Ιnterim Financial Report2019 - Bank of Cyprus...credit impaired financial asset (IFRS 9)). The...

Ιnterim Financial Report 2019

BANK OF CYPRUS HOLDINGS GROUPInterim Financial ReportSix months ended 30 June 2019

Contents PageBoard of Directors and Executives 1Forward Looking Statements and Notes 2Interim Management Report 3Consolidated Condensed Interim Financial statementsInterim Consolidated Income Statement 25Interim Consolidated Statement of Comprehensive Income 26Interim Consolidated Balance Sheet 27Interim Consolidated Statement of Changes in Equity 28Interim Consolidated Statement of Cash Flows 30Notes to the Consolidated Condensed Interim Financial Statements

1. Corporate information 322. Unaudited financial statements 323. Summary of significant accounting policies 324. Going concern 375. Operating environment 386. Significant and other judgements, estimates and assumptions 397. Segmental analysis 458. Net gains on financial instrument transactions and disposal/dissolution of subsidiaries and associates 539. Staff costs and other operating expenses 5310. Credit losses of financial instruments and impairment of non-financial instruments11. Income tax 5512. Earnings per share 5813. Investments 5814. Derivative financial instruments 6015. Fair value measurement 6116. Loans and advances to customers 6817. Stock of property 6818. Prepayments, accrued income and other assets 6919. Non-current assets and disposal groups held for sale 7020. Funding from central banks 7121. Customer deposits 7222. Subordinated loan stock 7323. Accruals, deferred income, other liabilities and other provisions 7324. Share capital 7325. Pending litigation, claims, regulatory and other matters 7526. Contingent liabilities 7927. Cash and cash equivalents 8028. Analysis of assets and liabilities by expected maturity 8129. Risk management - Credit risk 8230. Risk management - Market risk 11831. Risk management - Liquidity risk and funding 11832. Capital management 12233. Related party transactions 12234. Group companies 12535. Acquisitions and disposals of subsidiaries 12836. Investments in associates and joint venture 12937. Events after the reporting period 131Independent Review Report to the Bank of Cyprus Holdings Public Limited Company 132Additional Risk and Capital Management Disclosures including Pillar 3 semi-annual disclosures 134Definitions and explanations of Alternative Performance Measures Disclosures 173

BANK OF CYPRUS HOLDINGS GROUPBoard of Directors and Executivesas at 26 August 2019

Board of Directors of Bank of CyprusHoldings Public Limited Company

Efstratios-Georgios ArapoglouCHAIRMAN

Maksim Goldman VICE CHAIRMAN

Arne BerggrenLyn GroblerDr. Michael HegerJohn Patrick HouricanDr. Christodoulos PatsalidesIoannis ZographakisAnat Bar-GeraMaria PhilippouPaula Hadjisotiriou

Executive Committee John Patrick HouricanOUTGOING CHIEF EXECUTIVE OFFICER

Panicos Nicolaou DIRECTOR CORPORATE BANKING/CHIEF EXECUTIVE OFFICER DESIGNATE

Dr. Christodoulos PatsalidesDEPUTY CHIEF EXECUTIVE OFFICER AND CHIEF OPERATING OFFICER

Michalis AthanasiouCHIEF RISK OFFICER

Eliza LivadiotouFINANCE DIRECTOR

Louis PochanisDIRECTOR INTERNATIONAL BANKING, WEALTH AND MARKETS

Dr. Charis PouangareDIRECTOR CONSUMER AND SME BANKING

Nicolas Scott SmithDIRECTOR RESTRUCTURING AND RECOVERIES DIVISION

Anna SofroniouDIRECTOR REAL ESTATE MANAGEMENT UNIT

Aristos StylianouEXECUTIVE CHAIRMAN, INSURANCE BUSINESSES

Company Secretary Katia Santis

Legal Advisers as to matters of IrishLaw

Arthur Cox

Legal Advisers as to matters ofEnglish and US Law

Sidley Austin LLP

Legal Advisers as to matters ofCypriot Law

Chryssafinis & Polyviou

Statutory Auditors

PricewaterhouseCoopers,One Spencer Dock,North Wall Quay,Dublin 1,Ireland,I.D.E. Box No. 137

Registered Office

Arthur Cox 10 Earlsfort TerraceDublin 2D02 T380Ireland

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BANK OF CYPRUS HOLDINGS GROUPForward Looking Statements and Notes

This document contains certain forward-looking statements which can usually be identified by terms usedsuch as ‘expect’, ‘should be’, ‘will be’ and similar expressions or variations thereof or their negativevariations, 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 PublicLimited Company Group (the Group) near term and longer term future capital requirements and ratios,intentions, beliefs or current expectations and projections about the Group’s future results of operations,financial condition, expected impairment charges, the level of the Group's assets, liquidity, performance,prospects, anticipated growth, provisions, impairments, business strategies and opportunities. By theirnature, forward-looking statements involve risk and uncertainty because they relate to events, and dependupon circumstances, that will or may occur in the future. Factors that could cause actual business, strategyand/or results to differ materially from the plans, objectives, expectations, estimates and intentionsexpressed in such forward-looking statements made by the Group include, but are not limited to: generaleconomic and political conditions in Cyprus and other European Union (EU) Member States, interest rateand foreign exchange fluctuations, legislative, fiscal and regulatory developments and informationtechnology, litigation and other operational risks. Should any one or more of these or other factorsmaterialise, 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. Theforward-looking statements made in this document are only applicable as from the date of publication ofthis document. Except as required by any applicable law or regulation, the Group expressly disclaims anyobligation or undertaking to release publicly any updates or revisions to any forward-looking statementcontained in this document to reflect any change in the Group’s expectations or any change in events,conditions or circumstances on which any statement is based.

Non-IFRS performance measures

Bank of Cyprus Holdings Public Limited Company (the 'Company') management believes that the non-IFRSperformance measures included in this document provide valuable information to the readers of the InterimFinancial Report as they enable the readers to identify a more consistent basis for comparing the Group’sperformance between financial periods and provide more detail concerning the elements of performancewhich management is most directly able to influence or are relevant for an assessment of the Group. Theyalso reflect an important aspect of the way in which the operating targets are defined and performance ismonitored by the Group’s management. However, any non-IFRS performance measures in this documentare not a substitute for IFRS measures and readers should consider the IFRS measures as the key measuresof the 30 June position. Refer to ‘Definitions and explanations on Alternative Performance MeasuresDisclosures’ on pages 173 to 182 of the Interim Financial Report for the six months ended 30 June 2019 forfurther information, reconciliations with Consolidated Condensed Interim Financial Statements andcalculations of non-IFRS performance measures included throughout this document and the most directlycomparable IFRS measures.

The Interim Financial Report for the six months ended 30 June 2019 is available on the Group’s websitewww.bankofcyprus.com (Investor Relations/Financial Results).

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BANK OF CYPRUS HOLDINGS PUBLIC LIMITED COMPANYInterim Management Report

Financial results

Commentary on underlying basisThe financial information presented below provides an overview of the Group financial results for the sixmonths ended 30 June 2019 on the ‘underlying basis’ which the management believes it best fits themeasurement of the performance and position of the Group. Reconciliations are included in the belowsections and in ‘Definitions and explanations on Alternative Performance Measures Disclosures’ to allow forthe comparability of the underlying basis to statutory information.

