis The financial information presented in this section provides an overview of the Group financial results for the year ended 31 December 2023 on the ‘underlying basis’, which management believes best fits the true measurement of the performance and position of the Group, as this presents separately any non-recurring items and also includes certain reclassifications of items, other than non-recurring items, which are done for presentational purposes under the underlying basis for aligning their presentation with items of a similar nature. Reconciliations between the audited statutory basis and the underlying basis to facilitate the comparability of the underlying basis to the statutory information, are included in section ‘Reconciliation of the Consolidated Income Statement for the year ended 31 December 2023 between the audited statutory basis and the underlying basis’ and ‘Alternative Performance Measures Disclosures’ of the Annual Financial Report 2023. Throughout the Directors’ Report, financial information in relation to the year ended 31 December 2022 has been restated to reflect the transition to IFRS 17 which was adopted on 1 January 2023 and applied retrospectively. As a result, such 2022 financial information, ratios and metrics are presented on a restated basis unless otherwise stated. Further information on the impact of IFRS 17 transition is provided below and in Note 2.2.1 of the Consolidated Financial Statements for the year ended 31 December 2023. Throughout the Directors’ Report, the capital ratios as at 31 December 2022 have been restated in order to take into consideration the 2022 dividend declaration. This refers to the recommendation by the Board of Directors to the shareholders for approval of a final dividend in respect of the earnings of the year ended 31 December 2022 following the approval by the European Central Bank (‘ECB’). The proposed final dividend was declared at the Annual General Meeting (‘AGM’) which was held on 26 May 2023. This dividend amounted to €22.3 million in total and had a negative impact of 22 bps on the Group’s CET1 ratio and Total Capital ratio as at 31 December 2022. As a result, the 31 December 2022 capital ratios are presented as restated for the 2022 dividend unless otherwise stated. Further details are provided in section ‘Balance Sheet Analysis – Capital Base’ below. 5 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Group financial results on the underlying basis (continued) The main financial highlights for the year ended 31 December 2023 are set out below: Consolidated Income Statement on the underlying basis € million Net interest income Net fee and commission income Net foreign exchange gains and net gains/(losses) on financial instruments Net insurance result Net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties Other income Total income Staff costs Other operating expenses Special levy on deposits and other levies/contributions Total expenses Operating profit Loan credit losses Impairments of other financial and non-financial assets Provisions for pending litigations, claims, regulatory and other matters (net of reversals) Total loan credit losses, impairments and provisions Profit before tax and non-recurring items Tax Profit attributable to non-controlling interests Profit after tax and before non-recurring items (attributable to the owners of the Company) Advisory and other transformation costs - organic Profit after tax - organic (attributable to the owners of the Company) Net profit/(loss)/provisions relating to NPE sales Restructuring and other costs relating to NPE sales Restructuring costs - Voluntary Staff Exit Plan (VEP) Profit after tax (attributable to the owners of the Company) 20231 20221,2 (restated) 792 181 37 54 10 18 1,092 (192) (149) (43) (384) 708 (63) (53) (28) (144) 564 (73) (2) 489 (2) 487 - - - 487 370 192 26 44 13 17 662 (181) (144) (38) (363) 299 (47) (33) (11) (91) 208 (31) (3) 174 (11) 163 1 (3) (104) 57 1. The financial information is derived from and should be read in conjunction with the accompanied Consolidated Financial Statements. 2. On 1 January 2023 the Group adopted IFRS 17 ‘Insurance contracts’ which replaced IFRS 4 ‘Insurance contracts’. 2022 comparative information has been restated to reflect the impact of IFRS 17. For further details refer to Note 2.2.1 of the Consolidated Financial Statements for the year ended 31 December 2023. 6 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Group financial results on the underlying basis (continued) Consolidated Income Statement on the underlying basis (continued) Key Performance Ratios Net interest margin Cost to income ratio Cost to income ratio excluding special levy on deposits and other levies/contributions Operating profit return on average assets (annualised) Basic earnings per share attributable to the owners of the Company (€)2 Return on tangible equity (ROTE) Return on tangible equity (ROTE) excluding amounts reserved for distribution3 Tangible book value per share (€) 2023 3.41% 35% 31% 2.7% 1.09 24.8% 25.3% 4.93 20221 (restated) 1.65% 55% 49% 1.2% 0.13 3.2% 3.3% 3.93 1. On 1 January 2023 the Group adopted IFRS 17 ‘Insurance contracts’ which replaced IFRS 4 ‘Insurance contracts’. 2022 comparative information has been restated to reflect the impact of IFRS 17. For further details refer to Note 2.2.1 of the Consolidated Financial Statements for the year ended 31 December 2023. The diluted earnings per share attributable to the owners of the Company as at 31 December 2023 amounted to €1.09 (2022: €0.13). 2. 3. Calculated as profit after tax (attributable to the owners of the Company) (annualised) for the period divided by the average of shareholder’s equity minus intangible assets at each quarter/year end and the amounts approved/recommended for distribution in respect of earnings of the relevant year the distribution relates to. Consolidated Balance Sheet on the underlying basis € million Cash and balances with central banks Loans and advances to banks Reverse repurchase agreements Debt securities, treasury bills and equity investments Net loans and advances to customers Stock of property Investment properties Other assets Total assets Deposits by banks Funding from central banks Customer deposits Debt securities in issue Subordinated liabilities Other liabilities Total liabilities Shareholders’ equity Other equity instruments Total equity excluding non-controlling interests Non-controlling interests Total equity Total liabilities and equity 20231 20221,2 (restated) 9,615 385 403 3,695 9,822 826 62 1,821 26,629 472 2,044 19,337 672 307 1,309 24,141 2,247 220 2,467 21 2,488 26,629 9,567 205 - 2,704 9,953 1,041 85 1,734 25,289 508 1,977 18,998 298 302 1,157 23,240 1,807 220 2,027 22 2,049 25,289 1. The financial information is derived from and should be read in conjunction with the accompanied Consolidated Financial Statements. 2. On 1 January 2023 the Group adopted IFRS 17 ‘Insurance contracts’ which replaced IFRS 4 ‘Insurance contracts’. 2022 comparative information has been restated to reflect the impact of IFRS 17. For further details refer to Note 2.2.1 of the Consolidated Financial Statements for the year ended 31 December 2023. 7 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Group financial results on the underlying basis (continued) Consolidated Balance Sheet on the underlying basis (continued) Key Balance Sheet figures and ratios Gross loans (€ million) Allowance for expected loan credit losses (€ million) Customer deposits (€ million) Loans to deposits ratio (net) NPE ratio NPE coverage ratio Leverage ratio Capital ratios and risk weighted assets Common Equity Tier 1 (CET1) ratio (transitional) Total capital ratio (transitional) Risk weighted assets (€ million) 2023 20221, (restated) 10,070 267 19,337 51% 3.6% 73% 9.1% 2023 (Regulatory)3 17.4% 22.4% 10,341 10,217 282 18,998 52% 4.0% 69% 7.8% 20222 15.2% 20.4% 10,114 1. On 1 January 2023 the Group adopted IFRS 17 ‘Insurance contracts’ which replaced IFRS 4 ‘Insurance contracts’. 2022 comparative information has been restated to reflect the impact of IFRS 17. For further details refer to Note 2.2.1 of the Consolidated Financial Statements for the year ended 31 December 2023. 2. 3. The capital ratios have been restated to take into consideration the dividend in respect of the earnings of the year ended 31 December 2022. More information is provided in ‘Capital Base’ under the ‘Balance Sheet Analysis’ section below. Includes profits for the year ended 31 December 2023 net of distribution at 30% payout ratio, following ECB approval in March 2024 (refer to section ‘Balance Sheet Analysis – Capital Base’ below). 8 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Group financial results on the underlying basis (continued) Transition to IFRS 17 On 1 January 2023 the Group adopted IFRS 17 ‘Insurance Contracts’ (‘IFRS 17’) which replaced IFRS 4 ‘Insurance contracts’. IFRS 17 is an accounting standard that was implemented on 1 January 2023, with retrospective application, and establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts issued, investment contracts with discretionary participation features issued and reinsurance contracts held. In substance, IFRS 17 impacts the phasing of profit recognition for insurance contracts as profitability is spread over the lifetime of the contract compared to being recognised substantially up-front under IFRS 4. This new accounting standard does not change the economics of the insurance contracts but decreases the volatility of the Group’s insurance companies’ profitability. The Group’s total equity as at 31 December 2022 as restated for IFRS 17 compared to IFRS 4, was reduced by overall €52 million (predominantly relating to the life insurance business of the Group) as a result of: The removal of the present value of in-force life insurance contracts ('PVIF') asset including the associated deferred tax liability, resulting in a reduction of approximately €101 million in the Group’s total equity. The remeasurement of insurance assets and liabilities (including the impact of the recognition of the contractual service margin (‘CSM’)) resulting in an increase in the Group’s equity by €49 million. The estimated future profit of insurance contracts is included in the measurement of the insurance contract liabilities as the contractual service margin (‘CSM’) and this will be gradually recognised in revenue, as services are provided over the duration of the insurance contract. A contractual service margin liability of approximately €42 million was recognised as at 31 December 2022 (reflected in the impact from the remeasurement of insurance liabilities mentioned above). With regards to the Group’s income statement for the year ended 31 December 2022, as restated for IFRS 17, the profit after tax (attributable to the owners of the Company) was reduced by €14 million to €57 million (compared to €71 million under IFRS 4) reflecting mainly: Profit is deferred and held as a CSM liability as mentioned above to be recognised in the income statement over the contract service period. The impact of assumption changes relating to the future service is also deferred through the CSM liability and is recognised in the income statement over the contract service period. There is increased use of current market values in the measurement of insurance assets and liabilities (for unit-linked business) and market volatility on unit-linked business is deferred to the CSM, thereby reducing the volatility in the income statement. The transition to IFRS 17 had no impact on the Group’s regulatory capital. However, as a result of the benefit arising from the remeasurement of the insurance assets and liabilities, the life insurance subsidiary distributed €50 million as dividend to the Bank in February 2023, which benefited Group regulatory capital by an equivalent amount on the same date, enhancing the CET1 ratio by approximately 50 bps. Going forward, meaningful dividend generation from the insurance business is expected to continue. 9 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Group financial results on the underlying basis (continued) Reconciliation of the Consolidated Income Statement for the year ended 31 December 2023 between the audited statutory basis and the underlying basis € million Net interest income Net fee and commission income Net foreign exchange gains and net gains/(losses) on financial instruments Net gains on derecognition of financial assets measured at amortised cost Net insurance result* Net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of property Other income Total income Total expenses Operating profit Loan credit losses Impairment of other financial and non-financial assets Provisions for pending litigations, claims, regulatory and other matters (net of reversals) Credit losses on financial assets and impairment net of reversals of non-financial assets Profit before tax and non-recurring items Tax Profit attributable to non-controlling interests Profit after tax and before non-recurring items (attributable to the owners of the Company) Advisory and other transformation costs - organic Profit after tax (attributable to the owners of the Company) Underlying basis Other Statutory basis 792 181 37 - 54 10 18 1,092 (384) 708 (63) (53) (28) - - 4 6 - - - 10 (30) (20) 63 53 28 792 181 41 6 54 10 18 1,102 (414) 688 - - - - (126) (126) 564 (73) (2) 489 (2) 487 (2) - - (2) 2 - 562 (73) (2) 487 - 487 * Net insurance result per underlying basis comprises the aggregate of captions ‘Net insurance finance income/(expense) and net reinsurance finance income/(expense)’, ‘Net insurance service result’ and ‘Net reinsurance service result’ per the statutory basis. The reclassification differences between the statutory basis and the underlying basis are explained below: Net gains on loans and advances to customers at FVPL of €2 million included in ‘Loan credit losses’ under the underlying basis are included in ‘Net gains/(losses) on financial instruments’ under the statutory basis. Their classification under the underlying basis is done to align their presentation with the loan credit losses on loans and advances to customers at amortised cost. ‘Net gains on derecognition of financial assets measured at amortised cost’ of €6 million under the statutory basis comprise the below items which are reclassified accordingly under the underlying basis as follows: €8 million net gains on derecognition of loans and advances to customers included in ‘Loan credit losses’ under the underlying basis as to align their presentation with the loan credit losses arising from loans and advances to customers. Net losses on derecognition of debt securities measured at amortised cost of approximately €2 million included in ‘Net foreign exchange gains and net gains/(losses) on financial instruments’ under the underlying basis in order to align their presentation with the net gains/(losses) on financial instruments. 10 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Group financial results on the underlying basis (continued) Reconciliation of the Consolidated Income Statement for the year ended 31 December 2023 between the audited statutory basis and the underlying basis (continued) ‘Provisions for pending litigations, claims, regulatory and other matters (net of reversals)’ amounting to €28 million presented within ‘Operating profit before credit losses and impairment' under the statutory basis, are presented under the underlying basis in conjunction with loan credit losses and impairments. ‘Advisory and other transformation costs – organic’ of approximately €2 million included in 'Other operating expenses' under the statutory basis are separately presented under the underlying basis since they comprise, mainly, fees to external advisors in relation to the transformation programme and other strategic projects of the Group. ‘Credit losses on financial assets' and 'Impairment net of reversals of non-financial assets’ under the statutory basis include: i) credit losses to cover credit risk on loans and advances to customers of €73 million, which are included in ‘Loan credit losses’ under the underlying basis, and ii) credit losses of other financial assets of €6.5 million and impairment net of reversals of non-financial assets of €47 million, which are included in ‘Impairment of other financial and non-financial assets’ under the underlying basis, as to be presented separately from loan credit losses. Balance Sheet Analysis Capital Base Total equity excluding non-controlling interests totalled €2,467 million as at 31 December 2023 compared to €2,027 million as at 31 December 2022. Shareholders’ equity totalled to €2,247 million as at 31 December 2023 compared to €1,807 million as at 31 December 2022. The regulatory Common Equity Tier 1 capital (CET1) ratio on a transitional basis stood at 17.4% as at 31 December 2023, compared to 15.2% as at 31 December 2022, as restated. During the year ended 31 December 2023 organic capital generation amounted to 482 bps (of which 134 bps were recorded in the fourth quarter of 2023). Throughout this Directors’ Report, the capital ratios as at 31 December 2023 include profits for the year ended 31 December 2023 net of a distribution deduction of approximately 135 bps in respect of 2023 earnings distribution (refer to section ‘Distributions’ below). From the third quarter of 2023, the amount corresponding to the Pillar II add-on requirement relating to ECB’s prudential provisioning expectations of 32 bps (as at 31 December 2023) is deducted from CET1 capital and has been eliminated from the Pillar II SREP capital requirements from 1 January 2024. A prudential charge in relation to the onsite inspection on the value of the Group’s foreclosed assets is being deducted from own funds since June 2021, the impact of which is 12 bps on the Group’s CET1 ratio as at 31 December 2023. In addition, the Group is subject to increased capital requirements in relation to its real estate repossessed portfolio which follows a SREP provision to ensure minimum capital levels retained on long-term holdings of real estate assets, with such requirements being dynamic by reference to the in-scope REMU assets remaining on the balance sheet of the Group and the value of such assets. As at 31 December 2023 the impact of these increased capital requirements were 24 bps on the Group’s CET1 ratio. The above-mentioned requirements are within the capital plans of the Group and incorporated within its capital projections. The Group had 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 was phased-in gradually, with the impact being fully phased-in (100%) by 1 January 2023. The final phasing-in of the impact of the impairment amount from the initial application of IFRS 9 was approximately 65 bps on the CET1 ratio on 1 January 2023. 11 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Group financial results on the underlying basis (continued) Balance Sheet Analysis(continued) Capital Base (continued) The regulatory Total Capital ratio on a transitional basis stood at 22.4% as at 31 December 2023, compared to 20.4% as at 31 December 2022, as restated. The Group’s capital ratios are above the Supervisory Review and Evaluation Process (SREP) requirements. The Group’s minimum phased-in CET1 capital ratio requirement as at 31 December 2023 was at 10.72%, comprising a 4.50% Pillar I requirement, a 1.73% Pillar II requirement, the Capital Conservation Buffer of 2.50%, the O-SII Buffer of 1.50% and the CcyB of approximately 0.48%. The Group’s minimum phased-in Total Capital ratio requirement was set at 15.56%, comprising an 8.00% Pillar I requirement, of which up to 1.50% can be in the form of AT1 capital and up to 2.00% in the form of T2 capital, a 3.08% Pillar II requirement, the Capital Conservation Buffer of 2.50%, the O-SII Buffer of 1.50% and the CcyB of approximately 0.48%. Following the annual SREP performed by the ECB in 2022, ECB has maintained the non-public guidance for an additional Pillar II CET1 buffer (P2G) unchanged compared to 2021. Following the annual SREP performed by the ECB in 2023, and based on the final SREP decision received in November 2023, effective from 1 January 2024, the Group’s minimum phased-in CET1 capital ratio and Total Capital ratio requirements decreased, when disregarding the phasing-in of the O-SII buffer and CcyB, reflecting the elimination of the Pillar II add-on relating to ECB’s prudential provisioning expectations, following the Group’s decision to directly deduct from own funds such amount. On 1 January 2024, the Group’s minimum phased-in CET1 capital ratio is set at approximately 10.91%, comprising a 4.50% Pillar I requirement, a 1.55% Pillar II requirement, the Capital Conservation Buffer of 2.50%, the O-SII Buffer of 1.875% and the CcyB of approximately 0.48%. Likewise, the Group’s minimum phased-in Total Capital ratio requirement is set at approximately 15.61%, comprising an 8.00% Pillar I requirement, of which up to 1.50% can be in the form of AT1 capital and up to 2.00% in the form of T2 capital, a 2.75% Pillar II requirement, the Capital Conservation Buffer of 2.50%, the O- SII Buffer of 1.875% and the CcyB of approximately 0.48%. The ECB has also provided revised lower non-public guidance for an additional Pillar II CET1 buffer (P2G) compared to the previous year. From 2 June 2024, both CET1 capital and Total Capital requirements are expected to increase by approximately 0.50% as a result of the increase in the CcyB. On 30 November 2022, the CBC, following the revised methodology described in its macroprudential policy, decided to increase the CcyB from 0.00% to 0.50% of the total risk exposure amounts in Cyprus of each licensed credit institution incorporated in Cyprus effective from 30 November 2023. Further, in June 2023, the CBC announced an additional increase of 0.50% in the CcyB of the total risk exposure amounts in Cyprus of each licensed credit institution incorporated in Cyprus to be observed from June 2024, increasing the CcyB to 1.00%. The Bank has been designated as an Other Systemically Important Institution (O-SII) by the Central Bank of Cyprus (CBC) in accordance with the provisions of the Macroprudential Oversight of Institutions Law of 2015 and the relevant buffer stood at 1.50%. In October 2023, the CBC concluded its reassessment for the designation of credit institutions that meet the definition of O-SII institutions and the setting of O-SII buffer to be observed. The Group’s O-SII buffer has been revised to 2.25% (from 1.50%), phased in annually by 37.5 bps, to 1.875% on 1 January 2024 and to 2.25% on 1 January 2025. Own funds held for the purposes of P2G cannot be used to meet any other capital requirements (Pillar I, Pillar II requirements or the combined buffer requirement), and therefore cannot be used twice. The Group participated in the ECB Stress Test of 2023, the results of which were published by the ECB on 28 July 2023. For further information please refer to the ‘Risk and Capital Management Report’ of the Annual Financial Report 2023. Resumption of distributions Following the 2022 SREP decision, the equity dividend distribution prohibition was lifted for both the Company and the Bank, with any dividend distribution being subject to regulatory approval. 