The main financial highlights for 2019 are set out below:

Consolidated Condensed Interim Income Statement underlying basis

€ million30 June

201930 June 2018(represented)

Net interest income 170 166

Net fee and commission income 75 80

Net foreign exchange gains and net gains on financial instrumentstransactions and disposal/dissolution of subsidiaries and associates 26 42

Insurance income net of insurance claims and commissions 30 25

Net gains from revaluation and disposal of investment properties andon disposal of stock of properties 16 21

Other income 16 11

Total income 333 345

Staff costs (112) (102)

Other operating expenses (84) (80)

Special levy on deposits on credit institutions in Cyprus andcontribution to Single Resolution Fund (SRF) (12) (12)

Total expenses (208) (194)

Operating profit 125 151

Loan credit losses (87) (85)

Impairments of other financial and non-financial instruments (10) (13)

Reversal of provisions for litigation, regulatory and other matters 3 6

Total loan credit losses, impairments and provisions (94) (92)

Profit before tax and non-recurring items 31 59

Tax - (4)

(Profit)/loss attributable to non-controlling interests (2) 2

Profit after tax and before non-recurring items 29 57

Advisory and other restructuring costs excluding discontinuedoperations and NPE sale (Helix) (12) (15)

Profit after tax - organic 17 42

Profit from discontinued operations (UK) - 4

Profit/(loss) relating to NPE Sale (Helix) - (105)

Loss on remeasurement of investment in associate classified as heldfor sale (CNP) net of share of profit from associates (21) 5

Reversal of impairment of deferred tax assets and impairment of othertax receivables 101 -

Profit/(loss) after tax (attributable to the owners of theCompany) 97 (54)

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Financial results (continued)

Consolidated Condensed Interim Income Statement underlying basis (continued)

Reclassifications to comparative information were made as follows: Unrecognised interest on previously credit impaired loans which have cured during the period

amounting to €14,918 thousand was reclassified from 'Net interest income' to ‘Credit losses tocover credit risk on loans and advances to customers’ in line with an IFRIC discussion, which hastaken place in November 2018 (Presentation of unrecognised interest following the curing of acredit impaired financial asset (IFRS 9)). The corresponding amount for the six months ended 30June 2019 stood at €7,781 thousand.

The results of the discontinued operations in the UK (Bank of Cyprus UK Ltd and its subsidiary,Bank of Cyprus Financial Services Ltd) were represented as discontinued operations (profit aftertax for the six months ended 30 June 2018: €4,010 thousand).

The changes in presentation did not have a material impact on the profit/(loss) after tax of the Group forthe period. However the net interest margin, the cost to income and the cost of risk ratios were recalculatedto account for these reclassifications.

Key Performance Ratios30 June2019*

30 June2018**

Net interest margin %1.88 %1.86

Cost to income ratio %63 %56

Cost to income ratio excluding special levy and contribution to SingleResolution Fund %59 %53

Operating profit return on average assets %1.2 %1.4

Basic earnings/(losses) per share attributable to the owners of theCompany (€ cent) 21.84 (12.12)

*The interest income, non-interest income, staff costs, other operating expenses and loan credit lossesrelated to Project Helix are disclosed under 'Profit/(loss) relating to NPE sale (Helix)' in the underlying basis.**Additionally to the above, amounts are represented for the disposal of the UK subsidiary and includingthe impact from IFRIC presentation of unrecognised interest following the curing of a credit-impairedfinancial asset (IFRS 9). This resulted to a reclassification between net interest income and loan creditlosses, with no impact on overall profitability.

4



Consolidated Condensed Interim Balance Sheet underlying basis

€ million30 June

2019

31 December2018

(restated)Cash and balances with central banks 5,262 4,610

Loans and advances to banks 403 473

Debt securities, treasury bills and equity investments 1,881 1,515

Net loans and advances to customers 10,949 10,922

Stock of property 1,430 1,427

Investment property 142 127

Non-current assets and disposal groups classified as held for sale 198 1,470

Other assets 1,622 1,531

Total assets 21,887 22,075

Deposits by banks 532 432

Funding from central banks 830 830

Repurchase agreements 248 249

Customer deposits 16,377 16,844

Subordinated loan stock 261 271

Other liabilities 1,169 1,082

Total liabilities 19,417 19,708

Shareholders’ equity 2,222 2,121

Other equity instruments (AT1) 220 220

Total equity excluding non-controlling interests 2,442 2,341

Non-controlling interests 28 26

Total equity 2,470 2,367

Total liabilities and equity 21,887 22,075

Comparative information was restated following the change in the classification of properties which areleased out under operating leases as investment properties.

5



Consolidated Condensed Interim Balance Sheet underlying basis (continued)

Key Balance Sheet figures and ratios30 June20191

30 June2019

31 December2018

Gross loans and advances to customers (€ million) 13,072 13,148

Allowance for expected credit losses (€ million) 2,145 2,254

Customer deposits (€ million) 16,377 16,844

Loans to deposits ratio (net) %67 %65

NPE ratio %33 %36

Expected credit losses coverage ratio for NPEs %50 %47

Leverage ratio %10.5 %10.0

Capital ratios and risk weighted assets

Common Equity Tier 1 capital ratio (CET 1)(transitional for IFRS 9) 15.2% %14.9 %11.9

Total capital ratio 18.1% %17.8 %14.9

Risk weighted assets (€ million) 13,724 13,962 15,373

1As at 30 June 2019, BOC PCL signed an agreement for the disposal of its entire holding of 49.9% in CNPCyprus Insurance Holdings Ltd (CNP). Prior to the classification as held for sale, the investment wasremeasured and a loss of €25.9 million was recognised in the consolidated income statement. The above 30June 2019 figures and calculations have been calculated on the basis that the sale of CNP had beencompleted.

6



Reconciliation of the Income Statement for the six months ended 30 June 2019 betweenstatutory and underlying basis

€ millionUnderlying

basisHelix

portfolio

Investmentin associate

classifiedas HFS

Taxrelateditems

OtherStatutory

basis

Net interest income 170 34 - - - 204

Net fee and commission income 75 6 - (6) - 75

Net foreign exchange gains and netgains on other financial instrumentstransactions and disposal/dissolution of subsidiaries andassociates 26 - - - 0 26

Insurance income net of insuranceclaims and commissions 30 - - - - 30

Net gains from revaluation anddisposal of investment propertiesand on disposal of stock ofproperties 16 - - - - 16

Other income 16 - - - - 16

Total income 333 40 - (6) 0 367

Total expenses (208) (23) - - (9) (240)

Operating profit 125 17 - (6) (9) 127

Loan credit losses (87) (17) - - 0 (104)

Impairments of other financial andnon-financial assets (10) - - (8) - (18)

Reversal of provisions for litigation,regulatory and other matters 3 - - - (3) -

Remeasurement of investment inassociate classified as held for sale - - (26) - - (26)

Share of profit from associate - - 5 - - 5

Profit/(loss) before tax and non-recurring items 31 - (21) (14) (12) (16)

Tax 0 - - 115 - 115

(Profit) attributable to non-controlling interests (2) - - - - (2)

Profit after tax and before non-recurring items 29 - (21) 101 (12) 97

Advisory and other restructuringcosts excluding discontinuedoperations and NPE sale (Helix) (12) - - - 12 -

Profit after tax - organic* 17 - (21) 101 - 97

Profit/(loss) relating to NPE sale(Helix) 0 (0) - - - -

Loss on remeasurement ofinvestment in associate classified asheld for sale (CNP) net of share ofprofit from associates (21) - 21 - - -

Reversal of impairment of deferredtax assets (DTA) and impairment ofother tax receivables 101 - - (101) - -

Profit after tax (attributable tothe owners of the Company) 97 - - - - 97

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Reconciliation of the Income Statement for the six months ended 30 June 2019 betweenstatutory and underlying basis (continued)

*This is the profit after tax, before the loss on remeasurement of investment in associate classified as heldfor sale (CNP) net of share of profit from associates and the reversal of impairment of DTA and impairmentof other tax receivables.

This measure best represents the true performance of the Group for management.

The reclassification differences between the statutory basis and underlying basis mainly relate to the impactfrom 'non-recurring items' and are explained as follow:

Helix portfolio Net interest income of €34 million and fee and commission income of €6 million relating to the

NPE sale (Helix) is disclosed under non-recurring items within 'Profit/(loss) relating to NPE sale(Helix)' under the underlying basis.