12 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Group financial results on the underlying basis (continued) Balance Sheet Analysis(continued) Resumption of distributions (continued) In April 2023, the Company obtained the approval of the European Central Bank to pay a dividend. Following this approval, the Board of Directors of the Company recommended to the shareholders a final dividend of €0.05 per ordinary share in respect of earnings for the year ended 31 December 2022 (‘2022 Dividend’). The proposed final dividend was declared at the Annual General Meeting (‘AGM’) which was held on 26 May 2023. The 2022 Dividend amounted to €22.3 million in total and was equivalent to a payout ratio of 14% of the Group’s adjusted recurring profitability for the year ended 31 December 2022 or 31% based on profit after tax for the year ended 31 December 2022 (as reported in the 2022 Annual Financial Report). The 2022 Dividend was paid in cash on 16 June 2023. The 2022 Dividend had a capital impact of 22 bps on the Group’s CET1 ratio and Total Capital ratio as at 31 December 2022. This was the first dividend payment after 12 years underpinning the Group’s position as a strong and well- diversified organisation, capable of delivering sustainable shareholder returns. Distribution policy The Group aims to provide a sustainable return to shareholders. In line with the Group’s distribution policy, distributions are expected to build prudently and progressively over time, towards a payout ratio in the range of 30-50% of the Group’s adjusted recurring profitability, including cash dividends and buybacks. Group adjusted recurring profitability is defined as the Group’s profit after tax before non-recurring items (attributable to the owners of the Company) taking into account distributions under other equity instruments such as the annual AT1 coupon. The distribution policy takes into consideration market conditions as well as the outcome of capital and liquidity planning. The distribution level will reflect, amongst other things, the strength of the Group’s capital and capital generation, the Board of Directors’ assessment of the capital required to implement the Group Strategy and any capital the Group retains to cover uncertainties (e.g. related to the economic outlook) and any impact from the evolving regulatory and accounting environments. Distributions out of 2023 earnings The Company, in March 2024, obtained regulatory approval from the European Central Bank for a Distribution in respect of 2023 earnings of a total amount of €137 million, comprising a cash dividend of €112 million and a share buyback of ordinary shares of the Company for an aggregate consideration of up to €25 million. Following ECB approval, the Board of Directors of the Company recommended a final dividend to shareholders and approved in principle to undertake a buyback of ordinary shares as described in section ‘Distributions’ of the Directors’ Report. The payout ratio for the financial year 2023 of 30% is in line with the Distribution Policy and represents a material increase compared to the previous year (14% payout ratio for the financial year 2022, as reported). Other equity instruments At 31 December 2023, the Group’s other equity instruments relate to Additional Tier 1 Capital Securities (the ‘AT1 securities’) and amounted to €220 million, at the same levels as at 31 December 2022. In June 2023, the Company successfully launched and priced an issue of €220 million Fixed Rate Reset Perpetual Additional Tier 1 Capital Securities (the ‘New Capital Securities’). The New Capital Securities constitute unsecured and subordinated obligations of the Company, are perpetual and are issued at par. They carry an initial coupon of 11.875% per annum, payable semi-annually and resettable on 21 December 2028 and every 5 years thereafter. The Company will have the option to redeem the New Capital Securities from, and including, 21 June 2028 to, and including, 21 December 2028 and on each interest payment date thereafter, subject to applicable regulatory consents and the relevant conditions to redemption. Transaction costs of €3.5 million in relation to the transaction were recorded directly in equity in June 2023. At the same time, the Company invited the holders of its outstanding €220 million Fixed Rate Reset Perpetual Additional Tier 1 Capital Securities callable in December 2023 to tender their Existing Capital Securities at a purchase price of 103% of the principal amount, after which approximately €16 million Existing Capital Securities remained outstanding. As a result, a cost of approximately €7 million was recorded directly in the Company’s equity during the year ended 31 December 2023, forfeiting the relevant future coupon payments. 13 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Group financial results on the underlying basis (continued) Balance Sheet Analysis(continued) Capital Base (continued) Other equity instruments (continued) In July 2023, the Company purchased and cancelled a further approximately €7 million Existing Capital Securities in the open market. In November 2023, the Board of Directors resolved to exercise the Company’s option to redeem the remaining approximately €8 million in aggregate principal amount outstanding of the Existing Capital Securities on 19 December 2023. Legislative amendments for the conversion of DTA to DTC Legislative amendments allowing for the conversion of specific deferred tax assets (DTA) into deferred tax credits (DTC) became effective in March 2019. The legislative amendments cover the utilisation of income tax losses transferred from Laiki Bank to the Bank in March 2013. The introduction of the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD) IV in January 2014 and its subsequent phasing-in led to a more capital-intensive treatment of this DTA for the Bank. With this legislation, institutions are allowed to treat such DTAs as ‘not relying on future profitability’, according to CRR/CRD IV and as a result not deducted from CET1, hence improving a credit institution’s capital position. The Law provides that a guarantee fee on annual tax credit is payable annually by the credit institution to the Government. Following certain modifications to the Law in May 2022, the annual guarantee fee is to be determined by the Cyprus Government on an annual basis, providing however that such fee to be charged is set at a minimum fee of 1.5% of the annual instalment and can range up to a maximum amount of €10 million per year, and also allowing for a higher amount to be charged in the year the amendments became effective (i.e. in 2022). The Group estimates that such fees could range up to approximately €5 million per year (for each tax year in scope i.e. since 2018) although the Group understands that such fee may fluctuate annually as to be determined by the Ministry of Finance. An amount of approximately €5 million was recorded in the consolidated income statement during the year ended 31 December 2023. Regulations and Directives The 2021 Banking Package (CRR III and CRD VI and BRRD) In October 2021, the European Commission adopted legislative proposals for further amendments to the Capital Requirements Regulation (CRR), CRD and the BRRD (the ‘2021 Banking Package’). Amongst other things, the 2021 Banking Package would implement certain elements of Basel III that have not yet been transposed into EU law. In the case of the proposed amendments to CRD and the BRRD, their terms and effect will depend, in part, on how they are transposed in each member state. The European Council’s proposal on CRR and CRD was published on 8 November 2022. During February 2023, the European Parliament’s ECON Committee voted to adopt Parliament’s proposed amendments to the Commission’s proposal. In June 2023, negotiators from the Council presidency and the European Parliament reached a provisional agreement on amendments to the Capital Requirements Regulation and the Capital Requirements Directive. In December 2023, the preparatory bodies of the Council and European Parliament have endorsed the amendments to the Capital Requirements Regulation and the Capital Requirements Directive. With the decisions taken by the Council and European Parliament preparatory bodies, the legal texts have now been published on the Council and the Parliament websites. Although still subject to legal revision and to the final vote in the Plenary, no changes in substance are expected until their adoption by the European Parliament by the second quarter of 2024. It is expected that they will enter into force on 1 January 2025; and certain measures are expected to be subject to transitional arrangements or to be phased in over time. 14 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Group financial results on the underlying basis (continued) Balance Sheet Analysis (continued) Regulations and Directives (continued) Bank Recovery and Resolution Directive (BRRD) Minimum Requirement for Own Funds and Eligible Liabilities (MREL) 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. On 27 June 2019, as part of the reform package for strengthening the resilience and resolvability of European banks, the BRRD ΙΙ came into effect and was required to be transposed into national law. BRRD II was transposed and implemented in Cyprus law in early May 2021. In addition, certain provisions on MREL have been introduced in CRR ΙΙ which also came into force on 27 June 2019 as part of the reform package and were immediately effective. In January 2024, the Bank received final notification from the SRB regarding the 2024 MREL decision, by which the final MREL requirement is now set at 25.00% of risk weighted assets and must be met by 31 December 2024, one year earlier than the previous decision, in light of the Group’s progress over the years of becoming a strong, well-capitalised with sustainable profitability organisation. Furthermore, the binding interim requirement of 1 January 2022 set at 14.94% of risk weighted assets and 5.91% of LRE must continue to be met. The own funds used by the Bank to meet the Combined Buffer Requirement (CBR) are not eligible to meet its MREL requirement expressed in terms of risk-weighted assets. The Bank must comply with the MREL requirement at the consolidated level, comprising the Bank and its subsidiaries. The regulatory MREL ratio as at 31 December 2023, calculated according to the SRB’s eligibility criteria currently in effect and based on internal estimate, stood at 25.5% of risk weighted assets (RWA) and at 11.7% of LRE. The MREL ratio expressed as a percentage of risk weighted assets does not include capital used to meet the CBR requirement, which stood at 4.48% on 31 December 2023 (compared to 3.77% as at 31 December 2022), reflecting the increase on 30 November 2023 of CcyB from 0.00% to 0.50% of the total risk exposure amounts in Cyprus. CCyB is expected to further increase from June 2024 as announced by CBC. Additionally, the CBR requirement is increased further on 1 January 2024 following an increase in O-SII buffer from 1.50% to 1.875% and subsequently to 2.25% from 1 January 2025, as announced by CBC. Throughout this Directors’ Report, the MREL ratios as at 31 December 2023 include profits for the year ended 31 December 2023 net of a distribution deduction of approximately 135 bps in respect of 2023 earnings distribution. The Bank continues to evaluate opportunities to optimise the build-up of its MREL. Funding and Liquidity Funding Funding from Central Banks At 31 December 2023, the Bank’s funding from central banks amounted to €2,044 million, which relates to ECB funding, comprising solely of funding through the Targeted Longer-Term Refinancing Operations (TLTRO) III, compared to €1,977 million at 31 December 2022. The maturity date of the Bank’s funding of €1.7 billion under the seventh TLTRO III operation is in March 2024, whilst the €300 million under the eighth TLTRO III operation is in June 2024. 15 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Group financial results on the underlying basis (continued) Balance Sheet Analysis (continued) Funding and Liquidity (continued) Funding (continued) Deposits Customer deposits totalled €19,337 million at 31 December 2023, compared to €18,998 million at 31 December 2022. Customer deposits are mainly retail-funded and approximately 58% of deposits are protected under the deposit guarantee scheme as at 31 December 2023. The Bank’s deposit market share in Cyprus reached 37.7% at 31 December 2023, compared to 37.2% at 31 December 2022. Customer deposits accounted for 73% of total assets and 80% of total liabilities at 31 December 2023, compared to 75% of total assets and 82% of total liabilities at 31 December 2022. The net loans to deposits (L/D) ratio stood at 51% as at 31 December 2023, compared to 52% as at 31 December 2022 on the same basis. Subordinated liabilities At 31 December 2023, the carrying amount of the Group’s subordinated liabilities amounted to €307 million, compared to €302 million at 31 December 2022, and relate to unsecured subordinated Tier 2 Capital Notes (‘T2 Notes’). The T2 Notes were priced at par with a fixed coupon of 6.625% per annum, payable annually in arrear and resettable on 23 October 2026. The maturity date of the T2 Notes is 23 October 2031. The Company will have the option to redeem the T2 Notes early on any day during the six-month period from 23 April 2026 to 23 October 2026, subject to applicable regulatory approvals. Debt securities in issue At 31 December 2023, the carrying value of the Group’s debt securities in issue amounted to €672 million, compared to €298 million at 31 December 2022, and relate to senior preferred notes. The increase of 126% since the beginning of the year, relates to the issuance of €350 million senior preferred notes in the third quarter of 2023. In July 2023, the Bank successfully launched and priced an issuance of €350 million of senior preferred notes (the ‘Notes’). The Notes were priced at par with a fixed coupon of 7.375% per annum, payable annually in arrear, until the Optional Redemption Date, i.e. 25 July 2027. The maturity date of the Notes is 25 July 2028; however, the Bank may, at its discretion, redeem the Notes on the Optional Redemption Date subject to meeting certain conditions (including applicable regulatory consents) as specified in the Terms and Conditions. If the Notes are not redeemed by the Bank, the coupon payable from the Optional Redemption Date until the Maturity Date will convert from a fixed rate to a floating rate and will be equal to 3-month Euribor + 409.5 bps, payable quarterly in arrear. The Notes comply with the criteria for the Minimum Requirement for Own Funds and Eligible Liabilities (‘MREL’) and contribute towards the Bank’s MREL requirement. In June 2021, the Bank executed its inaugural MREL transaction issuing €300 million of senior preferred notes (the ‘SP Notes’). The SP Notes were priced at par with a fixed coupon of 2.50% per annum, payable annually in arrear and resettable on 24 June 2026. The maturity date of the SP Notes is 24 June 2027 and the Bank may, at its discretion, redeem the SP Notes on 24 June 2026, subject to meeting certain conditions as specified in the Terms and Conditions, including applicable regulatory consents. The SP Notes comply with the criteria for MREL and contribute towards the Bank’s MREL requirement. Liquidity At 31 December 2023, the Group Liquidity Coverage Ratio (LCR) stood at 359%, compared to 291% at 31 December 2022, well above the minimum regulatory requirement of 100%. The LCR surplus as at 31 December 2023 amounted to €9.1 billion, compared to €7.2 billion at 31 December 2022. When disregarding the TLTRO III, the Group’s liquidity position remains strong with an LCR of 302% and liquidity surplus of €7.1 billion. At 31 December 2023, the Group Net Stable Funding Ratio (NSFR) stood at 158%, compared to 168% at 31 December 2022, well above the minimum regulatory requirement of 100%. 16 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Group financial results on the underlying basis (continued) Balance Sheet Analysis (continued) Loans Group gross loans totalled €10,070 million at 31 December 2023, compared to €10,217 million at 31 December 2022, broadly flat compared to the beginning of the year, as repayments offset new lending. New lending granted in Cyprus reached €2,025 million in the year ended 31 December 2023, compared to €2,092 million in the year ended 31 December 2022, despite the rising interest rate environment, driven mainly by corporate demand. At 31 December 2023, the Group net loans and advances to customers totalled €9,822 million, compared to €9,953 million at 31 December 2022, broadly flat since the beginning of the year. The Bank is the largest credit provider in Cyprus with a market share of 42.2% at 31 December 2023, compared to 40.9% at 31 December 2022. In December 2023, the Bank entered into an agreement with Cyprus Asset Management Company (‘KEDIPES’) to acquire a portfolio of performing and restructured loans with gross book value of approximately €58 million with reference date 31 December 2022 (the ‘Transaction’). The Transaction is broadly neutral to the Group’s income statement and capital position. The Transaction was completed in March 2024. Loan portfolio quality The Group has continued to make steady progress across all asset quality metrics. Today, the Group’s priorities focus mainly on maintaining high quality new lending with strict underwriting standards and preventing asset quality deterioration following the ongoing macroeconomic uncertainty. The loan credit losses amounted to €63 million for the year ended 31 December 2023, compared to €47 million for the year ended 31 December 2022. Further details regarding loan credit losses are provided in section ‘Profit before tax and non-recurring items’. Non-performing exposures Following a deep dive assessment of the Group’s loan portfolio in the second half of 2023, a total amount of €90 million was classified as unlikely to pay exposures (‘UTPs’). The vast majority of the UTPs of approximately €76 million are customer specific with idiosyncratic characteristics and are not linked with the current macroeconomic environment, they adhere to their payment schedule and present no arrears. Despite the high interest rates and inflation, there are no material signs of asset quality deterioration to date. While defaults have been limited, the additional monitoring and provisioning for sectors and individuals vulnerable to the macroeconomic environment remain in place to ensure that potential difficulties in the repayment ability are identified at an early stage, and appropriate solutions are provided to viable customers. Non-performing exposures (NPEs) were decreased to €365 million at 31 December 2023, compared to €411 million at 31 December 2022. As a result, the NPEs account for 3.6% of gross loans as at 31 December 2023, compared to 4.0% at 31 December 2022. The NPE coverage ratio stands at 73% at 31 December 2023, compared to 69% at 31 December 2022. When taking into account tangible collateral at fair value, NPEs are fully covered. 17 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Group financial results on the underlying basis (continued) Balance Sheet Analysis (continued) Loan portfolio quality (continued) Mortgage-To-Rent Scheme (‘MTR’) In July 2023, the Mortgage-to-Rent Scheme (‘MTR’) was approved by the Council of Ministers and aims for both, the reduction of NPEs backed by primary residence and the protection of the primary residence of vulnerable borrowers. The eligible criteria include: Borrowers that were non-performing as at 31 December 2021, remained non-performing as at 31 December 2022 and who also received government allowances during the period January 2021 to December 2022, with facilities backed by primary residence with Open Market Value of up to €250 thousand; Borrowers that had a fully completed application to Estia Scheme and were assessed as eligible but not viable with a primary residence with Open Market Value of up to €350 thousand; and all applicants that were approved under Estia Scheme but their inclusion was terminated. Under the MTR, eligible property owners will voluntarily surrender ownership of their residence to Cyprus Asset Management Company (‘KEDIPES’) which has been approved by the Government to provide and manage social housing and will be exempted from their mortgage loan, as the state will be covering fully the required rent on their behalf. KEDIPES will carry out a new valuation and a technical due diligence for the eligible applicants’ property and if satisfied will approve the application and pay to the banks an amount equal to 65% of the Open Market Value of the primary residence in exchange for the mortgage release, the write off of the NPE loan and the transfer of the property title deeds. The eligible applicants will be able to acquire the primary residence after five years at a favourable price, below the Open Market Value. The scheme has been launched in December 2023; it is expected to act as another tool to address NPEs in the Retail sector. Fixed income portfolio Fixed income portfolio amounts to €3,548 million as at 31 December 2023, compared to €2,500 million as at 31 December 2022, increased by 42% compared to the prior year. As at 31 December 2023, the portfolio represents 14% of total assets (net of TLTRO III) and comprises €3,117 million (88%) measured at amortised cost and €431 million (12%) at fair value through other comprehensive income (‘FVOCI’). The fixed income portfolio measured at amortised cost is held to maturity and therefore no fair value gains/losses are recognised in the Group’s income statement or equity. This fixed income portfolio has high average rating at Aa3. The amortised cost fixed income portfolio as at 31 December 2023 has an unrealised gain of €3 million, reflecting an improvement in the market value of this portfolio, following the reduction in bond yields. Real Estate Management Unit (REMU) The Real Estate Management Unit (REMU) is focused on the disposal of on-boarded properties resulting from debt for asset swaps. Cumulative sales of repossessed assets since the beginning of 2019 amount to €0.9 billion and exceed properties on-boarded in the same period of €0.5 billion. During the year ended 31 December 2023, the Group completed disposals of €194 million (compared to €162 million during the year ended 31 December 2022), resulting in a profit on disposal of approximately €11 million for the year ended 31 December 2023 (compared to a profit of approximately €16 million for the year ended 31 December 2022). Asset disposals are across all property classes, with 47% gross sale value in the year ended 31 December 2023 relating to land. During the year ended 31 December 2023, the Group executed sale-purchase agreements (SPAs) for disposals of 569 properties with contract value of €213 million, compared to SPAs for disposals of 674 properties with contract value of €184 million during the year ended 31 December 2022. In addition, the Group had a strong pipeline of €40 million by contract value as at 31 December 2023, of which €29 million related to SPAs signed (compared to a pipeline of €70 million as at 31 December 2022, of which €47 million related to SPAs signed). 