Total expenses include staff costs of €3 million, operating expenses of €12 million andrestructuring costs of €8 million relating to NPE sale (Helix), and are presented within'Profit/(loss) relating to NPE sale (Helix)' under the underlying basis.

Net loan credit losses of €17 million, is disclosed under non-recurring items within 'Profit/(loss)relating to NPE sale (Helix)' under the underlying basis.

Investment in associate classified as HFS Loss on remeasurement of investment in associate classified as held for sale (CNP) net of share

of profit form associate of €21 million comprises the share of profit for associate of €5 millionwhich is reported in the 'Share of profits from associates' under the statutory basis and the losson remeasurement of €26 million which is classified as 'Remeasurement of investment inassociate classified as held for sale' under the statutory basis.

Tax related items Reversal of impairment of the deferred tax asset amounting to €115 million included within 'Tax'

under the statutory basis is classified as a non-recurring item and disclosed within 'Reversal ofimpairment of DTA and impairment of other tax receivables' under the underlying basis. 'Fee andcommission expense' relating to the revised income tax legislation of €6 million, which has beendisclosed within 'Reversal of impairment of deferred tax asset and impairment of other taxreceivables' under the underlying basis, is disclosed within the 'Net fee and commission income'under the statutory basis.

Impairment of other financial assets of €8 million, which are included in 'Credit losses of otherfinancial instruments' under the statutory basis, relate to the impairment of Greek tax receivablesand are classified as a non-recurring item and disclosed within 'Reversal of impairment of DTAand impairment of other tax receivables' under the underlying basis.

Other reclassifications Advisory and other restructuring costs of approximately €12 million included in 'Other operating

expenses' under the statutory basis, are separately presented under the underlying basis. Reversal of provisions for litigation, regulatory and other matters amounting to €3 million

included in 'Other operating expenses' under the statutory basis, are separately presented underthe underlying basis.

Balance Sheet Analysis

Capital Base

Total equity (excluding non-controlling interests) totalled €2,442 million at 30 June 2019, compared to€2,341 million at 31 December 2018. Shareholders’ equity totalled €2,222 million at 30 June 2019,compared to €2,121 million at 31 December 2018.

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Balance Sheet Analysis (continued)

Capital Base (continued)

The Common Equity Tier 1 capital (CET1) ratio on an IFRS 9 transitional basis stood at 14.9% at 30 June2019 (and 15.2% pro forma for the sale of investment in CNP Cyprus Insurance Holdings Ltd ('CNP')),compared to 11.9% at 31 December 2018 (adjusted to take into account the DTAs which were fully phasedin as of 1 January 2019). During the six months ended 30 June 2019 the Project Helix was completed,positively impacting CET1 ratio by c.140 bps. The CET1 ratio was positively affected by the tax legislationamendments relating to the conversion of deferred tax assets into deferred tax credits (DTC) and includesreviewed profits for the six months ended 30 June 2019.

The Group has elected to apply the EU transitional arrangements for regulatory capital purposes (EURegulation 2017/2395) where the impact on the impairment amount from the initial application of IFRS 9on the capital ratios is phased-in gradually. The amount added each year decreases based on a weightingfactor until the impact of IFRS 9 is fully absorbed back to CET1 at the end of the five years. The impact onthe capital ratios for the year 2018 was 5% of the impact on the impairment amounts from the initialapplication of IFRS 9, increasing to 15% (cumulative) for the year 2019. The CET1 ratio on a fully-loadedbasis amounts to 13.3% at 30 June 2019 and 13.5% pro forma for the sale of investment in CNP, comparedto 10.1% at 31 December 2018 (and 13.5% pro forma for DTC and Helix). On a transitional basis and on afully phased-in basis after the five year period of transition is complete, the impact of IFRS 9 is expected tobe manageable and within the Group’s capital plans.

As at 30 June 2019, the Total Capital ratio (TCR) stood at 17.8% (and 18.1% pro forma for the sale ofinvestment in CNP), compared to 14.9% at 31 December 2018.

The Group’s capital ratios are above the minimum CET1 regulatory capital ratio of 10.5% (comprising a4.5% Pillar I requirement, a 3.0% Pillar II requirement, the Capital Conservation Buffer of 2.5% and theOther Systemically Important Institution Buffer of 0.5%) and the overall Total Capital requirement of14.0%, comprising an 8.0% Pillar I requirement (of which up to 1.5% can be in the form of Additional Tier 1capital and up to 2.0% in the form of Tier 2 capital), a 3.0% Pillar II requirement (in the form of CET1), theCapital Conservation Buffer of 2.5% and the Other Systemically Important Institution Buffer of 0.5%. TheECB has also provided non-public guidance for an additional Pillar II CET1 buffer.

Pillar II add-on capital requirements derive from the context of the Supervisory Review and EvaluationProcess (SREP) process, which is a point in time assessment and are therefore subject to change over time.

In accordance with the provisions of the Macroprudential Oversight of Institutions Law of 2015, the CentralBank of Cyprus (CBC) is also the responsible authority for the designation of banks that are OtherSystemically Important Institutions (O-SIIs) and for the setting of the O-SII buffer requirement for thesesystemically important banks. The Group has been designated as an O-SII and the O-SII buffer currentlyset by the CBC for the Group is 2%. This buffer is being phased-in gradually having started from 1 January2019 at 0.5% and increasing by 0.5% every year thereafter, until being fully implemented (2.0%) on 1January 2022.

Based on the SREP decisions of prior years, the Company and BOC PCL were under a regulatory prohibitionfor equity dividend distribution and therefore no dividends were declared or paid during years 2018 and2017. Following the 2018 SREP decision, the Company and BOC PCL are still under equity dividenddistribution prohibition. This prohibition does not apply if the distribution is made via the issuance of newordinary shares to the shareholders which are eligible as CET1 capital. No prohibition applies to thepayment of coupons on any AT1 capital instruments issued by the Company and the BOC PCL.

The EBA final guidelines on SREP and supervisory stress testing in July 2018 and the Single SupervisoryMechanism’s (SSM) 2018 SREP methodology provide that CET1 held for the purposes of Pillar II add-oncapital requirements cannot be used to meet any other capital requirements (Pillar 1, P2R or the combinedbuffer requirements), and therefore cannot be used twice. Such restrictions are, however, only expected toapply with effect from the 2019 SREP cycle.

9




Project Helix

In June 2019, the Group completed the sale of a portfolio of loans with a gross book value of €2.8 billion (ofwhich €2.7 billion related to non-performing loans) (the 'Portfolio') secured by real estate collateral tocertain funds affiliated with Apollo Global Management LLC, the agreement for which was announced on 28August 2018 (Project Helix). Cash consideration of c.€1.2 billion was received on completion, reflectingadjustments resulting from, inter alia, loan repayments received on the Portfolio since the reference date of31 March 2018.

Overall, the transaction is capital accretive, with a net positive impact on the Group capital ratios of c.60bps. The impact from the completion of Project Helix on the CET1 ratio and Total Capital ratio at 30 June2019 is an increase of c.140 bps.

The participation of the Bank of Cyprus Public Company Limited (BOC PCL) in the senior debt in relation tofinancing the Transaction has been syndicated down from the initial level of €450 million to c.€45 million,representing c.4% of the total acquisition funding.

Agreement for the sale of investment in CNP Cyprus Insurance Holdings Ltd

In June 2019, the Group signed an agreement to sell its entire shareholding of 49.9% in its associate CNPCyprus Insurance Holdings Limited ('CNP') that had been acquired as part of the acquisition of certainoperations of Laiki Bank in 2013 for a cash consideration of €97.5 million. The sale is expected to becompleted in the second half of 2019, subject to regulatory approvals. On completion, the sale is expectedto have a positive impact of c.30 bps on both the Group’s CET1 ratio and Total Capital ratio (based on theFinancial results as at 30 June 2019) resulting mainly from the release of risk weighted assets.