18 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Group financial results on the underlying basis (continued) Balance Sheet Analysis (continued) Real Estate Management Unit (REMU) (continued) REMU on-boarded €21 million of assets in the year ended 31 December 2023, compared to additions of €86 million during the year ended 31 December 2022, via the execution of debt for asset swaps and repossessed properties. As at 31 December 2023, assets held by REMU had a carrying value of €878 million, (comprising properties of €826 million classified as ‘Stock of property’ and €52 million as ‘Investment properties’), of which €862 million are repossessed properties, compared to €1,116 million as at 31 December 2022 (comprising properties of €1,041 million classified as ‘Stock of property’ and €75 million as ‘Investment properties’). In addition to assets held by REMU, properties classified as ‘Investment properties’ with carrying value of €10 million as at 31 December 2023, compared to €10 million as at 31 December 2022, are not managed by REMU. Income Statement Analysis Total income Net interest income (NII) for the year ended 31 December 2023 amounted to €792 million, compared to €370 million for the year ended 31 December 2022, up by 114%, benefitting from higher interest rates on liquid assets and loans, the growth of fixed income portfolio and a well-managed deposit pass-through, notwithstanding the foregone NII on the NPE sale (the Helix 3 portfolio) (approximately €13 million in the year ended 31 December 2022) and the end of the TLTRO III favourable terms (approximately €15 million in the year ended 31 December 2022). Quarterly average interest earning assets (AIEA) for the year ended 31 December 2023 amounted to €23,211 million, compared to €22,483 million in the year ended 31 December 2022. The increase was driven by the increase in liquid assets mainly as a result of the increase in deposits by approximately €0.34 billion since the prior year and the issuance of senior preferred notes of €0.35 billion. Net interest margin (NIM) for the year ended 31 December 2023 amounted to 3.41%, compared to 1.65% for the year ended 31 December 2022. The increase was driven by the higher interest rate environment. Non-interest income for the year ended 31 December 2023 amounted to €300 million (compared to €292 million for the year ended 31 December 2022) comprising net fee and commission income of €181 million, net foreign exchange gains and net gains/(losses) on financial instruments of €37 million, net insurance result of €54 million, net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties of €10 million and other income of €18 million. The increase in non-interest income in the year ended 31 December 2023 was driven by higher net foreign exchange gains and net gains/(losses) on financial instruments and net insurance result, and was partly offset by lower net fee and commission income. Net fee and commission income for the year ended 31 December 2023 amounted to €181 million, compared to €192 million for the year ended 31 December 2022; when disregarding the impact of the liquidity fees abolished in December 2022 and NPE sale-related servicing fee, net fee and commission income was up 6% compared to the prior year, reflecting higher net credit card commissions and transactional fees. Net foreign exchange gains and net gains/(losses) on financial instruments of €37 million for the year ended 31 December 2023 (comprising net foreign exchange gains of approximately €28.5 million and net gains on financial instruments of approximately €8.5 million), compared to €26 million for the year ended 31 December 2022 up by 46%, due to higher net gains on financial instruments. Net foreign exchange gains and net gains/(losses) on financial instruments are considered volatile profit contributors. Net insurance result amounted to €54 million for the year ended 31 December 2023, compared to €44 million for the year ended 31 December 2022. The increase was driven mainly by improved experience variance due to better claims experience and the reduction in the loss component from the insurance contracts (recognised upfront in line with IFRS 17) in life insurance business. 19 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Group financial results on the underlying basis (continued) Income Statement Analysis (continued) Total income (continued) Net gains/(losses) from revaluation and disposal of investment properties and on disposal of stock of properties for the year ended 31 December 2023 amounted to €10 million (comprising net gains on disposal of stock of properties of €9 million, net gains on disposal of investment properties of €2 million and net loss from revaluation of investment properties of €1 million), compared to €13 million for the year ended 31 December 2022 (comprising net gains on disposal of stock of properties of €16 million and net loss from revaluation of investment properties of €3 million). REMU profit remains volatile. Total income amounted to €1,092 million for the year ended 31 December 2023, compared to €662 million for the year ended 31 December 2022, driven by strong growth in net interest income, as explained above. Total expenses Total expenses for the year ended 31 December 2023 were €384 million, compared to €363 million for the year ended 31 December 2022. Of these, 50% related to staff costs (€192 million), 39% to other operating expenses (€149 million) and 11% to special levy on deposits and other levies/contributions (€43 million). Total operating expenses amounted to €341 million for the year ended 31 December 2023 (compared to €325 million for the year ended 31 December 2022) with savings from the efficiency actions undertaken in 2022, partly offsetting inflationary pressures. Total operating expenses for the year ended 31 December 2023 included approximately €11 million performance related pay accrual (for both, the Long-Term Incentive Plan (‘LTIP’) and Short-term Incentive Plan (‘STIP’)), approximately €7.5 million in relation to staff exit costs and €2.5 million cost on the introduction of a Reward Programme for performing borrowers. When disregarding the aforementioned, total operating expenses for the year ended 31 December 2023 amounted to approximately €320 million, down by 1% compared to the prior year. Staff costs for the year ended 31 December 2023 were €192 million, compared to €181 million for the year ended 31 December 2022. The increase was driven by the staff exit costs of approximately €7.5 million and the performance related pay accrual of approximately €11 million, partly offset by the savings of the Voluntary Staff Exit Plan (VEP) that took place in 2022. During the year ended 31 December 2023, 50 full-time employees were approved to leave the Group at a total cost of approximately €7.5 million. The performance related pay accrual relates to the Short-Term Incentive Plan and the Long-Term Incentive Plan. The Short-Term Incentive Plan involves variable remuneration to selected employees and is driven by both delivery of the Group’s strategy as well as individual performance. At the Annual General Meeting which took place in May 2022, a special resolution was approved for the establishment and implementation of the share based Long-Term Incentive Plan (‘LTIP’). In December 2022 the Group granted 819,860 share awards to 22 eligible employees under the LTIP, comprising the Extended Executive Committee of the Group. The awards granted in December 2022 are subject to a three-year performance period for 2022-2024 (with all performance conditions being non-market performance conditions). In October 2023, 479,160 share awards were granted to 21 eligible employees, comprising the Extended Executive Committee of the Group. The awards granted in October 2023 are subject to a three-year performance period for 2023-2025 (with all performance conditions being non-market performance conditions). These shares will then normally vest in six tranches, with the first tranche vesting after the end of the performance period and the last tranche vesting on the fifth anniversary of the first vesting date. As at 31 December 2023, the Group employed 2,830 persons compared to 2,889 persons as at 31 December 2022. Other operating expenses for the year ended 31 December 2023 amounted to €149 million, compared to €144 million for the year ended 31 December 2022, driven mainly by inflationary pressures and higher expenses due to the Reward Programme launched to reward performing borrowers under Antamivi Reward Scheme. Special levy on deposits and other levies/contributions for the year ended 31 December 2023 amounted to €43 million compared to €38 million for the year ended 31 December 2022. The increase was driven by the increase of deposits by €0.34 billion year-on-year. 20 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Group financial results on the underlying basis (continued) Income Statement Analysis (continued) Total expenses (continued) The cost to income ratio excluding special levy on deposits and other levies/contributions for the year ended 31 December 2023 was 31% compared to 49% for the year ended 31 December 2022, a decrease of 18 p.p. The decrease is driven by the higher total income and disciplined cost management. Profit before tax and non-recurring items Operating profit for the year ended 31 December 2023 amounted to €708 million, compared to €299 million for the year ended 31 December 2022. The year-on-year increase is driven by the significant increase in net interest income. Loan credit losses for the year ended 31 December 2023 were €63 million, compared to €47 million for the year ended 31 December 2022 and include €19 million higher loan credit losses on specific customers with idiosyncratic characteristics assessed as ‘Unlikely to pay’ (‘UTPs’) exposures, even though they adhere to their repayment schedule and present no arrears. Cost of risk for the year ended 31 December 2023 is equivalent to 62 bps, compared to a cost of risk of 44 bps for the year ended 31 December 2022. At 31 December 2023, the allowance for expected loan credit losses, including residual fair value adjustment on initial recognition and credit losses on off-balance sheet exposures totalled €267 million (compared to €282 million at 31 December 2022) and accounted for 2.7% of gross loans (compared to 2.8% for 31 December 2022). Impairments of other financial and non-financial assets for the year ended 31 December 2023 amounted to €53 million, compared to €33 million for the year ended 31 December 2022, up €20 million year-on-year, driven mainly by higher impairments on specific, large, illiquid REMU stock properties. Provisions for pending litigations, claims, regulatory and other matters (net of reversals) for the year ended 31 December 2023 amounted to €28 million, compared to €11 million for the year ended 31 December 2022. The year-on-year increase is driven mainly by provisions in relation to certain legacy matters, as well as in relation to the run-down of legacy and non-core operations of the Group. Profit before tax and non-recurring items for the year ended 31 December 2023 totalled €564 million, compared to €208 million for the year ended 31 December 2022. Profit after tax (attributable to the owners of the Company) The tax charge amounted to €73 million for the year ended 31 December 2023, compared to €31 million for the year ended 31 December 2022. In 2023, the tax charge also includes a credit in relation to the recognition of deferred tax assets relating to temporary differences of approximately €10 million. On 22 December 2022, the European Commission approved Directive 2022/2523 which provides for a minimum effective tax rate of 15% for the global activities of large multinational groups (Pillar Two tax). The Directive that follows closely the OECD Inclusive Framework on Base Erosion and Profit Shifting should be transposed by the Member States throughout 2023, entering into force on 1 January 2024. In Cyprus, the legislation has not been substantively enacted at the balance sheet date however it is expected to be enacted within 2024. The Group expects to be in scope of the draft legislation and has performed an initial assessment of the potential impact of Pillar Two tax which is currently estimated to be in the range of up to 2% of profit before tax. However, the actual impact will depend on the Group’s consolidated income statement variables at the time of implementation. Because of the calculation complexity resulting from these rules and as the final legislation has yet to be implemented, the effects of this reform are still being examined and the Group will further refine the quantification in view of the first accounting recognition of the additional tax charge in the Group’s consolidated accounts in 2024. 21 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Group financial results on the underlying basis (continued) Income Statement Analysis (continued) Profit after tax (attributable to the owners of the Company) (continued) Profit after tax and before non-recurring items (attributable to the owners of the Company) for the year ended 31 December 2023 is €489 million, compared to €174 million for the year ended 31 December 2022. Advisory and other transformation costs – organic for the year ended 31 December 2023 are €2 million, compared to €11 million for the year ended 31 December 2022. Profit after tax arising from the organic operations (attributable to the owners of the Company) for the year ended 31 December 2023 amounted to €487 million, compared to €163 million for the year ended 31 December 2022. Following the completion of Helix 3 project, there are no amounts recognised for provisions/net profit/(loss) relating to NPE sales in the year ended 31 December 2023. Restructuring and other costs relating to NPE sales for the year ended 31 December 2023 was nil compared to €3 million for the year ended 31 December 2022 (relating to the agreements for the sale of portfolios of NPEs). Restructuring costs relating to the Voluntary Staff Exit Plan (VEP) of €104 million in the year ended 31 December 2022 mainly related to the Voluntary Staff Exit Plan (VEP) that took place in the third quarter of 2022. In July 2022 the Group completed a VEP which led to the reduction of the Group’s full-time employees by 16%, at a total cost of €101 million. The gross annual savings were estimated at approximately €37 million or 19% of staff costs with a payback period of 2.7 years. Profit after tax attributable to the owners of the Company for the year ended 31 December 2023 amounts to €487 million, corresponding to a ROTE of 24.8%, compared to €57 million for the year ended 31 December 2022 (with a ROTE of 3.2%). ROTE excluding amounts reserved for the distribution for the year ended 31 December 2023 increases to 25.3%, compared to a ROTE of 3.3% for the year ended 31 December 2022, calculated on the same basis. The adjusted recurring profitability (i.e. defined as the Group’s profit after tax before non-recurring items (attributable to the owners of the Company) taking into account distributions under other equity instruments such as the annual AT1 coupon) amounted to €455 million for the year ended 31 December 2023 compared to €147 million for the year ended 31 December 2022. 22 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Operating Environment War and geopolitics can be very disruptive to the economy and society. Meantime wars continue to rage in Ukraine and in the Middle East, adding to uncertainty and instability. The attacks on merchant shipping in the Red Sea from the Houthis in Yemen, is a reflection of the uncertainty. The attacks are forcing many carriers to change route adding days and costs to shipping which eventually will add to inflationary pressures, with implications for monetary policy. The European Commission’s Winter Forecast estimates GDP growth in 2023 at 0.5% in both the EU and the euro area. Going forward, growth is expected to rebound mildly in the euro area to 0.8% in 2024 and to 1.5% in 2025. HICP inflation is forecast to decrease from 5.4% in 2023, to 2.7% in 2024, and 2.2% in 2025, other things being equal. Uncertainty and downside risks to the economic outlook have increased in recent months, primarily related to the evolution of the geopolitical environment. Real GDP growth in Cyprus averaged 2.5% in the four quarters and was respectively 3.1%, 2.1%, 2.2% and 2.4% in the first, second, third and fourth quarter. Trade, transport and accommodation contributed more than half of the recorded growth in the period. Accommodation, which is tourism driven, continues to reflect the recovery from the Covid collapse, and so the respective contribution to the overall growth of the economy is higher than normal. Other important contributions came from the sectors of information and communications, industry and public administration, education and health. Financial services and professional services made small negative contributions. Private consumption expanded strongly supported by high employment and rising wages. The automatic partial indexation of wages (COLA) has somewhat cushioned the negative impact of elevated prices on consumption. Investment, particularly in residential construction, has been supported by the interest-subsidisation scheme for mortgages and an influx of foreign companies. In the labour market employment growth slowed in the first three quarters of 2023, averaging 0.8% compared with 3.2% and 2.8% respectively in 2021 and 2022. The unemployment rate continued to decline from 6.8% average in 2022, to 6.0% in the third quarter of 2023, seasonally adjusted. Inflation measured by the Harmonised Index of Consumer Prices, decreased to an average of 3.9% in Cyprus and 5.4% in the Euro area in 2023, from 8.1% on average in 2022 in Cyprus and 8.4% in the Euro Area. Core inflation (defined as total headline inflation excluding energy and food) for 2023 was 2.8% in Cyprus and 4.9% in the Euro area. The decline in the headline inflation was driven by the non-core components of energy and food, while core inflation was stickier. Harmonised inflation is expected to continue to decelerate in the medium term falling to around 2.4% and 2.1% respectively in 2024 and 2025 according to the European Commission’s Winter forecasts assuming falling energy prices and support measures adopted by the government. Tourist activity continued to improve in 2023 after a strong performance in 2022. Arrivals increased by 20.1% from a year earlier, reaching 3.8 million persons, which corresponds to 97% of arrivals in 2019 before the pandemic. Likewise, receipts for the year ended 31 December 2023 increased by 22.6% reaching almost €3 billion for the year, higher than total receipts in the respective period in 2019. In public finances, there have been significant improvements in budget and debt dynamics including debt affordability indicators. The recovery in 2021 was underpinned by a significant increase in general government revenue and a relative decrease in government expenditure. The result was a reduction in the budget deficit to 1.9% of GDP, from a deficit of 5.7% of GDP in 2020. In 2022 the budget surplus rose to 2.4% of GDP and gross debt dropped to 85.6% of GDP from 99.3% of GDP in 2021. The budget surplus in 2023 is estimated at 2.4% of GDP according to the Cyprus Ministry of Finance with gross debt falling to 78.4% of GDP. The budget balance is forecast to remain in surplus at 2.1% of GDP in 2024 and 2.5% in 2025. Gross debt is set to decline strongly in relation to GDP, to 71.5% and 66.3% respectively, on the back of nominal GDP growth and substantial budget surpluses. Debt affordability metrics are favourable and are expected to remain solid in 2023-2024, as gross financing needs are moderate, and the cash buffer gives the government a high degree of financing flexibility. 23 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Operating Environment (continued) The ECB left its interest rates unchanged at the latest Governing Council meeting on 7 March 2024. The minimum refinancing operations rate remained at 4.5%, compared with zero at the start of the tightening cycle in July 2021, while the ECB deposit facility rate is at 4.0%, compared with -50 bps in July 2021. The ECB’s policy remains focussed on ensuring that inflation returns to the 2% medium-term target in a timely manner, and so interest rates will remain at sufficiently restrictive levels for as long as necessary. Non-performing exposures (NPE) continued their declining trend mostly due to sales packages by the two largest banks. Non-performing loans were 8.3% of gross loans at the end of November 2023, according to data from the Central Bank of Cyprus compared to 9.5% at the end of December 2022. The NPE ratio in the non-financial corporations segment was 7.1% and that of households was 10.5%. Private indebtedness continues to decline with total loans to residents excluding the government dropping to about 68% of GDP at the end of December 2023. New lending in 2023 remained in line with new lending volumes in 2022, showing signs of slowing in the last quarter of the year, particularly in relation to housing loans, reflecting the tighter monetary conditions prevailing. Sovereign ratings The sovereign risk ratings of the Cypriot government have improved significantly in recent years, reflecting reduced banking sector risks, improved economic resilience and consistent fiscal outperformance. Cyprus has demonstrated policy commitment to correcting fiscal imbalances through reform and restructuring of its banking system. Public debt remains high as a share of GDP, but large-scale asset purchases by the ECB ensure favourable funding costs for Cyprus and ample liquidity in the government bond market. In December 2023, Fitch Ratings affirmed Cyprus' long-term foreign currency issuer default rating at 'BBB' and revised its outlook from stable to positive. This follows an affirmation of Cyprus' long-term foreign currency issuer default rating with a stable outlook in June 2023, and the upgrade in March 2023. The upgrade and affirmation reflect the improvement in public finances and government debt, as well as strong GDP growth, the resilience of the Cypriot economy to external shocks, and the improvement in the banking sector's asset quality. In September 2023, Moody's Investors Service upgraded the long-term issuer and senior unsecured ratings of the Government of Cyprus to Baa2 from Ba1. The outlook was revised to stable from positive. This is a two-notch upgrade of Cyprus' ratings, reflecting broad-based and sustained improvements in the country's credit profile as a result of past and ongoing economic, fiscal and banking reforms. Economic resilience has improved and medium-term growth prospects remain strong. Fiscal strength has also improved significantly, with a positive debt trend and sound debt affordability metrics. The stable outlook balances the positive credit trends with remaining challenges. In addition, S&P Global Ratings revised its outlook on Cyprus to positive from stable in September 2023 and affirmed Cyprus' long-term local and foreign currency sovereign ratings at BBB. The positive outlook reflects the ongoing macroeconomic normalisation since the country's financial crisis in 2012-2013, with the government on track to achieve steady fiscal surpluses and a declining debt-to-GDP ratio in the coming years. The positive outlook also reflects the significant progress made in the banking sector. Also in September 2023, DBRS Ratings GmbH (DBRS Morningstar) upgraded the long-term foreign and local currency issuer ratings of the Republic of Cyprus from BBB to BBB (high). The rating action is stable. The upgrade is driven by the recent decline in government debt and the expectation that public debt metrics will continue to improve over the next few years, while economic growth is expected to remain among the strongest in the euro area. The stable outlook balances the recent favourable fiscal dynamics with downside risks to the economic outlook. 