Additional Tier 1 (AT1)

In December 2018, the Company proceeded with the issuance of €220 million of Additional Tier 1 CapitalSecurities (AT1). AT1 constitutes an unsecured and subordinated obligation of the Company. The coupon isat 12.50% and is payable semi-annually. The first coupon payment to AT1 holders was made in June 2019and was recognised in retained earnings.

Legislative amendments for the conversion of deferred tax asset (DTA) to deferred tax credit(DTC)

Legislative amendments allowing for the conversion of specific deferred tax assets (DTA) into deferred taxcredits (DTC) were adopted by the Cyprus Parliament on 1 March 2019 and published on the Official Gazetteof the Republic on 15 March 2019. The law amendments cover the income tax losses transferred from LaikiBank to BOC PCL in March 2013. The introduction of CRD IV in January 2014 and its subsequent phasing-inled to a more capital intensive treatment of this DTA for the Company. The law amendments have resultedin improved regulatory capital treatment of the DTA, under Capital Requirements Regulation (EU) No.575/2013 ('CRR'), amounting to c.€285 million or a CET1 uplift of c.190 bps.

Pro forma capital ratios

With the completion of the sale of investment in CNP, expected in the second half of 2019, the CET1 ratio(IFRS 9 transitional basis) of 14.9% as at 30 June 2019 improves to 15.2% pro forma for CNP. The TotalCapital ratio of 17.8% as at 30 June 2019 improves to 18.1% pro forma for CNP.

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Legislative amendments for the conversion of deferred tax asset (DTA) to deferred tax credit(DTC) (continued)

Share premium reduction of BOC PCL

BOC PCL will proceed (subject to approvals mainly by the Court of Cyprus and the ECB) with a capitalreduction process which will result in the reclassification of approximate €551 million of BOC PCL sharepremium account balance as distributable reserves which shall be available for distribution to theshareholders of BOC PCL, resulting in total net distributable reserves of c.€1 billion on a pro forma basis (31December 2018). The reduction of capital will not have any impact on regulatory capital or the total equityposition of BOC PCL or the Group.

The distributable reserves provide the basis for the calculation of distributable items under the CRR, whichprovides that coupons on AT1 capital instruments may only be funded from distributable items.

Funding

Funding from Central Banks

At 30 June 2019, BOC PCL's funding from central banks amounted to €830 million, which relates to ECBfunding, (at the same level as at 31 December 2018), comprising solely of funding through the TargetedLonger-Term Refinancing Operations (TLTRO II).

Deposits

Customer deposits totalled €16,377 million at 30 June 2019 compared to €16,844 million at 31 December2018, down by 3%.

BOC PCL’s deposit market share in Cyprus reached 34.7% as at 30 June 2019, compared to 36.0% at 31December 2018. Customer deposits accounted for 75% of total assets at 30 June 2019.

Upon completion of the project Helix, the Loan to Deposit ratio (L/D) was reduced by 5 p.p. to 67%,compared to 72% to 31 December 2018 when ignoring the classification of the Helix portfolio as a disposalgroup held for sale and compared to a pick of 151% at 31 March 2014.

Subordinated Loan Stock

At 30 June 2019 BOC PCL’s subordinated loan stock (including accrued interest) amounted to €261 million(compared to €271 million as at 31 December 2018) and relates to unsecured subordinated Tier 2 CapitalNotes of nominal value €250 million, issued by BOC PCL in January 2017.

Liquidity

At 30 June 2019 the Group Liquidity Coverage Ratio (LCR) stood at 253% (compared to 231% at 31December 2018) and was in compliance with the minimum regulatory requirement of 100%. The liquiditysurplus at 30 June 2019 increased to €3.8 billion, reflecting a €1.2 billion increase of liquidity on Helixcompletion.

The Net Stable Funding Ratio (NSFR) has not yet been introduced. It will become a regulatory indicatorwhen Capital Requirement Regulation 2 (CRR2) is enforced, currently expected in 2021, with the limit set at100%. At 30 June 2019, the Group’s NSFR, on the basis of Basel ΙΙΙ standards, stood at 128% (comparedto 119% at 31 December 2018).

11




Loans

Group gross loans totalled €13,072 million at 30 June 2019 compared to €15,900 million at 31 December2018. Gross loans in Cyprus totalled €12,945 million at 30 June 2019. The reduction in gross loans by 17%is attributed mainly to the completion of Project Helix (sale of €2.8 billion of gross loans of which €2.7billion related to non-performing loans) and to a lesser extent to the completion of Project Velocity (sale of€30 million gross loans, of which the whole amount related to non-performing loans) in the second quarterof 2019.

New loans granted in Cyprus reached €1,111 million for the six months ended 30 June 2019, exceeding newlending in the six months ended 30 June 2018.

At 30 June 2019, the Group net loans and advances to customers totalled €10,949 million (compared to€10,922 million at 31 December 2018 excluding Project Helix loans).

BOC PCL is the single largest credit provider in Cyprus with a market share of 41.3% at 30 June 2019compared to 45.4% at 31 December 2018 with the reduction reflecting the derecognition of the Helixportfolio on completion of project Helix.

Loan portfolio quality

Tackling the Group’s loan portfolio quality remains the top priority for management. The Group continues tomake steady progress across all asset quality metrics and the loan restructuring activity continues. TheGroup has been successful in engineering restructuring solutions across the spectrum of its loan portfolio.

Non-performing exposures (NPEs) as defined by the European Banking Authority (EBA) were reduced to€4,312 million at 30 June 2019, accounting for 33% of gross loans compared to 47% at 31 December 2018(including the Helix and Velocity portfolios).

The provisioning coverage ratio of NPEs improved to 50% at 30 June 2019 compared to 47% at 31December 2018 on the same basis. Ignoring the classification of the Helix (and Velocity) Portfolios asdisposal groups held for sale, the NPE Provision coverage as at 31 December 2018 stood at 52%.

When taking into account tangible collateral at fair value, NPEs are fully covered.

30 June 2019 31 December 2018

€ million% of gross

loans€ million

% of grossloans

NPEs as per EBA definition 4,312 %33.0 7,419 %46.7

Of which:- NPEs with forbearance measures, no arrears 657 %5.0 1,211 %7.6

Overall, the Group has recorded organic NPE reductions for seventeen consecutive quarters and expects theorganic reduction of NPEs to continue during the coming quarters.

Project Helix

In June 2019, the Group announced the completion of Project Helix, that refers to the sale of a portfolio ofloans with a gross book value of €2.8 billion (of which €2.7 billion related to non-performing loans) (the'Portfolio') secured by real estate collateral to certain funds affiliated with Apollo Global Management LLC,the agreement for which was announced on 28 August 2018.

Following the completion of Project Helix, the Group’s gross NPEs are c.70% lower than its peak in 2014.Project Helix reduced the NPE ratio by c.11 p.p. to 33% as at 30 June 2019.

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Overall, the Group has recorded organic NPE reductions for seventeen consecutive quarters andexpects the organic reduction of NPEs to continue during the coming quarters. (continued)

Cash consideration of c.€1.2 billion was received on completion, reflecting adjustments resulting from, interalia, loan repayments received on the Portfolio since the reference date of 31 March 2018.

The participation of BOC PCL in the senior debt in relation to financing the Transaction has been syndicateddown from the initial level of €450 million to c.€45 million, representing c.4% of the total acquisitionfunding.

The Group remains focused on continuing to improve its asset quality position and to seek solutions, bothorganic and inorganic, to make BOC PCL a stronger and safer institution, capable of supporting the localeconomy.

ESTIA

In July 2018, the Government announced a scheme aimed at addressing NPEs backed by primary residence,known as ESTIA (the ‘Scheme’). This Scheme is expected to impact approximately €0.84 billion of retailcore NPEs, subject to eligibility criteria and participation rate. The ESTIA eligible portfolio refers to thepotentially eligible portfolio following on-going detailed assessment based on the BOC PCL’s available dataon Open Market Value (OMV) and NPE status. Eligibility criteria relate primarily to the OMV of the residence,total income and net wealth of the household. These will act as a clear definition of socially protectedborrowers, acting as an enabler against strategic defaulters. In accordance with the Scheme, the eligibleloans are to be restructured to the lower of the contractual balance and OMV. The Government willsubsidise one third of the instalment. In July 2019, the Memorandum of the Understanding was signed bythe banks and the Government for participation in the Scheme, which is underway for official launch inSeptember 2019. According to the timeline provided by the Government, the application submissions willoccur from September to mid-November 2019, with evaluation by the banks running concurrently until theend of November 2019. During the fourth quarter of 2019, participating banks will offer restructuringsolutions to the applicants and simultaneously the applications will be reviewed and approved by theGovernment, with the process expected to finish by March 2020. The first payment of the state subsidyinstallment is expected to occur between December 2019 and April 2020.

Project Velocity

In June 2019, BOC PCL completed the sale of an NPE portfolio of primarily retail unsecured exposures, witha contractual balance of €245 million and a gross book value of €30 million as at the date of disposal(known as 'Project Velocity' or the 'Sale') to APS Delta s.r.o. This portfolio comprised 9,700 heavilydelinquent borrowers, including 8,800 private individuals and 900 small-to-medium-sized enterprises. TheSale was broadly neutral to both, the income statement and to capital.

The Group continues to assess the potential to accelerate the decrease in NPEs on its balance sheet throughan additional sale of NPEs. To that extent the Group has, during the second half of 2019, embarked on apreparation phase to review the feasibility of NPE reduction structures with the aim of identifying the optionthat best meets the Group’s strategic objectives. The preparation phase involves defining the relevant NPEportfolio, evaluation of real estate collaterals, data remediation and enhancement of data tapes, borrowerinformation memorandums, legal due diligence and transaction structuring options. For the purposes ofcompleting the workstreams outlined above and in order to conclude on the best possible structure, theGroup has engaged international advisors, and is proceeding to engage in high level discussions via thesigning of confidentiality agreements with various third parties, including financial investors and investmentbanks, that may be interested in pursuing a possible collaboration with the Group. A range of potentialoutcomes of this preparation phase is possible, including an outright sale (including BOC PCL retaining aportion of the related financing). Any potential transaction is expected to involve a portfolio of NPEs inexcess of €2 billion by gross book value. The Group is not committed to any outcome arising from thispreparation phase, which is currently expected to be finalised in the first half of 2020.

13




Real Estate Management Unit (REMU)

The Real Estate Management Unit (REMU) on-boarded €126 million of assets during the six months ended30 June 2019, via the execution of debt for asset swaps and repossessed properties. The focus for REMU isincreasingly shifting from on-boarding of assets resulting from debt for asset swaps towards the disposal ofthese assets. The Group completed organic disposals of €92 million during the six months ended 30 June2019 (compared to €126 million for the same period last year), resulting in a profit on disposal of €16million for the six months ended 30 June 2019. During the six months ended 30 June 2019, the Groupexecuted sale-purchase agreements (SPAs) with contract value of €110 million (258 properties), excludingthe sale of Cyreit. In addition, the Group signed SPAs for disposals of assets with contract value of €89million.

In November 2018, BOC PCL signed an agreement for the disposal of its entire holding in the investmentshares of the Cyreit Variable Capital Investment Company PLC (Cyreit). During the first half of 2019, theGroup completed the sale of the Cyreit (21 properties) recognising a loss on disposal of approximate €1million. The total proceeds, since November 2018, from the disposal of Cyreit were €160 million.

With the completion of Project Helix, properties with carrying value of €109 million, which were included inthe portfolio for the NPE sale (Helix), were derecognised as at 30 June 2019.

The Group has decided to classify the leased properties acquired in exchange of debt and leased out underoperating leases as ‘Investment Properties’ instead of ‘Inventories’. This change has been appliedretrospectively resulting in the restatement of comparatives.

As a result of the above change in classification, properties with carrying value of €118 million werereclassified from the stock of properties (measured at the lower of cost and net realisable value under IAS2) to investment properties (measured at fair value under IAS 40) as at 30 June 2019 (compared to €103million at 31 December 2018). These properties continue to be managed by REMU.

This change in classification had no material impact on the Group’s comparative retained earnings and acumulative impact of €1 million gain has been recognised under ‘Net gains from revaluation and disposal ofinvestment properties and on disposal of stock of properties’ in the income statement of first half of 2019.

Overseas exposure

At 30 June 2019 there were overseas exposures of €311 million in Greece relating to both loans andproperties (compared to €144 million as at 31 December 2018), not identified as non-core exposures, sincethey are considered by management as exposures arising in the normal course of business. The increase ismainly driven by new lending to Greek entities investing in Cyprus, granted by BOC PCL in the normalcourse of business.

During the six months ended 30 June 2019, the Group signed a binding agreement for the disposal of theoverseas exposure in Serbia, comprising loans and properties, amounting to €8 million. As at 30 June 2019the exposure was classified as held for sale.

The Group continues its efforts for further deleveraging and disposal of non-essential assets and operations.

Income Statement Analysis

Total incomeNet interest income (NII) and net interest margin (NIM) for the six months ended 30 June 2019 amountedto €170 million and 1.88% respectively on the underlying basis. NII was up by 3% compared to €166million a year earlier. The NIM remained broadly flat when compared to previous year, negatively affectedby the continued pressure on lending rates and positively affected by the reduction of cost of deposits.

Average interest earning assets for the six months ended 30 June 2019 amounted to €18,270 million, up by1% a year earlier.

14



Income Statement Analysis (continued)

Non-interest income for the six months ended 30 June 2019 amounted to €163 million, mainly comprisingnet fee and commission income of €75 million, net foreign exchange gains and net gains on financialinstrument transactions and disposal/dissolution of subsidiaries of €26 million, net insurance income of €30million, net gains from revaluation and disposal of investment properties and on disposal of stock ofproperties of €16 million and other income of €16 million.

Net foreign exchange gains and net gains on financial instrument transactions and disposal/dissolution ofsubsidiaries of €26 million for the six months ended 30 June 2019, comprising mainly net foreign exchangegains of €14 million and net gains on revaluation of financial instruments of €12 million, decreased by 37%compared to same period last year mainly due to one-off gain on disposal of bonds during the six monthsended 30 June 2018 amounting to €19 million.

Net insurance income amounted to €30 million for the six months ended 30 June 2019, compared to €25million for the same period last year, up by 20%, reflecting increased income and positive investmentreturns.

Net gains from revaluation and disposal of investment properties and on disposal of stock of properties forthe six months ended 30 June 2019 amounted to €16 million, of which net profit from the disposal of stockproperties of €17 million (REMU gains), and a valuation loss of €1 million, compared to net gains of €21million for the same period last year which related mainly to the net profit from the disposal of stock ofproperties (REMU gains).

Total income for the six months ended 30 June 2019 amounted to €333 million, compared to €345 millionfor the same period last year (down by 4%).

Total expensesTotal expenses for the first half of 2019 were €208 million compared to €194 million for the same periodlast year), 54% of which related to staff costs (€112 million), 40% to other operating expenses (€84million) and 6% (€12 million) to special levy and contribution to Single Resolution Fund (SRF).