24 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Strategy and Outlook The vision of the Group is to create a lifelong partnership with its customers, guiding and supporting them in an evolving world. The strategic pillars of the Group remain intact: Grow revenues in a more capital efficient way; by enhancing revenue generation via growth in high quality new lending, diversification to less capital intensive banking and other financial services (such as insurance and the digital economy) as well as prudent management of the Group’s liquidity Achieve a lean operating model; by ongoing focus on efficiency through further automations facilitated by digitisation Maintain robust asset quality; by maintaining high quality new lending via strict underwriting criteria, normalising cost of risk and reducing other impairments Enhance organisational resilience and ESG (Environmental, Social and Governance) agenda; by leading the transition of Cyprus to a sustainable future and building a forward-looking organisation embracing ESG in all aspects. In 2023, there was a fast and steep increase in interest rates and in conjunction with the Group’s highly liquid balance sheet, resulted in a significant increase in the net interest income of the Group. During 2023 the Group’s net interest income has more than doubled compared to the previous year, facilitating strong profitability. Overall, the Group delivered a ROTE of 24.8% (or ROTE excluding distributions of 25.3%) for the year ended 31 December 2023, exceeding significantly its 2023 targets that were set in June 2023 during the Investor Update Event. In line with the average market forward rates for January 2024, the ECB deposit facility rate is expected to average to 3.4% in 2024 (compared to 3.3% in 2023), with recent market expectation indicating great volatility in the path of rate cuts. Nevertheless, the ECB deposit facility rate is expected to normalise by 2025, and expected to reduce to 2.7% by the fourth quarter of 2024 and to 2.0% by the fourth quarter of 2025. Euribor rates have already started to move in expectation of these moves, with 6-month Euribor expected to average to 3.2% in 2024 (compared to 3.7% in 2023) using average January forecasts. As a result, the Group’s net interest income is expected to exceed €670 million (compared to over €625 million previously guided in June 2023) with a quarterly declining trend. The main drivers for this guidance are: Time and notice deposit pass-through to increase to an average of 40% in 2024 from 18% in 4Q2023. The interest rate cuts are expected to pass gradually to new deposits whilst slow repricing of the back book is expected in 2025; Gradual change in deposit mix towards time and notice deposits from 32% as at 31 December 2023 to approximately 45% by 31 December 2024; Low single-digit loan growth whilst loans are expected to reprice to lower Euribor rates (in anticipation of the ECB deposit facility rate cuts); Fixed income portfolio is expected to continue to grow, subject to market conditions, so that it represents approximately 16% of total assets by end-2024, benefitting also from rollover to higher rates; and Higher wholesale funding costs, reflecting the full year impact of the 2023 senior preferred issuance and any further planned issuance in order to meet the 2024 MREL requirement. Additionally, as the Group’s majority of interest earning assets are floating, the Group is undertaking solutions in order to reduce its net interest income sensitivity, converting some of its assets from floating rate to fixed. During 2023 these actions included: investing in fixed rate bonds, initiating the use of reverse repos, offering fixed rate loans and engaging into receiving fixed interest rate swaps on the subordinated debt and debt securities. Simultaneously, about one fifth of the Group’s loan portfolio is linked with the Bank’s base rate which provides a natural hedge against the cost of deposits. Overall, these structural hedging actions have led to a reduction in the net interest income sensitivity (to a parallel shift in interest rates by 100 bps) by €16 million in 2023 compared to prior year. These actions are expected to continue in 2024 so that the structural hedging increases by around €4 to €5 billion by end of 2024, subject to market conditions, via partial hedging of non-rate sensitive deposits through receipt of fixed interest rate swaps, further investment in fixed rate bonds, additional reverse repos and continuing offering of fixed rate loans. In this respect, it is expected that NII sensitivity by end-2024 will decrease further by approximately €30-40 million. Separately, the Group continues to focus on improving revenues through multiple less capital-intensive initiatives, with a focus on net fee and commission income, insurance and non-banking activities, enhancing the Group’s diversified business model further. Non-interest income is an important contributor to the Group’s profitability and historically covered on average around 80% of its total operating expenses and it is expected to continue covering around 70-80% of the Group’s total operating expenses for 2024-2025, supported by a growing net fee and commission income in line with economic growth. 25 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Strategy and Outlook (continued) Maintaining cost discipline management remains an ongoing focus for the Group. The cost to income ratio excluding special levy on deposits or other levies/contributions is reiterated at approximately 40% for 2024, reflecting mainly reduced income due to the lower interest rates. In terms of asset quality, the NPE ratio target by end-2024 is updated and is currently expected to stand at approximately 3% whilst the NPE ratio target of below 3% by end-2025 is reaffirmed. The cost of risk for 2024- 2025 is expected to trend towards normalised levels of 40-50 bps. Since 2019, the Real Estate Management Unit (REMU) stock has been consistently reducing, with properties sold exceeding the book value of properties acquired, while inflows remain substantially reduced following balance sheet derisking. Going forward, REMU sales are expected to continue, with expected inflows to remain at limited levels. Therefore, the target of REMU portfolio to reduce to approximately €0.5 billion by end-2025 is reiterated. Overall, the Group continues to expect that it can deliver a ROTE of over 17% on 15% CET1 ratio (excluding amounts reserved for distribution) for 2024 corresponding to a CET1 generation of between 200-250 bps pre- distributions. Additionally, the ROTE target for 2025 of over 16% on 15% CET1 ratio (excluding amounts reserved for distribution) is reiterated, reflecting lower interest rates (average ECB deposit facility rate at 2.2% for 2025). The Group’s aim to provide sustainable shareholder returns is reiterated. Distributions are expected to build prudently and progressively over time, towards a payout ratio in the range of 30-50% of the Group’s adjusted recurring profitability, including cash dividends and share buybacks. A summary of the targets are shown below: Key metrics Net interest income Average ECB Deposit facility rate Cost to income ratio1 Return on tangible equity on 15% CET1 ratio FY2024 (June 2023) FY2025 (June 2023) FY2024 (February 2024) >€625 mn Lower than 2024 >€670 mn 3.1% c.40s 2.5% Mid 40s 3.4% c.40s >17% >16% >17%5 NPE ratio <4% <3% c.3% Cost of risk To normalise towards 40-50 bps over the medium- term Capital 200-250 bps organic capital generation p.a. pre distributions2 CET1 ratio of c.19% by end-2025 Trending towards normalised levels of 40- 50 bps 200-250 bps CET1 generation pre- distributions3 Distributions Building prudently and progressively to 30-50% payout ratio4, including cash dividends and buybacks 1. Excluding special levy on deposits and other levies/contributions 2. Based on profit after tax (pre distributions) 3. Yoy increase in CET1 ratio pre-distributions 4. Payout ratio calculated on adjusted recurring profitability which refers to profit after tax before non- recurring items (attributable to the owners of the Company) taking into consideration the distributions from other equity instruments such as AT1 coupon. Any recommendation for a distribution is subject to regulatory approval. 5. Excluding amounts reserved for distribution 26 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Business Overview Credit ratings The Group’s financial performance is highly correlated to the economic and operating conditions in Cyprus. In December 2023, S&P Global Ratings upgraded the long-term issuer credit rating of the Bank to BB and maintained a positive outlook. The upgrade by one notch reflects the significant progress Cypriot banks have made toward rebalancing their funding profiles, reducing the dependence on non-resident deposits, the improved operating environment and the profitability prospects due to higher interest rates, improved efficiency and contained credit losses. In November 2023, Fitch Ratings upgraded the long-term issuer default rating to BB from B+, whilst maintaining the positive outlook. The two notch upgrade reflects a combination of Fitch’s improved assessment of the Cypriot operating environment and continued improvement in the Bank’s credit profile, strengthened capitalisation, reduced stock of legacy problem assets and structurally improved profitability. In October 2023 Moody’s Investors Service upgraded the Bank’s long-term deposit rating to the investment grade Baa3 from Ba1, while the outlook remained positive. The main drivers for this upgrade are the continued resilience of the Cypriot economy and credit conditions and the continued improvements in Bank’s solvency profile, with further gradual improvements in asset quality and capital metrics, and a significant strengthening in the Bank’s core profitability. Financial performance The Group is a leading, financial and technology hub in Cyprus. During the quarter ended 31 December 2023, the Group delivered another strong set of financial results, generating a ROTE of 25.6%, the fourth consecutive quarter with a ROTE over 20%. Overall, the Group generated €487 million profit after tax for the year, corresponding to a ROTE of 24.8%, surpassing its 2023 targets, supported by strong net interest income growth, whilst non-interest income remained a significant contributor to the Group’s profitability and diversified model, covering 88% of total operating expenses. The Group’s efficiency ratio was significantly improved on prior year reflecting continued revenue growth and disciplined cost management amidst inflationary pressures. The Group’s tangible book value per share improved by 25% to €4.93. Currently, the Group enters a declining interest rate environment with the path of interest rate normalisation being very volatile. The Group reiterates its expectation of delivering a ROTE of over 17% based on 15% CET1 ratio (excluding amounts reserved for distribution) for 2024. Ιnterest rates are expected to normalise to around 2.0-2.5% by 2025 and the Group’s 2025 ROTE target of over 16% based on 15% CET1 ratio (excluding amounts reserved for distribution) is reaffirmed. Financial Year 2023 Distribution at 30% payout ratio The Group’s strong financial performance in 2023 facilitated a rapid capital build-up, unlocking approximately 480s bps organic capital generation during the year and as a result, accelerating shareholder value. In March 2024, the Company obtained the approval of the ECB to pay a cash dividend and to conduct a share buyback (together the ‘Distribution’). The Distribution corresponds to a 30% payout ratio on financial year 2023 adjusted recurring profitability and amounts to €137 million in total, comprising a cash dividend of €112 million and an approved share buyback of up to €25 million. The payout ratio for financial year 2023 of 30% is in line with the updated Distribution Policy (refer to section ‘Capital Base’ above) and represents a material increase compared to the previous year (at 14% payout ratio). Following ECB approval, the Board of Directors of the Company has resolved to propose to the AGM that will be held on 17 May 2024 for approval, a final cash dividend of €0.25 per ordinary share in respect of earnings for the year ended 31 December 2023. Further, the Board of Directors of the Company confirmed its intention to commence a programme to buy back ordinary shares in the Company for an aggregate consideration of up to €25 million. The Group’s ROTE excluding amounts reserved for the Distribution for the year ended 31 December 2023 increases to 25.3% (compared to 3.3% for the year ended 31 December 2022 calculated on the same basis). 27 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Business Overview (continued) Financial performance (continued) Interest rate environment The structure of the Group’s balance sheet is highly liquid, and hence benefitted immediately from the rises in interest rates. As at 31 December 2023, cash balances with ECB (excluding TLTRO III of approximately €2.0 billion) amounted to approximately €7.6 billion. The repricing of the references gradually benefited the interest income on loans as almost half of the Group’s loan portfolio is Euribor based. As a result, the net interest income for the year ended 31 December 2023 amounted to €792 million, more than double compared to the previous year. This increase was underpinned by faster and steeper than expected interest rate rises as well as a resilient low cost of deposits. In a dynamic interest rate environment, the Group’s interest earning assets are in majority floating rate. Therefore, the Group undertook pro-active solutions to reduce the net interest income sensitivity by converting some of its floating assets to fixed rate assets. These actions included: investing in fixed rate bonds, initiating the use of reverse repos, offering fixed rate loans and engaging into receiving fixed interest rate swaps on the subordinated debt and debt securities. Simultaneously, about one fifth of the Group’s loan portfolio is linked with the Bank’s base rate which provides a natural hedge against the cost of deposits. Overall, these actions have led to a reduction in the net interest income sensitivity (to a parallel shift in interest rates by 100 bps) by €16 million compared to prior year. The Group intends to increase its structural hedging position by a further €4 to €5 billion (with average duration of 3-4 years) by end of 2024, subject to market conditions, via partial hedging of non-rate sensitive deposits with fixed interest rate swaps, further investment in fixed rate bonds, additional reverse repos and continuing offering of fixed rate loans. In this respect, it is expected that NII sensitivity by end-2024 will decrease further by approximately €30 to €40 million. In line with the average market forward rates for January 2024, the ECB deposit facility rate is expected to average to 3.4% in 2024 (compared to 3.3% in 2023), with recent market expectation indicating great volatility in the path of rate cuts. Nevertheless, the ECB deposit facility rate is expected to normalise by 2025, and expected to reduce to 2.7% by the fourth quarter of 2024 and to 2.0% by the fourth quarter of 2025. Euribor rates have already started to move in expectation of these moves, with 6-month Euribor expected to average to 3.2% in 2024 (compared to 3.7% in 2023) on the basis of average January forward rates. As a result, the Group’s net interest income is expected to exceed €670 million (compared to over €625 million previously guided in June 2023) with a quarterly declining trend. This updated guidance incorporates assumptions on deposit pass-through, deposit mix, loan and fixed income portfolio growth, the impact of structural hedging and wholesale funding costs. For further details, please refer to section ‘Strategy and Outlook’. Growing revenues in a more capital efficient way The Group remains focused on growing revenues in a more capital efficient way through growth of high-quality new lending and the growth in niche areas, such as insurance and digital products that provide further market penetration and diversify through non-banking operations. The Group has continued to provide high quality new lending in the year ended 31 December 2023 via prudent underwriting standards. Growth in new lending in Cyprus has been focused on selected industries in line with the Bank’s target risk profile. During the year ended 31 December 2023, new lending remained strong at €2,025 million, despite the rising interest rate environment. Gross performing loan book remained broadly flat on a yearly basis, as repayments offset new lending. Low single-digit loan growth per annum for 2024 and 2025 is expected. Fixed income portfolio continued to grow in 2023 to €3,548 million, and currently represents 14% of total assets (net of TLTRO III). This portfolio is mostly measured at amortised cost and is highly rated with average rating at Aa3. The amortised cost fixed income portfolio as at 31 December 2023 has an unrealised gain of €3 million, reflecting an improvement in the market value of this portfolio, following the reduction in bond yields. Careful expansion of fixed income portfolio is expected, subject to market conditions, so that fixed income portfolio represents approximately 16% of total assets by 31 December 2024. 28 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Business Overview (continued) Financial performance (continued) Growing revenues in a more capital efficient way (continued) Separately, the Group focuses to continue improving revenues through multiple less capital-intensive initiatives, with a focus on fees and commissions, insurance and non-banking opportunities, leveraging on the Group’s digital capabilities. During the year ended 31 December 2023, non-interest income amounted to €300 million, remaining an important contributor to the Group’s profitability, and covering overall 88% of the Group’s total operating expenses and is expected to continue covering 70-80% of the Group’s total operating expenses for 2024-2025. In 2023, net fee and commission income is negatively affected by the termination of liquidity fees in December 2022 and an NPE sale-related servicing fee in mid-February 2023. When disregarding the aforementioned impact of the liquidity fees and NPE sale-related servicing fee, net fee and commission income increased by 6% on prior year, reflecting higher net credit card commissions and transactional fees. In the following two years, net fee and commission income is expected to increase broadly in line with economic growth. Net fee and commission income is enhanced by transaction fees from the Group’s subsidiary, JCC Payment Systems Ltd (JCC), a leading player in the card processing business and payment solutions, 75% owned by the Bank. During the year ended 31 December 2023, JCC’s net fee and commission income contributed 10% of total non-interest income and amounted to €30 million, up 11% compared to the prior year, backed by strong transaction volume. The Group’s insurance companies, EuroLife and GI are respectively leading players in the life and general insurance business in Cyprus, and have been providing recurring and improving income, further diversifying the Group’s income streams. The net insurance result for the year ended 31 December 2023 contributed 18% of non- interest income and amounted to €54 million, up 20% compared to the year ended 31 December 2022, reflecting improved experience variance in life insurance business; insurance companies remain valuable and sustainable contributors to the Group’s profitability. Finally, the Group through the Digital Economy Platform (Jinius) (‘the Platform’) aims to support the national digital economy by optimising processes in a cost-efficient way, allow the Bank to strengthen its client relationships, create cross-selling opportunities as well as to generate new revenue sources over the medium term, leveraging on the Bank’s market position, knowledge and digital infrastructure. The first Business-to- Business services are already in use by clients and include invoice, remittance, tender and ecosystem management. Currently, over 2,000 companies are registered in the platform and over €360 million cash were exchanged via the platform in 2023 through invoicing and remittance services. In February 2024, the Business- to-Consumer service was launched, a product marketplace aiming to increase the touch points with customers. Currently over 50 retailers were onboarded in fashion and technology sectors and over 100 thousand products were embedded in the marketplace. Lean operating model Striving for a lean operating model is a key strategic pillar for the Group in order to deliver shareholder value, without constraining funding its digital transformation and investing in the business. The efficiency actions of the Group in 2022 to maintain operating expenses under control in an inflationary environment included further branch footprint optimisation and substantial streamline of workforce. In 2022 the Group successfully completed a Voluntary Staff Exit Plan (VEP) through which 16% of the Group’s full-time employees were approved to leave at a total cost of €101 million. Following the completion of the VEP, the gross annual savings were estimated at approximately €37 million or 19% of staff costs with a payback period of 2.7 years. Additionally, in January 2022, one of the Bank’s subsidiaries completed a small-scale targeted VEP, through which a small number of full-time employees were approved to leave at a total cost of €3 million. In relation to branch restructuring, during 2022 the Group reduced the number of branches by 20 to 60, a reduction of 25%. In 2023, 50 full-time employees were approved to leave the Group at a total cost of approximately €7.5 million, recorded in staff costs. In addition, staff costs for the year ended 31 December 2023 include approximately €11 million staff cost rewards, namely the Short-Term Incentive Plan and the Long-Term Incentive Plan. The Short-Term Incentive Plan involves variable remuneration to selected employees and will be driven by both, delivery of the Group’s strategy as well as individual performance. 