Total operating expenses for the first half of 2019 were €196 million compared to €182 million in thecorresponding period last year, up by 8%.

Staff costs of €112 million for the first half of 2019 increased by 9% compared to €102 million in the firstsix months of 2018 mainly driven by the increase in employer’s social insurance contributions from thebeginning of the year and the additional contributions to the new general healthcare system whichcommenced in March 2019.

The number of persons employed by the Group as at 30 June 2019 was 4,155 and includes 108 personsrelating to the Helix transaction, where the full migration and transfer to the buyer is expected to concludeby the end of the year (31 December 2018: 4,146 and 30 June 2018: 4,158 represented).

Other operating expenses were €84 million, increased by 6% from the same period last year, mainly due tohigher property related costs and higher depreciation and amortisation resulting from increased capitalexpenditure following the Digital Transformation Programme.

Cost management, including containment of staff costs, remains a key focus for this year and goingforward.

Profit before tax and non-recurring itemsProfit before tax and non-recurring items for the six months ended 30 June 2019 was €125 million,compared to €151 million for the six months ended 30 June 2018, down by 17%, mainly due to the lowervolume on loans and pressure on lending rates.

The loan credit losses for the six months ended 30 June 2019 totalled €87 million, compared to €85 millionfor the same period last year, reflecting further balance sheet de-risking.

15



Income Statement Analysis (continued)

The annualised loan credit losses charge (cost of risk) for the first half of 2019, following the completion ofNPE sales which led to the reduction of gross loans by €2.8 billion, accounted for 1.3% of gross loans,compared to an annualised loan credit losses charge of 1.22% for the same period last year, on the samebasis.

At 30 June 2019, the allowance for expected loan credit losses, including fair value adjustment on initialrecognition and provisions for off-balance sheet exposures totalled €2,145 million (compared to €2,254million at 31 December 2018 pro forma for Helix) and accounted for 16.4% of gross loans on the samebasis.

Impairments of other financial and non-financial instruments for the six months ended 30 June 2019amounted to €10 million compared to €13 million for the six months ended 30 June 2018, mainly driven bythe de-risking of the legacy REMU properties.

Reversal of provisions for litigation, regulatory and other matters relates to reversal of provisions ofpreviously provided cases with a favourable outcome.

Profit/(loss) after taxThe tax credit for the six months ended 30 June 2019 is minimal, positively affected by overprovisionsrelating to prior years, compared to a tax charge of €4 million for the six months ended 30 June 2018.

Profit after tax and before non-recurring items for the six months ended 30 June 2019 was €29 million,compared to a profit of €57 million for the same period last year, down by 51%.

Advisory and other restructuring costs-excluding discontinued operations and NPE sale (Helix) amounted to€12 million, compared to €15 million for the first half of 2018, down by 22%.

Profit after tax arising from the organic operations of the Group for the first half of 2019 amounted to €17million, compared to €42 million for the corresponding period last year, down by 61%.

The net result relating to NPE sale (Helix) comprising the interest income, non-interest income, staff costs,other operating expenses and loan credit losses related to Project Helix, for the first six months of 2019 wasnil compared to a net loss of €105 million for the six months ended 30 June 2018.

The loss on remeasurement of investment in associate classified as held for sale (CNP) net of share of profitfrom associates totalled €21 million for the six months ended 30 June 2019, comprising a loss onremeasurement of investment in associate classified as held for sale of €26 million and a share of profitfrom investment in associate of €5 million (compared to a share of profit from associates of €5 million in theperiod ended 30 June 2018). During 2019 the Group announced a binding agreement to sell its entireshareholding of 49.9% in its associate CNP Cyprus Insurance Holdings Limited (CNP) that had been acquiredas part of the acquisition of certain operations of Laiki Bank in 2013, for a cash consideration of €97.5million.

The reversal of impairment of DTA and impairment of other tax receivables totalled €101 million for the firsthalf of 2019, comprising the positive impact of €109 million following amendments to the Income Taxlegislation in Cyprus adopted in March 2019, and an impairment of €8 million relating to Greek taxreceivables adversely impacted from legislative changes.

Profit after tax attributable to the owners of the Company for the six months ended 30 June 2019 was €97million, compared to a loss of €54 million for the six months ended 30 June 2018.

16


Operating environment

Economic expansion continued into 2019 with real Gross Domestic Product (GDP) increasing by 3.4% in thefirst quarter and by 3.2% in the second quarter seasonally adjusted, after rising by 3.9% in 2018, and by4.5% and 4.8% respectively in 2017 and 2016 (Cyprus Statistical Service). The deceleration was driven byslowing activity in the traditional sectors including tourism and construction. From the demand side theslowdown was driven by a deteriorating external balance. Excluding ships registrations, net exports havebeen contributing negatively to real GDP growth in 2018 and in the first quarter of 2019. Exports andimports of goods and services excluding ships, declined in the first quarter. Regarding exports, both thegoods and services components declined, the latter reflecting a poorer tourism performance at the start ofthe year. Government consumption surged in the quarter. Other than transport equipment which fluctuateswith ship registrations, fixed investment was driven by construction related activities.

Total employment increased by 6% in the first quarter (Cyprus Statistical Service) driven by full-timehirings, and the unemployment rate dropped to 7.3% when seasonally adjusted (Eurostat). Consumerinflation remained tamed in the first seven months of the year rising by 0.8% compared with 1.4% for 2018due in part to low energy prices in world markets, but also limited pricing power in most categories of goodsand services with the exception of housing. Tourist arrivals dropped marginally by 0.9% in the first half ofthe year with the drop of Russian tourists more pronounced at 4.4%, whilst arrivals from the UK were upmarginally by 0.4%. In the construction sector, building permits remained strong in the first quarter,particularly for dwellings, with some deceleration in terms of volume. Building permits increased sharply inApril 2019 in terms of volume, driven by the hotel sector. On the demand side, the volume of retail salesdecelerated sharply in the first quarter of the year, rising by 1.9%, compared to a 5.4% overall yearlyincrease in 2018.

Looking into the medium term, the economy is expected to continue to grow but at a slowing pace,according to forecasts by the IMF and the European Commission. Employment conditions are expected tocontinue to improve and the unemployment rate is expected to drop further. Price inflation is expected torise in later years as capacity utilisation will be tightening. The economy will continue to wrestle with legacyproblems to some degree, but the real challenge will be the transformation of the economy towards highervalue added activities that will support higher productivity growth and improved competitiveness.

The primary challenges therefore will be, to further de-risk the economy by reducing public debt and theremaining stock of non-performing loans; to safeguard fiscal space so as to be able to respond tounforeseen circumstances; and to pursue additional structural reforms especially in the judiciary and publicadministration domains that will improve the investment environment and in the process induce productivityboosting investments.

Fiscal performance has been strengthening driven by rising public revenues and constrained expenditures.The general government budget surplus rose to 3.5% of GDP in 2018 and remained sizable in the first halfof 2019. Public debt remains high and rose further in 2018 to €21.3 billion or 102.5% of GDP, as a result ofthe fiscal burden associated with the resolution of the Cyprus Cooperative Bank (Eurostat). However, acombination of budget surplus, rising expected inflation and low debt service costs, will be supporting anaccelerated decline in the public debt to GDP ratio in the medium term.

In the banking sector, funding conditions remained favourable and the stock of NPEs continued to decline.Specifically, the stock of NPEs declined from €20.9 billion at the end of December 2017 to €10.4 billion atthe end of December 2018 after Bank of Cyprus’ loans sale and the resolution of the Cyprus CooperativeBank. The stock of NPEs was €10.3 billion at the end of March 2019 and the ratio to gross loans was 30.9%,marginally higher than 30.5% at the end of December 2018, reflecting a further drop in loans outstanding.