29 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Business Overview (continued) Financial performance (continued) Lean operating model (continued) At the Annual General Meeting which took place in May 2022, a special resolution was approved for the establishment and implementation of the share based Long-Term Incentive Plan (‘LTIP’). In December 2022 the Group granted 819,860 share awards to 22 eligible employees under the LTIP, comprising the Extended Executive Committee of the Group. The awards granted in December 2022 are subject to a three-year performance period 2022-2024 (with all performance conditions being non-market performance conditions). In October 2023, 479,160 share awards were granted to 21 eligible employees, comprising the Extended Executive Committee of the Group. The awards granted in October 2023 are subject to a three-year performance period 2023-2025 (with all performance conditions being non-market performance conditions). These shares will then normally vest in six tranches, with the first tranche vesting after the end of the performance period and the last tranche vesting on the fifth anniversary of the first vesting date. The Group’s total operating expenses for the year ended 31 December 2023 amounted to €341 million, up by 5% compared to the prior year with savings partly offsetting inflationary pressures. Total operating expenses excluding exit costs of approximately €7.5 million, variable pay (STIP and LTIP) of approximately €11 million and the cost of €2.5 million for the Reward Programme for performing borrowers, were reduced by 1% compared to 31 December 2022. The cost to income ratio excluding special levy on deposits and other levies/contributions for the year ended 31 December 2023 was reduced further to 31%, 18 p.p. down compared to the year ended 31 December 2022, driven mainly by the higher total income and disciplined cost management. Maintaining cost discipline management is a key priority. The cost to income ratio excluding special levy on deposits and other levies/contributions for 2024 of approximately 40% is reaffirmed, reflecting mainly lower income due to lower rates. Transformation plan The Group’s focus continues on deepening the relationship with its customers as a customer centric organisation. A transformation plan is already in progress and aims to enable the shift to modern banking by digitally transforming customer service, as well as internal operations. The holistic transformation aims to (i) shift to a more customer-centric operating model by defining customer segment strategies, (ii) redefine distribution model across existing and new channels, (iii) digitally transform the way the Group serves its customers and operates internally, and (iv) improve employee engagement through a robust set of organisational health initiatives. Digital transformation In the dynamic world of banking, the Group stands as a pioneer of digital banking innovation in Cyprus, reshaping the banking experience into something more intuitive, more responsive, and more aligned with the contemporary needs of its customers, consistently pushing the boundaries to offer unparalleled banking services. The Group aims to continue to innovate and simplify the banking journey, providing a unique and personalised experience to each of its customers. The Group’s digital channels continue to grow. As at 31 December 2023, the Group’s digital community has increased to more than 450 thousand active subscribers, both on Internet Banking and the BoC Mobile App, improving by 9.4% since the beginning of the year. Likewise, the BOC Mobile App, had more than 410 thousand active subscribers as at 31 December 2023 and increased by 14.4% since the beginning of the year. This app is a central pillar in the Group’s ongoing endeavour to constantly refine, expand and elevate its digital services, ensuring that every interaction is a testament to its commitment to digital excellence. During 2023, the Group continued to enrich and improve its digital portfolio with new innovative services to its customers. The redesign of the Home Insurance flow in BOC Mobile App for improved user experience that will lead to a substantial increase in user engagement, ultimately translating into higher adoption rates and amplified sales figures. A new feature ‘View Card Details’ was launched in BOC Mobile App empowering users with greater control and accessibility to their essential payment information. This new functionality enables users to effortlessly access crucial card details, including card number, expiry date, and CVV, directly within BOC mobile app. In collaboration with the Ministry of Culture, the Group launched the ‘Youth Culture Card’, a transformative initiative aimed at fostering cultural engagement among young adults. The Youth Culture Card, designed for individuals aged 18 and above, is a prepaid card loaded with €220 in credit, empowering recipients to immerse themselves in a diverse array of enriching cultural experiences throughout the year. 30 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Business Overview (continued) Financial performance (continued) Lean operating model (continued) Digital transformation (continued) One of the Group’s latest digital innovations, Quickloans, accessible through both the BOC Mobile App and Internet Banking, has transformed the traditional loan process, enabling customers to obtain a credit facility decision instantly, without the need to visit a branch. Since the beginning of the year 2023, over 33 thousand applications were processed, granting €100 million new loans. The digital signing feature, launched in July 2023 further simplified the process of allowing customers to apply, sign, and obtain loans up to €15 thousand and car loans up to €35 thousand efficiently. In collaboration with Genikes Insurance, an insurance plan purchase was integrated into BoC Mobile App, enabling customers to access car or home insurance plans through the BOC Mobile App at lower rates than branch prices. Digital insurance sales for the year ended 31 December 2023 amounted to €415 thousand, compared to €68 thousand for the year ended 31 December 2022, reflecting around 1,400 policies in 2023 compared to approximately 230 policies in 2022. As at 31 December 2023, 95.6% of the number of transactions involving deposits, cash withdrawals and internal/external transfers were performed through digital channels (up by 11.8 p.p. from 83.8% in June 2020). In addition, 84.1% of individual customers were digitally engaged (up by 11.7 p.p. from 72.4% in June 2020), choosing digital channels over branches to perform their transactions. Furthermore, digital account openings increased by 108% in 2023 to 9,715 from 4,667 in 2022 and new debit cards increased by 156% to 11,536 in 2023. Asset quality Balance sheet de-risking was largely completed in 2022, marked by the completion of Project Helix 3 in November 2022 which refers to the sale of non-performing exposures with gross book value of approximately €550 million as at the date of completion. As at 31 December 2023, the Group’s NPE ratio stood at 3.6% below its 2023 target of reaching an NPE ratio below 4%. The Group’s priorities remain intact, maintaining high quality new lending with strict underwriting standards and preventing asset quality deterioration. The NPE ratio target for the year ended 31 December 2024 is updated and is currently expected to stand at approximately 3% whilst the NPE ratio target of below 3% by end-2025 is reaffirmed. The cost of risk for 2024-2025 is expected to trend towards normalised levels of 40-50 bps. Enhancing organisational resilience and ESG (Environmental, Social and Governance) agenda Climate change and transition to a sustainable economy is one of the greatest challenges. As part of its vision to be the leading financial hub in Cyprus, the Group is determined to lead the transition of Cyprus to a sustainable future. The Group continuously evolves towards its ESG agenda and continues to progress towards building a forward-looking organisation embracing ESG in all aspects of business as usual. In 2023, the Company received a rating of AA (on a scale of AAA-CCC) in the MSCI ESG Ratings assessment. Reaffirming its strong commitment to sustainability and to the long term value creation for all its stakeholders, in November 2023, the Bank was the first bank in Cyprus to become an official signatory of the United Nations Principles for Responsible Banking representing a single framework for a sustainable banking industry developed through a collaboration between banks worldwide and the United Nations Environment Programme Finance Initiative. The ESG strategy formulated in 2021 is continuously expanding. The Group is maintaining its leading role in the Social and Governance pillars and focus on increasing the Group’s positive impact on the Environment by transforming not only its own operations, but also the operations of its customers. The Group has committed to the following primary ESG targets, which reflect the pivotal role of ESG in the Group’s strategy: Become carbon neutral by 2030 Become Net Zero by 2050 Steadily increase Green Asset Ratio Steadily increase Green Mortgage Ratio ≥30% women in Group’s management bodies (defined as the Executive Committee (EXCO) and the Extended EXCO) by 2030 31 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Business Overview (continued) Financial performance (continued) Enhancing organisational resilience and ESG (Environmental, Social and Governance) agenda (continued) For the Group to continue its progress against its primary ESG targets and address the evolving regulatory expectations, it further enhanced in 2023, its ESG working plan which was established in 2022. Progress on the ESG working plan is closely monitored by the Sustainability Committee, the Executive Committee and the Board Committees on a quarterly basis. Environmental Pillar The Group has estimated the Scope 1 and Scope 2 greenhouse gas (GHG) emissions of 2021 relating to own operations in order to set the baseline for carbon neutrality target. The Bank being the main contributor of GHG emissions of the Group, designed in 2022 the strategy to meet the carbon neutrality target by 2030 and GHG progress towards Net Zero target of 2050. For the Group to become carbon neutral by 2030, Scope 1 and Scope 2 emissions should be reduced by 42% by 2030. The Bank, following the implementation of various energy upgrade actions in 2022 and 2023, achieved approximately 18% reduction in Scope 1 and Scope 2 GHG emissions in 2023 compared to the baseline of 2021. The Group plans to invest in energy efficient installations and actions as well as replace fuel intensive machineries and vehicles from 2024 to 2025, which would lead to approximately 3-4% reduction in Scope 1 and Scope 2 emissions by 2025 compared to 2021. The Group expects that the Scope 2 emissions will be reduced further when the energy market in Cyprus shifts further towards renewable energy. The Bank achieved a reduction of approximately 8% in Scope 1 - Mobile and Stationery Combustion GHG emissions and approximately 11% in Scope 2 – Purchased electricity GHG emissions in the year ended 31 December 2023 compared to the year ended 31 December 2022 due to new solar panels connected to energy network in 2022 and early 2023 as well as buildings abandonment as part of the digitalization journey. The Group is also considering several other actions aiming to a further reduction of approximately 30% in Scope 1 and Scope 2 GHG emissions by 2030 compared to 2022. The Bank achieved an increase of 65% in renewable energy production, from 173,583 Kwh to 285,907 Kwh in the year ended 31 December 2023 compared to the year ended 31 December 2022. The Group is gradually integrating climate-related and environmental (C&E) risks into its Business Strategy. The Bank was the first bank in Cyprus to join the Partnership for Carbon Accounting Financials (PCAF) in October 2022, and has estimated and published the Financed Scope 3 GHG emissions associated with its lending portfolio using the PCAF standards, methodology and proxies. Following the estimation of Financed Scope 3 GHG emissions of loan portfolio, the Bank established a decarbonization target on Mortgage loan portfolio. The decarbonization target on Mortgage loan portfolio was established by applying the International Energy Agency’s Below 2 Degree Scenario. For the Group’s Mortgage loan portfolio to be aligned with the climate scenario and effectively be associated with lower transition risks, the baseline as at 31 December 2022 of 53.5 kgCO2e/m2 should be reduced by 43% by 31 December 2030. The carbon intensity of the Mortgage loan portfolio as at 31 December 2023 was estimated at 50.73 kgCO2e/m2 achieving a reduction of approximately 5% compared to baseline, due to increased installation of solar panels in residential properties in 2023. A Green Housing product was launched at the end of 2023 to support the Bank to meet the decarbonization target on Mortgage loans and effectively limit the level of climate transition risk that is exposed to. In addition, the Bank has set lending and investment limits on specific carbon intensive sectors which are widely considered to be associated with high climate transition risk. Further, having introduced and implementing a Business Environment Scan process, the Bank developed green/transition new lending targets in certain sectors to support its customers’ transition to a low carbon economy and effectively manage climate transition risks. During 2023, the Bank has made considerable progress in integrating climate-related and environmental risks into its risk management approach and risk culture. The Bank revised and enhanced the Materiality assessment process on C&E risks. The Bank has carried out a comprehensive identification and assessment of C&E risks as drivers of existing financial and non-financial risks considering its business profile and loan portfolio composition. As part of this process, the Bank has identified the risk drivers, both physical and transition, which could potentially have an impact on its risk profile and operations and has assessed the severity of each risk driver for all the existing categories of risks. The Bank has implemented an ESG Due Diligence process designed to enhance data collection, score customers on their performance against various aspects around C&E risks and provide guidance on remediation actions. This process involves the utilization of structured ESG questionnaires applied at the individual company level for customers of the Corporate Division to derive an ESG score. 32 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Business Overview (continued) Financial performance (continued) Enhancing organisational resilience and ESG (Environmental, Social and Governance) agenda (continued) Environmental Pillar (continued) The Bank established a structure and detailed Business Environment Scan process to monitor the impact of C&E risks on its business environment in the short, medium and long-term. The results of the preliminary (quarterly) and final (annual) impact assessment have been incorporated in the Materiality assessment of C&E risks as well as informed the Bank’s Business Strategy. BOC PCL offers a range of environmentally friendly products to manage transition risk and help its customers become more sustainable. Specifically, BOC PCL offers loans for energy upgrades of homes, installation of solar panels, acquisition of new hybrid or electric cars, as well as financing of renewable energy projects. The gross amount of environmentally friendly loans as at 31 December 2023 was €24.5 million compared to €20.9 million as at 31 December 2022. During 2023, in order to enhance the awareness and skillset on ESG matters, the Group performed relevant trainings to the Board of Directors and Senior Management as well as to members of control functions and other members of staff. Social Pillar At the centre of the Group’s leading social role lie its investments in the Bank of Cyprus Oncology Centre (with an overall investment of approximately €70 million since 1998, whilst 60% of diagnosed cancer cases in Cyprus are being treated at the Centre), the immediate and efficient response of Bank of Cyprus’ SupportCY network, consisting of companies and organisations, to various needs of the society and in cases of crises and emergencies, through the activation of programs, specialized equipment and a highly trained Volunteers Corps, the contribution of the Bank of Cyprus Cultural Foundation in promoting the cultural heritage of the island, and the work of IDEA Innovation Centre. During 2023, SupportCY among other initiatives responded to more than 30 fire incidents in Cyprus and Greece, the deadly floods in Greece and sent support to the earthquake victims in Syria. The Cultural Foundation undertook a number of innovative projects such as ‘AISTHISEIS’ - Multi sensory museum experience for groups with disabilities, educational programs for schools approved by the Ministry of Education, Sport and Youth, aspiring to bring youth closer to art, literature, museums and culture of Cyprus as well as exhibitions, events and activities developed to encourage and promote the island’s history. The ReInHerit program facilitating innovation and research cooperation between European museums and heritage continued also into 2023, with 35,154 people participating in events at the Cultural Foundation between January to December 2023. The IDEA Innovation Centre, invested approximately €4 million in start-up business creation since its incorporation, supported creation of 89 new companies to date, provided support to 210+ entrepreneurs through its Startup program since incorporation, and provided education to 7,000 entrepreneurs. Staff continued to engage in voluntary initiatives to support charities, foundations, people in need and initiatives to protect the environment. The Group has continued to upgrade its staff’s skillset by providing training and development opportunities to all staff and capitalising on modern delivery methods. In 2023, the Bank’s employees attended 72,888 hours of training. In addition, in 2023 the Group launched the BoC Academy to offer up-skilling short courses for employees, with 20 members of staff enrolling on the Academy’s programs. In addition, 4 full MBA scholarships were offered to selected members of staff. Moreover, the Group continued its emphasis on staff wellness during 2023 by offering webinars, team building activities and family events with sole purpose to enhance mental, physical, financial and social health, attended by approximately 2,000 employees through its Well at Work program. One of the highlights of 2023, was the successful launch of the 1st BOC Intrapreneurship Competition ‘Think Tank’. The vision was to empower creativity, increase engagement, nurture a Culture of Innovation, and identify our talents. More than 70 ideas were submitted with 9 Think Tank finalists presenting their ideas to the committee in a final pitching event. The 3 winning ideas were related with the areas of ESG, Digital Transformation and New product development. 33 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Business Overview (continued) Financial performance (continued) Enhancing organisational resilience and ESG (Environmental, Social and Governance) agenda (continued) Governance Pillar The Group continues to operate successfully within a complex regulatory framework of a holding company which is registered in Ireland, listed on two Stock Exchanges and run in compliance with a number of rules and regulations. Its governance and management structures enable it to achieve present and future economic prosperity, environmental integrity and social equity across its value chain. The Group operates within a framework with adequate control environment, which enable risk assessment and risk management based on the relevant policies under the leadership of the Board of Directors. The Group has set up a Governance Structure to oversee its ESG agenda. Progress on the implementation and evolution of the Group’s ESG strategy is monitored by the Sustainability Committee and the Board of Directors. The Sustainability Committee is a dedicated executive committee set up in early 2021 to oversee the ESG agenda of the Group, review the evolution of the Group’s ESG strategy, monitor the development and implementation of the Group's ESG objectives and the embedding of ESG priorities in the Group’s business targets. The Group’s ESG Governance structure continues to evolve, so as to better address the Group’s evolving ESG needs. The Group’s regulatory compliance continues to be an undisputed priority. The Board composition of the Company and the Bank is diverse, with 45% of the Board members being female as at 31 December 2023. The Board displays a strong skillset stemming from broad international experience. Moreover, the Group’s aspiration to achieve a representation of at least 30% women in Group’s management bodies (defined as the EXCO and the Extended EXCO) by 2030, has been reached earlier. As at 31 December 2023 there is a 33% representation of women in Group’s management bodies, following the appointment of two female General Managers in Eurolife and General Insurance of Cyprus. As at 31 December 2023, there is a 40% representation of women at key positions below the Extended EXCO level (defined as positions between Assistant Manager and Manager). Going concern The Directors have made an assessment of the ability of the Group, the Company and BOC PCL to continue as a going concern for a period of 12 months from the date of approval of the Consolidated Financial Statements. The Directors have concluded that there are no material uncertainties which would cast significant doubt over the ability of the Group, the Company and BOC PCL to continue to operate as a going concern for a period of 12 months from the date of approval of the Consolidated Financial Statements and the Financial Statements of the Company. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including projections of profitability, cash flows, capital requirements and capital resources, liquidity and funding position, taking also into consideration, the Group’s Financial Plan 2024-2027 approved by the Board in February 2024 (the ‘Plan’) and the operating environment (as set out in section ‘Operating Environment’ in the Directors’ Report). The Group has sensitised its projection to cater for an adverse scenario and has used reasonable economic inputs to develop its medium-term strategy. The Group is working towards materialising its Strategy. Capital The Directors and Management have considered the Group’s forecasted capital position, including the potential impact of a deterioration in economic conditions. The Group has developed capital projections under a base and an adverse scenario and the Directors believe that the Group has sufficient capital to meet its regulatory capital requirements throughout the period of assessment. Funding and liquidity The Directors and Management have considered the Group’s funding and liquidity position and are satisfied that the Group has sufficient funding and liquidity throughout the period of assessment. The Group continues to hold a significant liquidity buffer at 31 December 2023 that can be easily and readily monetised in a period of stress. 34 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Viability statement In accordance with the requirements of Provision 31 of the UK Corporate Governance Code 2018 (‘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. Time horizon The Directors have selected a three-year period for this assessment in arriving at the viability statement. This period is chosen as it is within the period covered by the Group’s Financial Plan approved by the Board which contains projections of profitability, capital and liquidity requirements and capital resources as well as within the period covered by the Group’s stress testing programmes. This period is representative of the time horizon to consider the impact of ongoing regulatory changes in the financial services industry. The Group’s Financial Plan covers the period 2024–2027. Planning process and assessment The Directors have assessed the prospects of the Group through a number of sources, including the latest Financial Plan of the Group, the Internal Capital Adequacy Assessment Process (‘ICAAP’) and the Internal Liquidity Adequacy Assessment Process (‘ILAAP’) reports. The Group’s Financial Plan takes into account the Group’s strategy, risk appetite and objectives in the context of its operating environment including actual and reasonably expected changes in the Cyprus macroeconomic environment, competitive landscape, margin pressures and capital requirements. The Board-approved risk appetite framework is a key consideration of the Group's Financial Plan. Risks to the achievement of the Financial Plan are identified and assessed through a Risk Assessment of the Financial Plan. Performance against the risk appetite for each of the risk indicators is reported to the Board on a regular basis. The ICAAP is a process the main objective of which is to assess the Group’s capital adequacy in relation to the level of underlying material risks that may arise from pursuing the Group’s strategy or from changes in its operating environment. More specifically, the ICAAP analyses, assesses and quantifies the Group’s risks, establishes the current and future capital needs for the material risks identified and assesses the Group’s absorption capacity under both the baseline scenario and stress testing conditions, aiming to assess whether the Group has sufficient capital, under both the base and stress case scenarios, to support its business and achieve its strategic objectives as per its Board-approved Risk Appetite and Strategy. The Group undertakes quarterly reviews of its ICAAP results as well as on an ad-hoc basis if needed, considering the latest actual and forecasted information. During the quarterly review, any material changes/developments since the annual ICAAP exercise are assessed in terms of capital adequacy. The 2023 quarterly ICAAP reviews indicated that the Group has sufficient capital and available mitigants to support its risk profile and its business and to enable it to meet its regulatory requirements, both under baseline and stressed conditions. The ILAAP is a process the main objective of which is to assess whether 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 base and severe stress scenarios, and to meet regulatory requirements. The Group undertakes quarterly reviews of its ILAAP through quarterly liquidity stress tests, where actual and forecasted information is considered. Any material changes since the year-end are assessed in terms of liquidity and funding. The 2023 quarterly ILAAP reviews indicated that the Group maintains liquidity resources which are adequate to ensure its ability to meet obligations as they fall due under ordinary and stressed conditions. The 2023 ICAAP and ILAAP packages are due for submission to the SSM on 28 March 2024. Risk management The Group identifies, assesses, manages and monitors its risk profile based on the disciplines outlined within its Risk Management Framework. The Group is exposed to a number of risks, the most significant of which are credit risk, liquidity and funding risk, market risk (arising from adverse movements in interest rates, foreign currency exchange rates, and in security and property prices), non-financial risks (mainly operational risk, compliance risk, reputational risk, climate and environmental risks, information security and data quality risks) and strategic risk (business model risks, macroeconomic risks). These risks are identified, monitored, managed and mitigated through various control mechanisms and processes set out in the 'Principal risks and uncertainties-Risk management and mitigation' section below. Similarly, the Group monitors the uncertain geopolitical environment and the macroeconomic outlook and assesses and manages the potential impact on its operations. 35 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Viability statement (continued) Risk management (continued) Further, stress testing is an integral risk management principle used to assess the financial and operational resilience of the Group. Stress tests are performed to assess the capital adequacy, liquidity and funding availability. Internal scenarios used for the ICAAP are designed to be extreme but plausible and take account of potential risk management actions. Reverse stress testing is also used to assess scenarios and circumstances that could potentially make the Group’s business model unviable. These exercises begin with a definition of business model failure e.g. a breach of capital minimum thresholds, and analyse potential events that could cause such failure and the identification of appropriate mitigating actions. The results are reported to the Board Risk Committee and the Board. The Group has identified a suite of management actions which can be implemented to manage and mitigate the impact of stress scenarios. Management actions’ impact on capital, liquidity and recovery planning under stress conditions is assessed. This enables the Group to understand, monitor and control the risks identified. Management believes that the stress testing process considers a range of severe but plausible scenarios. However, stress tests should not be assumed to be an exhaustive assessment of all possible hypothetical extreme or remote scenarios. In making their viability assessment the Directors have considered a wide range of detailed information relating to present and potential conditions, including projections for profitability, cash flows, capital and liquidity requirements and capital and liquidity resources. The Group has sensitised its baseline projections to cater for a downside scenario and has used conservative economic inputs. The Financial Plan adverse scenario considers the capital forecast for the Group, and its ability to withstand adverse scenarios such as the deterioration of the economic environment in Cyprus. In addition to the information outlined above, the Directors have also considered a wide range of information and a number of factors including but not limited to: The Group’s business and operating models and strategy. The Group’s approach to managing risk and allocating capital. The Group’s financial position considering performance, its ability to maintain minimum levels of regulatory capital, liquidity and funding and the minimum requirements for own funds and eligible liabilities over the period of the assessment. The Group’s strong capital position as at 31 December 2023. The Group’s strong liquidity position as at 31 December 2023. The Directors confirm that based on their 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 2026. Principal risks and uncertainties - Risk management and mitigation As part of its business activities, the Group faces a variety of risks. The Group identifies, monitors, manages and mitigates these risks through various control mechanisms. Credit risk, liquidity and funding risk, market risk (arising from adverse movements in foreign currency exchange rates, interest rates, security prices and property prices), insurance and re-insurance risk and operational risk, are some of the key significant risks the Group faces. In addition, key risks facing the Group include geopolitical risk, legal risk, regulatory compliance risk, information security and cyber risk, digital transformation and technology risks, climate related and environmental risks, and business model and strategic risk. Information relating to the principal risks the Group faces and risk management is set out in Notes 44 to 47 of the Consolidated Financial Statements and in the ‘Risk and Capital Management Report’, both of which form part of the Annual Financial Report for the year ended 31 December 2023, and in the ‘Pillar III Disclosures 2023’ which is published on the Group’s website. In addition, in relation to legal risk arising from litigations, investigations, claims and other matters, further information is disclosed in Note 38 of the Consolidated Financial Statements. Additionally, the Group is exposed to the risk of changes in the 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 for debt and is intended to be disposed of in line with the Group’s strategy. Further information is disclosed in Note 27 of the Consolidated Financial Statements. 36 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Principal risks and uncertainties - Risk management and mitigation (continued) Details of the financial instruments and hedging activities of the Group are set out in Note 21 of the Consolidated Financial Statements. Further information on financial instruments is also presented in Notes 44 and 45 of the Consolidated Financial Statements. The Group’s activities are mainly in Cyprus therefore the Group's performance is impacted by changes in the Cyprus operating environment, as described in the 'Operating environment' section of this Directors’ Report and changes in the macroeconomic conditions and geopolitical developments as described in the ‘Risk and Capital Management Report' which forms part of the Annual Financial Report for the year ended 31 December 2023. In addition, details of the significant and other 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. As the war in Ukraine continues and the latest military conflict in the Middle east rages on, considerable uncertainly is added to the outlook for the global economy and the wider impact will depend on how these conflicts evolve in the future. The Group has limited direct exposure to both Ukraine and Russia as well as to Israel, and is continuously monitoring the current affairs and remains vigilant to take precautionary measures as required. The risk factors discussed above and in the reports referenced above should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties. There may be risks and uncertainties of which the Group is not aware of, or which the Group does not consider significant, but which may become significant. There are challenging conditions in global markets due to the high interest rate environment, inflationary pressures, the geopolitical developments, the growing threat from cyberattacks and other unknown risks. As a result the precise nature of all risks and uncertainties that the Group faces cannot be predicted with accuracy as many of these risks are outside of the Group’s control. Events after the reporting date KEDIPES Loan portfolio acquisition In December 2023, BOC PCL entered into an agreement with Cyprus Asset Management Company ('KEDIPES') to acquire a portfolio of performing and restructured loans with gross book value of approximately €58 million with reference date 31 December 2022 (the 'Transaction'). The Transaction is broadly neutral to the Group's income statement and capital position. Regulatory approvals have been obtained and the Transaction was completed in March 2024. Distribution out of 2023 earnings The Group, in March 2024, obtained regulatory approval from the European Central Bank for a Distribution in respect of 2023 earnings of a total amount of €137 million, comprising a cash dividend of €112 million and a buyback of ordinary shares of the Company for an aggregate consideration of up to €25 million. Following ECB approval, the Board of Directors of the Company recommended a final dividend to shareholders and approved in principle to undertake a buyback of ordinary shares as described in section ‘Distributions’ below. No other significant non-adjusting events have taken place since 31 December 2023. Capital base Total equity excluding non-controlling interests totalled €2,467 million at 31 December 2023, compared to €2,027 million at 31 December 2022 (as restated). The regulatory CET1 ratio on a transitional basis stood at 17.4% at 31 December 2023 (incorporating the Distribution in respect of 2023 earnings of a 30% payout ratio) and at 15.2% at 31 December 2022 as restated. During the year ended 31 December 2023, the CET1 ratio was positively affected by organic capital generation from profitability in the year, net of deduction for a distribution in respect of 2023 earnings at a payout ratio of 30% in line with the Group Distribution Policy and as approved by the ECB and relevant resolution by the Board of Directors, as well as the €50 million distribution to BOC PCL in February 2023 by the life insurance subsidiary. The CET1 ratio was negatively affected mainly by the final phasing-in of IFRS 9 and other transitional adjustments, the increase in risk-weighted assets and the deduction of 0.33% in relation to the ECB prudential expectations for NPEs as well as the AT1 coupon and refinancing costs The regulatory Total Capital ratio on a transitional basis at 31 December 2023 stood at 22.4% (2022: 20.4% as restated). 37 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Capital base (continued) Additional information on the regulatory capital is disclosed in the 'Risk and Capital Management Report' which forms part of this Annual Financial Report and in the Pillar III Disclosures Report, which is published on the Group’s website. Share capital As at 31 December 2023, there were 446,199,933 issued ordinary shares with a nominal value of €0.10 each. Information about the authorised and issued share capital during 2023 and 2022 is disclosed in Note 34 of the Consolidated Financial Statements. Share-based payments - share awards Long-term incentive award During the Annual General Meeting of the shareholders of the Company which took place on 20 May 2022, a special resolution was approved for the establishment and implementation of the share-based Long-Term Incentive Plan of Bank of Cyprus Holdings Public Limited Company (the ‘LTIP’), which is effective for ten years since its adoption. The LTIP is a share-based compensation plan for executive directors and senior management of the Group. The LTIP provides for an award in the form of ordinary shares of the Company based on certain non-market performance and service vesting conditions. Performance will be measured over a 3-year period. The performance conditions are set by the Human Resources & Remuneration Committee (HRRC) each year and may be differentiated to reflect the Group’s strategic targets and employee's personal performance, at its discretion. Performance will be assessed against an evaluation scorecard consistent with the Group’s Medium Term Strategic Targets containing both financial and non-financial objectives, and including targets in the areas of: (i) Profitability; (ii) Asset quality; (iii) Capital adequacy; (iv) Risk control & compliance; and (v) Environmental, Social and Governance ('ESG') targets. The awards ordinarily vest in six tranches, with 40% vesting in the year following the year the performance period ends and the remaining 60% vesting in five equal tranches (12%), on each annual anniversary following the first vesting date. For any award to vest the employee must be in employment of the Group up until the date of the vesting of such an award. Under certain circumstances the HRRC has the discretion to determine whether the award will lapse and/or the extent to which the award will be vested. The maximum number of shares that may be issued pursuant to the LTIP until the tenth anniversary of the relevant resolution shall not exceed 5% of the issued ordinary share capital of the Company, as at the date of the resolution (being 22,309,996 ordinary shares of €0.10 each), as adjusted for any issuance or cancellation of shares subsequently to the date of the resolution (excluding any issuances of shares pursuant to the LTIP). The awards are not entitled to dividend equivalents in accordance with regulatory requirements. The pre-existing Share Option Plan, which was operating at the level of the Company, has been superseded by the LTIP. Under the LTIP, share awards were granted by the Company in December 2022 (subject to a three-year performance period during 2022-2024) and in October 2023 (subject to a three-year performance period during 2023-2025). Each award vests in six tranches and vesting is subject to service conditions. Awards are subject to potential forfeiture under certain leaver scenarios. Further information on awards granted is disclosed in Note 14 of the Consolidated Financial Statements. 38 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Share-based payments - share awards (continued) Short-term incentive award Short-term incentive award refers to a Short-Term Incentive Plan established by the Company in 2023. This involves variable remuneration in the form of cash to selected employees and is driven by both delivery of the Company's Strategy, as well as individual performance, in the relevant year. Executive Management are also eligible to be considered for the short-term incentive award. The short-term incentive award is generally paid in cash and is non-deferred, however, and in cases where the amount exceeds a specified threshold as per regulatory guidelines, 50% of the award is awarded in shares and 50% in cash. In cases the award for an individual comprises both a share and a cash component, the award vests, similarly to LTIP vesting, i.e. 40% vests in the year of the grant i.e. following the performance year to which the incentive award relates to and the remaining 60% vests in tranches (12%) over five years. Further information on the short-term incentive award for the performance year 2023 awarded to Executive Directors and Other Key Management personnel is disclosed in Note 49 of the Consolidated Financial Statements. Other than the amounts disclosed in Note 49, the Short-Term Incentive Plan award for the performance year 2023 will be in the form of cash. Treasury shares of the Company The consideration paid, including any directly attributable incremental costs (net of income taxes), for shares of the Company held by entities controlled by the Group is deducted from equity attributable to the owners of the Company as treasury shares, until these shares are cancelled or reissued. No gain or loss is recognised in the consolidated income statement on the purchase, sale, issue or cancellation of such shares. The life insurance subsidiary of the Group, as at 31 December 2023, held a total of 142 thousand ordinary shares of the Company of a nominal value of €0.10 each (2022: 142 thousand ordinary shares of the Company of a nominal value of €0.10 each), as part of its financial assets which are invested for the benefit of insurance policyholders (Note 24 of the Consolidated Financial Statements). The cost of acquisition of these shares was €21,463 thousand (2022: €21,463 thousand). Change of control There are no significant agreements to which the Company is a party and which take effect following a change of control of the Company following a bid, but the Company is a party to a number of funding agreements that may allow the counterparties to alter or terminate the agreements following a change of control. As at 31 December 2023, these agreements were not deemed to be significant in terms of their potential effect on the Group as a whole given the liquidity position of the Group at the time, but the extent of their significance could vary depending on the liquidity position at the time of the change of control. 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 2023 and 2022 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 regulatory approval prior to acquiring shares of the Company in excess of certain thresholds, and the generally applicable provisions including those of the Market Abuse Regulation and applicable takeover legislation. From time to time, specific shareholders may have their rights in shares restricted in accordance with sanctions, anti-corruption, anti-money laundering and/or anti-terrorism compliance, including sanctions relating to events in Ukraine as applicable. The Group’s policy is to comply with all applicable laws, including sanctions and other restrictive measures that apply at all times, and the Group may from time to time request individual shareholders to refrain from exercising certain rights to facilitate compliance with such measures or related compliance issues. 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. 