Going forward, downside risks derive from the external environment and the structure of the domesticeconomy which is characterised by a large foreign balance relative to the GDP. The slowing of global trade,uncertainties over Brexit and fragilities in the EU are having an impact. Brexit presents downside risks tothe Cyprus economy given close trade and investment links. Economic growth is expected to remainpositive, but to soften. Growth in 2019 and 2020 according to the European Commission is expected to beat 2.9% and 2.6%, respectively. Employment is expected to continue to rise, but at a slower pace than inrecent years, and the unemployment rate is expected to continue to drop. Investment is expected to bestrengthening, but high imports are expected to limit the contribution to growth from the external sector.Exports growth is expected to decelerate relative to 2014-2018 against a less favourable internationalenvironment.

17


Operating environment (continued)

The sovereign risk ratings of the Cyprus Government improved considerably in the recent period reflectingexpectations of a sustained decline in public debt as a ratio to GDP, expected further declines in non-performing exposures and a more stable price environment following a protracted period of deflation andlow inflation. In November 2018 Fitch Ratings upgraded its Long-Term Issuer Default ratings for Cyprus toinvestment grade (BBB-), affirming in April 2019. In September 2018, S&P Global Ratings also upgradedCyprus to investment grade (BBB-). In July 2018 Moody’s Investors Service upgraded Cyprus’ sovereignrating to Ba2 from Ba3, affirmed in April 2019. All maintain stable outlook.

Business Overview

As the Cypriot operations account for 99% of gross loans and 100% of customer deposits, after the disposalof the UK operations in 2018, the Group’s financial performance is highly correlated to the economic andoperating conditions in Cyprus and is expected to consequently benefit from the country’s recovery. Mostrecently, at the end of July 2019, Standard and Poor’s affirmed their long-term issuer credit rating on theBank to ‘B+’ (stable outlook). In March 2019, Fitch Ratings affirmed their long-term issuer default rating ofB- (positive outlook). In January 2019, Moody’s Investors Service upgraded the Bank’s long-term depositrating to B3 from Caa1, with a positive outlook. The positive outlook reflects expectations of furtherimprovements in the BOC PCL’s financial fundamentals, mainly asset quality over the next 12-18 months, inthe context of an improved operating environment in Cyprus. The key drivers for the rating actions werethe improvement in the BOC PCL’s financial fundamentals, mainly in asset quality, and its funding position.

Tackling the BOC PCL’s loan portfolio quality is of utmost importance for the Group. The Group has beensuccessful in engineering restructuring solutions across the spectrum of its loan portfolio, and expects theorganic reduction of residual NPEs to continue, with a target of c. €800 million for 2019, as portfolio sizeand business line mix has changed radically upon completion of the Project Helix. In parallel, the Groupcontinues to actively explore strategies to further accelerate de-risking including further portfolio sales.

The July 2018 foreclosure law amendments have expedited the process and removed options to frustrateexecution. Recently, the Cyprus Parliament voted through certain changes to the 2018 law which, in themost part, seek to (a) provide additional checks and balances where banks are seeking to foreclose smallloans (


Business Overview (continued)

In order to further optimise its funding structure, the Bank continues to focus on the shape and cost ofdeposit franchise, taking advantage of the increased customer confidence towards the Bank, as well asimproving macroeconomic conditions. The cost of deposit was reduced by 52 bps to 24 bps over the last 18months.

In common with other European banks, the changed interest rate environment presents a challenge to theGroup’s profitability. A key focus for management this year and going forward is the active management offunding costs and on-going running expenses, including the containment of staff cost. The DigitalTransformation Programme that started in 2017 is beginning to deliver an improved customer experience(see section below) and the branch network is half the size it was in 2013.

Digital Transformation

As part of its vision to be the leading financial hub in Cyprus, BOC PCL continues its Digital TransformationProgramme in collaboration with IBM, the BOC PCL's Strategic Digital Transformation Partner, which focuseson three strategic pillars: developing digital services and products that enhance the customer experience,streamlining internal processes and introducing new ways of working to improve the workplaceenvironment. In the last few months, various new features were introduced on the new mobile app, such asthe ability to apply for e-products, transfer amounts over €150 through QuickPay, log-in through biometrics,and view own accounts with UK banks. Also, financial management tools have been introduced that allowour clients to use the 1Bank service to better manage their finances. In addition, Apple Pay was launchedthat allows Bank of Cyprus Visa cardholders to make secure and fast payments through iOS mobile devices.This has had very positive feedback from customers and rapid adoption. Payments via Android devices aremade through the BoC Wallet app. Moreover, the introduction of the 1Bank B2B (business to business) APIs(Application Programming Interfaces) is gaining traction.

These are interfaces that enable businesses to enjoy access to 1Bank functionality directly through theirown systems without the need to access the 1Bank website. In addition, the IBU Gateway was introducedthat provides 24/7 access to Professional Associates and IBU/Wealth customers to apply for products orservices and get a ready-to-sign application form.

BOC PCL has led the way in Cyprus in establishing an open banking ecosystem, by being the first bank inCyprus to launch its PSD2 APIs (Payment Service Directive2, Application Programming Interfaces) and alsoby integrating with nine UK banks allowing customers to view their account balances and transactions fromthe integrated banks together with their Bank of Cyprus accounts through 1Bank. Building on the success ofthe integration of the UK banks BOC PCL is working on integrating Cypriot banks. Furthermore, severalother initiatives are in progress, including enhancing digital channels to improve customer experience,providing online services using digital signatures, automating internal end to end processes using a BPM(Business Process Management) platform and introducing collaboration and knowledge sharing tools acrossthe organisation.

The adoption of digital products and services continues to grow and gain momentum, compared to twoyears ago, when the digital transformation program began. Today, 75% of transactions involving deposits,cash withdrawals and internal/external transfers, are performed through digital channels (with thecorresponding rate two years before reaching 65%). Regarding the use of mobile banking, the number ofactive users increased by 54% from June 2017, while the average monthly number of log-ins per customeralso increased by 44% during the same period. BOC PCL also monitors the Digital Adoption Rate, which is acomposite indicator that demonstrates the digital engagement of customers with BOC PCL and the overalldigital economy. This indicator is currently 66% and moving steadily upwards (compared to 59% two yearsago).

Outlook

The Group remains on track for implementing its strategic objectives aiming to become a stronger, saferand a more focused institution capable of supporting the recovery of the Cypriot economy and deliveringappropriate shareholder returns in the medium term.

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Outlook (continued)

The key pillars of the Group's strategy are to: Materially reduce the level of delinquent loans Further optimise the funding structure Maintain an appropriate capital position by internally generating capital Focus on the core Cyprus market Achieve a lean operating model Deliver value to shareholders and other stakeholders

KEY PILLARS PLAN OF ACTION

1. Materially reduce the level of delinquent loans

Sustain momentum in restructuring andcontinue reduction of NPEs

Focus on terminated portfolios (in RecoveryUnit) – "accelerated consensual foreclosures"

Real estate management via REMU Continue to explore alternative accelerating

NPE reduction measures such as NPE sales,securitisations etc.

2. Further optimise the funding structure Focus on shape and cost of deposit franchise 3. Maintain an appropriate capital position Internally generating capital

4. Focus on core Cyprus market

Targeted lending in Cyprus into promisingsectors to fund recovery

New loan origination, while maintaininglending yields

Revenue diversification via fee income frominternational banking, wealth, and insurance

5. Achieve a lean operating model

Implementation of digital transformationprogram underway, aimed at enhancingproductivity through alternative distributionchannels and reducing operating costs overtime, including containment of staff costs

Post the execution of further NPE reduction,BOC PCL is focusing on the need to managecosts

6. Deliver value Deliver appropriate medium term risk-

adjusted returns

Going concern

The Directors have made an assessment of the Group’s ability to continue as a going concern for a period of12 months from the date of approval of these Financial Statements. The Directors believe that the Group istaking all necessary measures to maintain its viability and the development of its business in the currenteconomic environment.