39 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Rights and obligations of ordinary shares 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 distribution of the total assets of the Company. Major holders of shares and financial instruments As at 31 December 2023 and 6 March 2024, the Company has been advised of the following notifiable interests in the share capital of the Company: Lamesa Investments Ltd CarVal Investors Senvest Management LLC Caius Capital LLP European Bank for Reconstruction and Development (EBRD) Cyprus Popular Bank Public Co Ltd Provident Fund of the Cyprus Bank Employees Osome Investments Lamesa Investments Ltd CarVal Investors Senvest Management LLC Caius Capital LLP European Bank for Reconstruction and Development (EBRD) Cyprus Popular Bank Public Co Ltd Provident Fund of the Cyprus Bank Employees Osome Investments 31 December 2023 Number of ordinary shares or Depositary Interests representing Company ordinary shares % held 41,383,699 9.27% 40,455,322 9.07% Financial instruments with similar economic effect (Regulation 17(1)(b) of the Transparency (Directive 2004/109/EC) Regulations 2007 of Ireland as amended) - - % held - - 38,163,877 8.56% 1,347,482 0.30% 24,884,267 5.58% 22,401,744 5.02% 21,467,719 4.81% 21,153,863 4.74% 14,809,498 3.32% - - - - - - - - - - 6 March 2024 Number of ordinary shares or Depositary Interests representing Company ordinary shares % held 41,383,699 9.27% 40,455,322 9.07% Financial instruments with similar economic effect (Regulation 17(1)(b) of the Transparency (Directive 2004/109/EC) Regulations 2007 of Ireland as amended) - - % held - - 38,330,080 8.59% 1,439,626 0.32% 24,884,267 5.58% 22,401,744 5.02% 21,467,719 4.81% 21,153,863 4.74% 14,809,498 3.32% - - - - - - - - - - 40 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Distributions Based on the 2022 SREP decision, effective from 1 January 2023, any equity dividend distribution is subject to regulatory approval, both for the Company and BOC PCL. The requirement for approval 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 nor to the payment of coupons on any AT1 capital instruments issued by the Company or BOC PCL. Distribution in respect of 2023 earnings The Group, in March 2024, obtained regulatory approval from the European Central Bank for a Distribution in respect of 2023 earnings of a total amount of €137 million, comprising a cash dividend of €112 million and a buyback of ordinary shares of the Company for an aggregate consideration of up to €25 million. Following ECB approval, the Board of Directors of the Company recommended a final cash dividend to shareholders and approved in principle to undertake a buyback of ordinary shares as described below. Proposed Dividend The Board of Directors recommended to shareholders a final dividend of €0.25 per ordinary share in respect of earnings for the year ended 31 December 2023 (totalling €112 million based on the total number of ordinary shares currently outstanding). This is subject to shareholder approval at the Annual General Meeting in May 2024. The financial statements for the year ended 31 December 2023 do not reflect this dividend, which will be accounted for in shareholders’ equity as an appropriation of retained earnings in the year ending 31 December 2024. Proposed Buyback of ordinary shares The Board of Directors confirmed their intention to undertake a buyback of ordinary shares of the Company of an aggregate consideration amount of up to €25 million and in compliance with the terms of the approval received from the ECB. The financial statements for the year ended 31 December 2023 do not reflect the impact of the proposed share buyback, which will be accounted for as and when shares are repurchased by the Company. Dividends and share buybacks are funded out of distributable reserves. The combined Proposed Dividend and Proposed Share Buyback (together referred to as the ‘Distribution’) represents a 30% payout of the Group’s adjusted recurring profitability for the year 2023 in line with the Group’s approved distribution policy. Group adjusted recurring profitability is defined as the Group’s profit after tax before non-recurring items (attributable to the owners of the Company) taking into account distributions under other equity instruments such as the annual AT1 coupon. Distribution in respect of 2022 earnings In April 2023, the Company obtained the approval of the European Central Bank to pay a dividend in respect of earnings for the year ended 31 December 2022. Following this approval, the Board of Directors of the Company recommended to the shareholders for approval at the Annual General Meeting (‘AGM’) on 26 May 2023, a final dividend of €0.05 per ordinary share in respect of the earnings of the year ended 31 December 2022 (‘2022 Dividend’). The AGM on 26 May 2023 declared a final dividend of €0.05 per share. The 2022 Dividend amounted to €22,310 thousand in total and is equivalent to a payout ratio of 14% of the financial year 2022 adjusted recurring profitability or 31% based on the financial year 2022 profit after tax (as reported in the 2022 Annual Financial Report). Books and significant records 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 regards 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 Stasinos Street, 2002 Strovolos, Nicosia, Cyprus. 41 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Research and development In the ordinary course of business, the Group develops new products and services that enhance the customer experience. Additional information is disclosed in the 'Business Overview' section of this Directors' Report. 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, ESG and 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 and the Risk 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. 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. Where from time-to-time areas of improvement are identified these become the focus of management’s attention in order to resolve them and thus strengthen the procedures that are in place. Areas of improvement may include the formalisation of existing controls and the introduction of new information technology controls, as dependency on information technology is ever increasing. The Annual Financial 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 Financial 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. 42 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Corporate Governance Statement In January 2019, the CSE released the 5th Edition of the Corporate Governance Code (the ‘2019 CSE Code’). It is mandatory for listed companies to incorporate a report by the Board of Directors on Corporate Governance, known as the Corporate Governance Report, in their Annual Financial Report. In the first section of this Corporate Governance Report companies are required to disclose their level of compliance with the 2019 CSE Code and the extent of implementation of its principles. The second section necessitates an explicit confirmation from the companies regarding their adherence to the provisions of the 2019 CSE Code. Additionally, in instances where there is any deviation from the provisions of the 2019 CSE Code, companies are obligated to provide a comprehensive explanation justifying the non-compliance. The Company has voluntarily chosen to adhere to the provisions of the 2018 UK Corporate Governance Code, as published by the Financial Reporting Council in the UK (the ‘2018 UK Code’). In accordance with the Corporate Governance Report, it is hereby noted that the Group has applied the principles and complied with the provisions of the 2018 UK Code, other than as set out in Part B of the Introduction of the 2023 Corporate Governance Report. In relation to the first section of the Corporate Governance Report, the Company, as an entity listed on the CSE, has formally adopted the 2019 CSE Code, and is actively implementing its principles. In reference to the second section of the Corporate Governance Report, it is affirmed that the Company adheres to the provisions of the 2019 CSE Code. The Corporate Governance Report for the year 2023 includes a detailed narrative statement on how the principles of the 2019 CSE Code have been effectively applied. The narrative also covers principles of the 2018 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 2023. 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 shareholders' meeting, the key powers of the shareholders' meeting, shareholders’ rights and the exercise of such rights are contained in section 5 of the Corporate Governance Report for 2023. 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 included on page 40. In accordance with section 167 of the Companies Act 2014, the Directors confirm that a Board Audit Committee is established. The Corporate Governance Report for 2023 details the role and responsibilities of the Board Audit Committee and also includes a thorough account of the Board Audit Committee’s activities throughout the year ended 31 December 2023. Furthermore, the Corporate Governance Report explicitly enumerates the members of the Board Audit Committee and records the frequency of meetings held, as well as the attendance record of each member for the reporting year. Diversity information for the purposes of the UK Listing Rules, the FCA Disclosure and Transparency Rules and the European Union Disclosure of Non-Financial and Diversity Information by certain large undertakings and groups Regulations 2017, SI No. 360 of 2017 (as amended) is included in the Corporate Governance Report for 2023 on pages 176 to 177. The Corporate Governance Report for 2023 is included within this Annual Financial Report on pages 158 to 232 and contains the information required for the purposes of section 1373 of the Companies Act 2014. The statements and information referred to in this Corporate Governance Statement are deemed to be incorporated herein. 43 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 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) of the Companies Act 2014). 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 agreements termination The service contract of one of the Executive Directors in office as at 31 December 2023 includes a clause for termination, by service of six months’ notice to that effect by the Executive Director but provided there is a change of control of BOC PCL as this is defined in the service agreement. In such an event, the Executive Director will be entitled to compensation as this is determined in the service contract. 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 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. Political donations Political donations are required to be disclosed under the Electoral Act 1997 of Ireland (as amended). Based on the Donations, Sponsorships and Partnerships Policy of the Group, the Group does not sponsor political parties, or any associations/organisations related directly, or indirectly, to one. The Directors, on enquiry, have satisfied themselves that there were no political donations made during the year ended 31 December 2023. 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 17 February 2023 the Board of Directors nominated Mrs Monique Hemerijck as a new member to the Board of Directors. On 10 August 2023 ECB approved the appointment of Mrs Monique Hemerijck as a member of the Board of Directors. On 31 March 2023 Mr Arne Berggren resigned as a member of the Board of Directors and on the same day the Board of Directors nominated Mr Adrian John Lewis as a new member of the Board of Directors. On 17 November 2023 ECB approved the appointment of Mr Adrian John Lewis as a member of the Board of Directors. On 13 October 2023 Mrs Maria Philippou resigned as a member of the Board of Directors. On 11 December 2023 Mr Nicolaos Sofianos resigned as a member of the Board of Directors. On 31 December 2023 both Mrs Paula Hadjisotiriou and Mr Ioannis Zographakis resigned from their respective positions as members of the Board of Directors. 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 49 of the Consolidated Financial Statements and in the Remuneration Policy Report set out in the Corporate Governance Report. 44 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 Directors’ and Secretary’s interests The interest in the share capital of the Company held by each member of the Board of Directors and the Company Secretary, including interests of their close family members at 31 December 2023, is presented in the table below: Ordinary shares or Depositary Interests representing Company ordinary shares of €0.10 each at 31 December 2023 Ordinary shares or Depositary Interests representing Company ordinary shares of €0.10 each at 1 January 2023 or at the date of appointment Non-executive directors Efstratios-Georgios (Takis) Arapoglou Arne Berggren (resigned on 31/03/2023) Ioannis Zographakis (resigned on 31/12/2023) Paula Hadjisotiriou (resigned on 31/12/2023) Constantine (Dinos) Iordanou Maria Philippou (resigned on 13/10/2023) Executive directors Panicos Nicolaou Eliza Livadiotou Company Secretary Katia Santis 106,500 n/a 3,012 7 1,395,449 n/a 5,027 35 5 1,510,035 106,500 25,000 3,012 7 1,347,979 1 5,027 35 5 1,487,566 The table above excludes awards under the Company’s long-term incentive plan and short-term incentive plan, details of which are outlined on pages 224 to 226 and 230 of the Remuneration Policy Report. 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 2023. Auditors The Auditors, PricewaterhouseCoopers (‘PwC’) Chartered Accountants and Statutory Audit Firm, were re-appointed as Auditors at the last Annual General Meeting held on 26 May 2023 in accordance with section 383(2) of the Companies Act 2014. ESG Disclosures As a recognised leader of the sustainability agenda in Cyprus, the Group is committed to building long-term resilience and sustainability for its business, the economy and society. With key ambitions and targets set across its sustainability agenda, the Group’s focus is on implementation and delivery, including investing in corporate sustainability reporting and meeting disclosure obligations. The Group believes transparency is at the heart of corporate sustainability, and in this section, it demonstrates its commitment to principles of openness and accountability through the publication of a range of non-financial corporate sustainability and ESG disclosures. These disclosures provide a basis for us to consider our commitments, while also imposing additional discipline on the Group to make further progress and to use our influence to advocate for sustainability across our range of stakeholders. The mandatory non-financial reporting disclosures are provided in the ‘ESG Disclosures’ section of this Annual Financial Report and are comprised of the Task Force on Climate-related Financial Disclosures (TCFD), the EU Taxonomy Disclosures and the Non-Financial Information Statement, a requirement under the Non-Financial Reporting Directive (NFRD). 45 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 ESG Disclosures (continued) Task Force on Climate-related Financial Disclosures The Financial Conduct Authority (FCA) Listing Rules require premium-listed and standard-listed companies to make disclosures under the TCFD framework. The Group’s disclosures are in line with the TCFD Recommendations and Recommended Disclosures which are structured in the core elements of how organisations operate – governance, strategy, risk management and metrics and targets. The Group is cognisant that the preparation of comprehensive TCFD aligned disclosures is an ongoing process and anticipates that a number of key actions will be necessary in 2024 to further advance our TCFD disclosures, including: i. ii. iii. iv. v. vi. vii. setting additional Science Based Targets aligned with a climate scenario relating to the loan portfolio, enabling the Group to incorporate further climate-related objectives and targets into the Group’s business strategy; setting additional metrics used to assess the impact of climate-related risks on loan portfolio; estimating Financed Scope 3 GHG emissions and Insurance associated GHG emissions on additional asset classes currently not available under the PCAF standards; developing further the stress testing and risk quantification methodologies and modelling; developing the methodology to estimate the impact of climate-related issues on the financial performance and financial position of the Group; developing further our tracking and data capabilities to facilitate regular and transparent reporting on our progress; further leveraging our climate-related opportunities, in particular in relation to the development of the Group’s sustainable finance propositions; and continuing to address feedback from the ECB on the Group’s Climate Risk Implementation Plan and implementing actions as per the expectations embedded in the ECB Guide on climate-related and environmental risks. The Company acknowledges the importance of the TCFD and the UK’s FCA Listing Rules’ requirements for reporting on climate-related risks and opportunities. We have undertaken a comprehensive review of our climate- related risks and opportunities, taking into account the potential impact of climate change on our business environment, and we have been making progress in integrating these considerations into our overall risk management framework. Disclosures have been made for all TCFD Recommendations and Recommended Disclosures, providing information on relevant decisions and on how these were taken. We have considered our ‘comply or explain’ obligation under the UK’s FCA Listing Rules, and confirm that we have made disclosures consistent with the TCFD Recommendations and Recommended Disclosures. All the current and future actions are comprehensively reported within our TCFD disclosures under each different pillar of the reporting recommendations. Uncertainties and disclaimers associated with climate disclosures are reported within the TCFD disclosures. The Group is committed to providing transparent and consistent climate-related disclosures to its stakeholders, including investors, customers, and employees, and will regularly review and update its disclosure practices in line with evolving regulatory requirements and best practices. The Group is committed to the principles of the TCFD and will continue to engage with stakeholders and collaborate with industry peers to advance the adoption of climate-related disclosure practices across the business community. Information required is included in the ‘Non-financial information statement’ included within the ‘ESG Disclosures’ section of the Annual Financial Report EU Taxonomy In 2020, the European Union adopted the Taxonomy Regulation establishing a list of activities that can qualify as environmentally sustainable and the obligation for companies subject to the NFRD to disclose how their operations align with the EU Taxonomy. In response to the disclosure requirement, in 2021 and 2022 the Group published the eligibility ratio. This ratio shows the proportion of activities on its balance sheet that are included in the list of EU Taxonomy activities, but without determining if they are aligned. 46 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 ESG Disclosures (continued) EU Taxonomy(continued) For the first time in 2023, financial institutions are required to publish the green asset ratio (GAR) for two climate objectives (Climate Change Mitigation and Climate Change Adaptation). As companies' transparency in line with the EU Taxonomy increases, it will enable expanded reporting against the Taxonomy. The adoption of CSRD and European Sustainability Reporting Standards (ESRS) will support further implementation of the EU Taxonomy Regulation into our business strategy, systems, investment and lending processes. Information required is included in the ‘Non-financial information statement’ included within the ‘ESG Disclosures’ section of the Annual Financial Report. Non-financial information statement EU regulations on non-financial information, which were transposed into Irish law (European Union Disclosure of Non-Financial and Diversity Information by certain large undertakings and groups) Regulations 2017, SI No. 360 of 2017 (as amended), require reporting on specific topics such as the environment, social and employee matters, respect for human rights, bribery and corruption. Information required is included in the ‘Non-financial information statement’ included within the ‘ESG Disclosures’ section of the Annual Financial Report. The Group publishes its Annual Non-Financial Results based on the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (‘SASB’) guidelines and standards, which identify and include all the above information. The Corporate Sustainability Report 2023 will be available at the Group's website http://www.bankofcyprus.com (Group/Sustainability/Our Sustainability Reports). In November 2023, TCFD was succeeded by the International Sustainability Standards Board (ISSB). Going forward, the Group will align its disclosures with the Corporate Sustainability Reporting Directive (CSRD) and the International Financial Reporting Standards for Climate (S2) and Sustainability Disclosures (S1). 47 BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANY Directors’ Report Annual Financial Report 2023 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, the EU (Credit Institutions: Financial Statements) Regulations 2015 and, in respect of the consolidated financial statements, Article 4 of the International Accounting Standards (IAS) Regulation. Company law requires the Directors to prepare Group and Company financial statements for each financial year. 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 and otherwise comply with the Companies Act 2014. 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 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 Group and the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions, to disclose with reasonable accuracy at any time the assets, liabilities and financial position of the Company and enable them to ensure that the financial statements comply with the provisions of the Companies Act 2014 and Article 4 of IAS Regulation. The Directors, through the use of appropriate procedures and systems, have also ensured that measures are in place to secure compliance with the Company’s and the Group’s obligations to keep adequate accounting records. These accounting records are kept at the Company’s registered office at 10 Earlsfort Terrace, Dublin 2, D02 T380, Ireland and at 51 Stasinos Street, 2002, Strovolos, Nicosia, Cyprus. In compliance with section 283 of the Companies Act 2014, the information and returns relating to the business dealt with in the accounting records for 2023 have been sent to the registered office of the Company. The Directors are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Under applicable law and the requirements of the UK’s FCA Listing Rules issued by the LSE, the Directors are also responsible for preparing a Directors' Report and reports relating to Directors' remuneration and corporate governance. The Directors are also required by the Transparency (Directive 2004/109/EC) Regulations 2007, as amended Part 2 (Transparency Requirements) of the Central Bank (Investment Market Conduct) Rules 2019 and the Disclosure Guidance and Transparency Rules of the UK's Financial Conduct Authority to include a Directors' report containing a fair review of the development and performance of the business and the position of the Group and a description of the principal risks and uncertainties facing the Group. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in Ireland governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 48  Risk and Capital Management Report 2023 50 BANK OF CYPRUS HOLDINGS GROUP Annual Financial Report 2023 Risk and Capital Management Report The Group’s approach to risk management One of the Group’s main priorities is to continually improve its risk management framework to be able to respond to the ever changing environment in an appropriate manner. Effective risk management is critical to the success of the Group, and as such the Group maintains a risk management framework designed to ensure the safety and soundness of the institution, protect the interests of depositors and shareholders and comply with regulatory requirements. Clearly defined lines of authority and accountability are in place as well as the necessary infrastructure and analytics to allow the Group to identify, assess, monitor and control risk. 1. Risk Management Framework (RMF) The Board of Directors, through the Risk Committee (RC), is responsible to ensure that a coherent and comprehensive Risk Management Framework (the ‘Framework’ or ‘RMF’) for the identification, assessment, monitoring and controlling of all risks is in place. The Framework ensures that material and emerging risks are identified, including, but not limited to, risks that might threaten the Group’s business model, future performance, liquidity, and solvency. Such risks are taken into consideration in defining the Group’s overall business strategy ensuring alignment with the Group’s risk appetite. In setting its risk appetite, the Group ensures that its risk bearing capacity is considered so that the appropriate capital levels are always maintained. The RMF is supported by a strong governance structure and is comprised of several components that are analysed in the sections below. The RMF is reviewed, updated and approved by the Board at least annually to reflect any changes to the Group’s business or to take into consideration external regulations, corporate governance requirements and industry best practices. 1.1 Risk Governance The responsibility for the governance of risk at the Group lies with the Board of Directors (the ‘Board’) which is ultimately accountable for the effective management of risks and for the system of internal controls in the Group. The Board is assisted in its risk governance responsibilities by the Board Risk and Board Audit Committees (RC and AC respectively) and at executive management level by the Executive Committee (EXCO), Asset and Liability Committee (ALCO), Asset Disposal Committee (ADC), Technology Committee (TC), Sustainability Committee (SC) and the Credit Committee. The RC supports the Board on risk oversight matters including the monitoring of the Group’s risk profile and of all risk management activities whilst the AC supports the Board in relation to the effectiveness of the system of internal controls. In addition, discussion and escalation processes are in place through both the Board Committees and executive level Committees that provide for a consistent approach to risk management and decision-making. Discussion around risk management is supported by the appropriate risk information submitted by the Risk Management Division (RMD) and Executive Management. The Chief Risk Officer (CRO) or his representatives participate in all such key committees to ensure that the information is appropriately presented, and that RMD’s position is clearly articulated. Furthermore, the roles of the CEO and the Group CRO are critical as they carry specific responsibilities with respect to risk management. These include: 51 BANK OF CYPRUS HOLDINGS GROUP Annual Financial Report 2023 Risk and Capital Management Report 1. 1.1 Risk Management Framework (RMF) (continued) Risk Governance (continued) Chief Executive Officer (CEO) The CEO is accountable for leading the development of the Group’s strategy and business plans in a manner that is consistent with the approved risk appetite and for managing and organising Executive Management to ensure these are executed. It is the CEO’s responsibility to manage the Group’s financial and operational performance within the approved risk appetite. Chief Risk Officer (CRO) The CRO leads an independent RMD across the Group including its subsidiaries. The CRO is responsible for the execution of the Risk Management Framework and the development of risk management strategies. The CRO is expected to challenge business strategy and overall risk taking and risk governance within the Group and independently submit his findings, where necessary, to the RC. The CRO reports to the RC and for administrative purposes has a dotted line to the CEO, as presented in the figure organizational diagram below. 1.2 Organisational Model The RMD is the business function set up to manage the risk management process of the Group on a day-to-day basis. The risk management process is integrated into BOC PCL’s internal control system. The RMD is organized into several departments, each of which is specialized in one or several categories of risks. The organization of RMD reflects the types of risks inherent in the Group. *The Data Quality and Governance Unit of the Data Office & Risk Analytics Department directly reports through its manager to the Data Quality & Governance committee chaired by the Executive Director People & Change. RMD organisational model The RMD operates independently and this is achieved through: - - - - - Organisational independence from the activities assigned to control; Unrestricted and direct access to Executive Management and the Board, either through the RC or directly Direct and unconditional access to all business lines that have the potential to generate material risk to the Group. Front Line managers are required to cooperate with the RMD managers and provide access to all records and files of the Group as well as any other information necessary; A separate budget submitted to the RC for approval; The CRO is a member of the EXCO and holds voting or veto presence in key executive committees as well as operational committees. Furthermore, this independence is also ensured as: - - The CRO is assessed annually by the RC that is jointly responsible with Human Resources & Remuneration Committee The CRO maintains a close working relationship with both the RC and its Chairperson which includes regular and frequent direct communication both during official RC meetings as well as unofficial meetings and discussions 52 BANK OF CYPRUS HOLDINGS GROUP Annual Financial Report 2023 Risk and Capital Management Report 1. 1.2 Risk Management Framework (RMF) (continued) Organisational Model (continued) The RMD organisational model is structured so as to: - Define risk appetite and report regularly on the status of the risk profile - Ensure that all material and emerging risks have proper ownership, management, monitoring and clear reporting Promote proper empowerment in key risk areas that will assist in the creation of a robust risk culture Provide tools and methodologies for risk management to the business units Report losses from risks identified to the EXCO, the RC and the Board and, where necessary, to the Regulatory Authorities Collect and monitor Key Risk Indicators (KRIs) - - - - The RMD is responsible for the risk identification and management across the Group companies. 1.3 Risk Identification The risk identification process is comprised of two simultaneous but complementary approaches, namely, the top-down and the bottom-up approaches. The top-down process is led by Senior Management and focuses on identifying the Group’s material risks whilst the bottom-up approach risks are identified and captured through several methods such as the Risk and Control Self-Assessment (RCSA) process, incident capture, fraud events capture, regulatory audits, direct engagement with specialized units and other. The risks captured by these processes are compiled during the annual ICAAP process and its quarterly updates and form the Groups’ material risks. To ensure a complete and comprehensive identification of risks the Group has integrated several key processes into its risk identification process, including the: Internal Capital Adequacy Assessment Process (ICAAP) Internal Liquidity Adequacy Assessment Process (ILAAP) Stress testing - - - - Group Financial Plan compilation process - Regulatory, internal and external reviews and audits 1.4 Three Lines of Defence The Group complies with the regulatory guidelines for corporate governance and has established the "Three Lines of Defence" model as a framework for effective risk and compliance management and control. The three lines of defence model defines the responsibilities in the risk management process ensuring adequate segregation in the oversight and assurance of risk. First Line of Defence The first line of defence lies with the functions that own and manage risks as part of their responsibility for achieving objectives and are responsible for implementing corrective actions to address, process and control deficiencies. It comprises of the management and staff of business lines and support functions who are directly aligned with the delivery of products and/or services. Second Line of Defence The second line of defence includes functions that oversee the compliance of the first line management and staff, with the regulatory framework and risk management principles. It comprises of the RMD, Information Security and Compliance functions. The second line of defence sets the corporate governance framework of the Group and establishes policies and guidelines that the business lines and support functions, Group entities and staff should operate within. The second line of defence also provides support, as well as independent oversight of the risk profile and risk framework. 53 BANK OF CYPRUS HOLDINGS GROUP Annual Financial Report 2023 Risk and Capital Management Report 1. 1.4 Risk Management Framework (RMF) (continued) Three Lines of Defence (continued) Third Line of Defence The third line of defence is the Internal Audit Division (IA) which provides independent assurance to the Board and the EXCO on the design adequacy and operating effectiveness of the Group’s internal control framework, corporate governance and risk management processes for the management of risks according to the risk appetite set by the Board. Findings are communicated to the Board through the committees and senior management and other key stakeholders, with remediation plans monitored for progress against agreed completion dates. 54 BANK OF CYPRUS HOLDINGS GROUP Annual Financial Report 2023 Risk and Capital Management Report 1. 1.5 Risk Management Framework (continued) Risk Appetite Framework (RAF) The objective of the Risk Appetite Framework (RAF) is to set out the level of risk that the Group is willing to take in pursuit of its strategic objectives, outlying the key principles and rules that govern the risk appetite setting. It comprises the Risk Appetite Statement (RAS), the associated policies and limits where appropriate, as well as the roles and responsibilities for the implementation and monitoring of the RAF. The RAF has been developed in order to be used as a key management tool to better align business strategy (financial and non-financial targets) with risk management, and it should be perceived as the focal point for all relevant stakeholders within the Group, as well as the supervisory bodies, for the assessment of whether the undertaken business activities are consistent with the set risk appetite. The RAF is one of the main elements of the Risk Management Framework which includes, among others, a number of frameworks, policies and circulars that address the principal risks of the Group. Separate RAFs are in place for all operating subsidiaries which are subject to each subsidiary’s board approval. Risk Appetite Statement (RAS) The RAS is the articulation, in written form, of the aggregate level and types of risk that the Group is willing to accept in the course of executing its business objectives and strategy. It includes qualitative statements as well as quantitative measures expressed relative to Financial and Non-Financial risks. As part of the overall framework for risk governance, it forms a boundary condition to strategy and guides the Group in its risk-taking and related business activities. Risk appetite and Financial Plan interaction The Group’s Financial Plan is integral to how the Group manages its business and monitors performance. It informs the delivery of the Group’s strategy and is aligned to the Risk Appetite Statement. The RAS is subject to an annual review process during the period in which the Group’s Financial Plan as well as the divisional strategic plans are being formulated. The interplay between these processes provides for cycle of feedback during which certain RAS indicators (such as ones related to minimum regulatory requirements) act as a backstop to the Group’s Financial Plan while for other indicators the Group Financial Plan provides input for risk tolerance setting. Furthermore, the Group Financial Plan and Reforecast exercises are tested to ensure they are within the Group’s risk appetite. 55 BANK OF CYPRUS HOLDINGS GROUP Annual Financial Report 2023 Risk and Capital Management Report 1. 1.5 Risk Management Framework (continued) Risk Appetite Framework (RAF) (continued) Risk Appetite monitoring To ensure that the risk profile of the Group is within the approved risk appetite, a consolidated risk report and a risk appetite profile report are regularly reviewed and discussed by the Board and the RC. Where a breach of a RAS indicator occurs, the Risk Appetite Framework provides the necessary escalation process to analyse the materiality and nature of the breach, notify the appropriate authorities, and decide the necessary remediation actions. 1.6 Risk Taxonomy In order to ensure that all risks the Group may face are identified and managed, a risk taxonomy is in place which is a key component of the Internal Capital Adequacy Assessment Process (ICAAP) and the Internal Liquidity Adequacy Assessment Process (ILAAP). The taxonomy ensures that the coverage of risks is comprehensive and identifies potential linkages between risks. The Risk taxonomy provides a categorisation of different risk types / factors enabling the institution to assess, aggregate and manage risks in a consistent way through a common risk language and mapping. It comprises of several levels of risks in increasing granularity and supports a multi-level tree categorization to enhance the overall risk classification. This risk categorization is also used to accommodate additional regulatory compliance requirements and internal risk analysis and reporting needs. 1.7 Risk measurement and reporting The RMD uses several systems and models to support key business processes and operations, including stress testing, credit approvals, fraud risk and financial reporting. The RMD has established a model governance and validation framework to help address risks arising from model use. Additionally, the RMD: - - - - - Maintains a categorization and definitions of risks and terminologies which are used throughout the Group Collates reports of Key Risk Indicators (KRIs) and other relevant risk information. When limit violations occur, escalation and reporting procedures are in place; Checks that risk information provided by management is complete and accurate and management has made all reasonable endeavour to identify and assess all key risks; Ensures that the risk information submitted to the RC and the Board by RMD and management is appropriate and enables monitoring and control of all the risks faced by the Group ; Discloses risk information externally and prepares reports on significant risks in line with internal and external regulatory requirements. 56 BANK OF CYPRUS HOLDINGS GROUP Annual Financial Report 2023 Risk and Capital Management Report 1. 1.7 Risk Management Framework (continued) Risk measurement and reporting (continued) Stress testing Stress testing is a key risk management tool used by the Group to provide insights on the behaviour of different elements of the Group in a crisis scenario and to assess the Group’s resilience and capital and liquidity adequacy. To make this assessment, a range of scenarios is used, based on variations of market, economic and other operating environment conditions. Stress tests are performed for both internal and regulatory purposes and serve an important role in: - Understanding the risk profile of the Group; - Evaluating whether there is sufficient capital or adequate liquidity under stressed conditions (ICAAP and ILAAP) so as to put in place appropriate mitigants; Evaluating of the Group’s strategy; Establishing or revising limits; Assisting the Group to understand the events that might push the Group outside its risk appetite. - - - The Group carries out the stress testing process through a combination of bottom-up and top-down approaches. Scenario and sensitivity analysis follows a bottom-up approach, whereas reverse stress testing follows a top- down approach. If the stress testing scenarios reveal vulnerability to a given set of risks, management makes recommendations to the Board, through RC, for remedial measures or actions. The Group’s stress testing programme embraces a range of forward looking stress tests and takes all the Group’s material risks into account. These key internal exercises include:  Stress testing undertaken in support of the Internal Capital Adequacy Assessment Process (ICAAP). Quarterly ICAAP reviews are also undertaken.  Stress testing applied to the funding and liquidity plan in support of the Internal Liquidity Adequacy Assessment Process (ILAAP) to formally assess the Group’s liquidity risks. Quarterly ILAAP reviews are also undertaken.  Annual recovery stress tests which use scenarios to assess the adequacy of recovery indicators of both capital and liquidity in identifying the recovery plan options used to exit that stress;  Ad hoc stress testing as and if required, including in response to regulatory requests. Other business and specific risk type stress tests The Market and Liquidity Risk Department performs additional stress tests, which include the following: - - - - Monthly stress testing for interest rate risk (2% shock on Economic Value (EV)); Quarterly stress testing for interest rate risk (2% shock on Net Interest Income (NII)); Quarterly stress testing for interest rate risk (based on the six predefined Basel interest rate scenarios which involve flattening, steepening, short up, short down, parallel up, parallel down shocks); Quarterly stress testing on items that are marked to market: impact on profit/loss and reserves is indicated from changes in interest rates and prices of bonds and equities. ICAAP The ICAAP is a process whose main objective is to assess the Group’s capital adequacy in relation to the level of underlying material risks that may arise from pursuing the Group’s strategy or from changes in its operating environment. More specifically, the ICAAP analyses, assesses and quantifies the Group’s risks, establishes the current and future capital needs for the material risks identified and assesses the Group’s absorption capacity under both the baseline scenario and stress testing conditions, aiming to assess whether the Group has sufficient capital, under both the base and stress case scenarios, to support its business and achieve its strategic objectives as per its Board-approved Risk Appetite and Strategy. The Group undertakes quarterly reviews of its ICAAP results as well as on an ad-hoc basis if needed, which are submitted to the ALCO and the RC, considering the latest actual and forecasted information. During the quarterly review, the Group’s risk profile is reviewed and any material changes/developments since the annual ICAAP exercise are assessed in terms of capital adequacy. 57 BANK OF CYPRUS HOLDINGS GROUP Annual Financial Report 2023 Risk and Capital Management Report 1. 1.7 Risk Management Framework (continued) Risk measurement and reporting (continued) The 2023 ICAAP is due for submission to the ECB on 28 March 2024. The 2023 quarterly ICAAP reviews indicated that the Group has sufficient capital and available mitigants to support its risk profile and its business and to enable it to meet its regulatory requirements, both under baseline and stressed conditions. ILAAP The ILAAP is a process whose main objective is to assess whether 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 base and severe stress scenarios, and to meet regulatory requirements, including the LCR and the NSFR. The Group undertakes quarterly reviews of its ILAAP results through quarterly liquidity stress tests which are submitted to the ALCO and the RC, where actual and forecasted information is considered. Any material changes since the year-end are assessed in terms of liquidity and funding. The 2023 ILAAP is due for submission to the ECB on 28 March 2024. The 2023 quarterly ILAAP reviews indicated that the Group maintains liquidity resources which are adequate to ensure its ability to meet obligations as they fall due under ordinary and stressed conditions. 1.8. 2023 ECB SREP Stress Test The Group participated in the ECB SREP Stress Test of 2023. The stress test measures how banks would fare in a hypothetical adverse economic scenario, which assumes a prolonged period of low growth, elevated interest rates and high inflation. It is not a ‘pass-or-fail’ exercise, and no threshold is set to define the failure or success of banks. Instead, the findings of the stress test will feed into the ongoing supervisory dialogue, in which supervisors explain their assessment to banks and discuss potential measures to address any shortcomings. The ECB published on 28 July 2023 the results of the stress test. As per the relevant ECB press release ‘Capital depletion at the end of the three-year horizon was lower than in previous stress tests’. This was mainly due to banks overall being in better shape going into the exercise, with higher-quality assets and stronger profitability. 58 BANK OF CYPRUS HOLDINGS GROUP Annual Financial Report 2023 Risk and Capital Management Report 1. 1.8. Risk Management Framework (continued) 2023 ECB SREP Stress Test (continued) By its standard procedures, the ECB considers the quantitative performance in the adverse scenario as an input when reconsidering the level of the Pillar II Guidance in its 2023 SREP assessment and the qualitative performance as one aspect when holistically reviewing the Pillar II Requirement. The stress test was based on a static balance sheet approach, thus using the Group’s financial and capital position as at 31 December 2022 as a starting point. The results for the Group, as published by the ECB, are presented below: Institution Sample High-level individual results by range Scenario sensitivities: 2023-2025 projections adverse scenario, FL (delta over total REA FL 2022) Maximum CET1 ratio (FL) depletion by ranges Minimum CET1 ratio (FL) by ranges Minimum Tier 1 leverage ratio (FL) by ranges Delta projected NII adverse vs. baseline scenario (in %) Delta projected LLPs adverse vs. baseline scenario (in %) Delta projected profit/ loss adverse vs. base-line scenario (in %) Bank of Cyprus Holdings Public Limited Company SSM 300 to 599 bps 8%

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