In making this assessment, the Directors considered the significant transactions during 2018 and the sixmonths ended 30 June 2019, which had a positive impact on the capital position of the Group, including thesale of non performing loans (the Helix transaction), the disposal of Bank of Cyprus UK Ltd and the issuanceof €220 million Additional Tier 1 Capital Securities. The Directors have also considered the legislativeamendments on the Income Tax Law Amendment 28 (I) of 2019, enacted on 1 March 2019, which allow forthe conversion of specific deferred tax assets (DTA) into deferred tax credits (DTC), the Group’s Financialand Capital Plan and the developments in the operating environment in Cyprus.

The Group has developed a Financial and Capital Plan (the ‘Plan’), which has been approved by the Board inFebruary 2019. One of the most important objectives of the Plan was to ensure that the Group has sufficientresources and capital in order to continue the balance sheet de-risking and further deal with the residualNPEs. The IFRS 9 impact on a fully phased-in basis has been considered within the Group’s Plan.

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Going concern (continued)

Despite the implementation risk associated with the outcome of future events outlined in the Plan at thereporting date, the Directors believe that there is sufficient capital throughout the period of assessment tomeet regulatory capital requirements. The Group will continue its de-risking strategy and remains focusedto implement the actions contemplated in the Plan.

The Directors, in making their assessment, have given particular attention to the regulatory requirementsrelating to capital and liquidity as follows:

Non-Performing Exposures The Group completed the Helix transaction in June 2019 which along with the organic reduction

led to a significant decrease of NPEs during the six months ended 30 June 2019; and The reduction of NPEs has been a regulatory focus for a number of years and will continue to be

so. The Group has prepared an updated NPE strategy plan for the years 2019-2021 which wassubmitted to the ECB in June 2019. The Directors believe that the reduction of NPEs is asignificant factor with regards to the future viability of the Group as a pillar bank in Cyprus.

CapitalThe Common Equity Tier 1 (CET1) ratio and the Total Capital ratio on a transitional basis at 30 June 2019are higher than the minimum required ratios (Note 5.1 of these Consolidated Condensed Interim Financial Statements).

Following the Annual Supervisory Review and Evaluation Process (SREP) performed by the ECB in 2018 andbased on the final 2018 SREP decision received on 27 March 2019, the Group’s minimum phased in CET1ratio and Total Capital ratio remain unchanged, when ignoring the phasing-in of the Capital ConservationsBuffer and the Other Systemically Important Institution Buffer. The final 2018 SREP decision was appliedfrom 1 April 2019.

The projected capital ratios of the Group indicate that there will be sufficient capital throughout the periodof assessment when considered in conjunction with the following items:

The phase-in of IFRS 9. The Group has elected to apply the EU transitional arrangements forregulatory capital purposes (EU Regulation 2017/2395) where the total impact on adoption ofIFRS 9 of €308,511 thousand, on 1 January 2018 and any subsequent increase allowed by theregulation for phasing-in (i.e. increase in Stage 1 and Stage 2 allowance), will impact the capitalratios over a period of five years. The impact on the regulatory capital is being phased-in basedon a weighting factor until it is fully absorbed at the end of the five years. The initial impact ofIFRS 9 was phased in by 5% on 1 January 2018 and increased to 15% (cumulative) on 1 January2019.

The regulatory capital position of the Group has strengthened further, upon the completion of theHelix transaction. On completion, the derecognition of the Helix portfolio had a positive impact onthe Group's capital ratios resulting from the release of risk weighted assets.

The Group’s capital position is sufficient, allowing acceleration of risk reduction and recalibrationof the cost base. The Group remains focused to implement the actions contemplated in the Plansubmitted to the ECB.

The agreement for the sale of investment in CNP Cyprus Insurance Holdings Ltd will furtherenhance the capital position of the Group.

As the Cypriot operations account for 99% of gross loans and 100% of customer deposits (afterthe disposal of the UK operations in 2018), the Group’s financial performance is highly correlatedto the economic and operating conditions in Cyprus and is expected to consequently benefit fromthe country’s recovery. The sovereign risk ratings of the Cyprus government improvedconsiderably in the recent period reflecting expectations of a sustained decline in public debt as aratio to GDP, expected further declines in non-performing exposures and a more stable priceenvironment following a protracted period of deflation and low inflation. In November 2018, FitchRatings upgraded its Long-Term Issuer Default ratings for Cyprus to investment grade (BBB-),affirming in April 2019. In September 2018, S&P Global Ratings also upgraded Cyprus toinvestment grade (BBB-). In July 2018 Moody’s Investors Service upgraded Cyprus’ sovereignrating to Ba2 from Ba3, affirmed in April 2019. All maintain stable outlook.

21


Going concern (continued) Most recently, at the end of July 2019, Standard and Poor’s affirmed their long-term issuer credit

rating on the BOC PCL’s of ‘B+’ (stable outlook). In March 2019, Fitch Ratings affirmed their long-term issuer default rating of B- (positive outlook). In January 2019, Moody’s Investors Serviceupgraded the Bank’s long-term deposit rating to B3 from Caa1, with a positive outlook. Thepositive outlook reflects expectations of further improvements in the BOC PCL’s financialfundamentals, mainly asset quality over the next 12-18 months, in the context of an improvedoperating environment in Cyprus. The key drivers for the ratings were the improvement in theBOC PCL’s financial fundamentals, mainly in asset quality, and its funding position.

Funding and liquidity The Group is monitoring its liquidity position and is considering ways to reduce the deposits cost;

and The Group is in compliance with the Liquidity Coverage Ratio (LCR) and is significantly above the

minimum requirements (Note 31 of these Consolidated Condensed Interim Financial Statements).

Based on the projections of the management, it is expected that the Group will maintain compliance withthese liquidity requirements for the period of the going concern assessment.

Principal risks and uncertainties - Risk management and mitigation

Like other financial organisations, the Group is exposed to risks, the most significant of which are creditrisk, liquidity risk, market risk (arising from adverse movements in exchange rates, interest rates andsecurity prices) and insurance risk. The Group monitors, manages and mitigates these risks throughvarious control mechanisms. Detailed information relating to Group risk management is set out in Note 29to 31 of these Consolidated Condensed Interim Financial Statements and in the Additional Risk and CapitalManagement Disclosures including Pillar 3 Semi-annual disclosures which form part of the Interim FinancialReport for the six months ended 30 June 2019.

The Group is also exposed to litigation risk, arising from claims, investigations, regulatory and othermatters. Further information is disclosed in Note 25 to these Consolidated Condensed Interim FinancialStatements.

Additionally, the Group is exposed to the risk on changes in the fair value of property which is held eitherfor own use or as stock of property or as investment property. Stock of property is predominately acquiredin exchange of debt and is intended to be disposed of in line with the Group’s strategy. Further informationis disclosed in Note 17 to these Consolidated Condensed Interim Financial Statements.

The Group activities are mainly in Cyprus therefore the Group performance is impacted by changes in theCyprus operating environment as described in the 'Operating environment' section of this InterimManagement Report.

In addition, details of the significant judgements, estimates and assumptions which may have a materialimpact on the Group’s financial performance and position are set out in Note 6 of these ConsolidatedCondensed Interim Financial statements.

Details of the financial instruments and hedging activities of the Group are set out in Note 14 of theseConsolidated Condensed Interim Financial Statements.

Events after the reporting date

ESTIA Memorandum of Understanding

In July 2019 the Memorandum of Understanding was signed by BOC PCL and the Government for theimplementation of ESTIA scheme, which is underway for official launch in September 2019. ESTIA is ascheme aimed at addressing NPEs backed by primary residence, announced by the Government in July2018. According to the timeline provided by the Government, the application submissions will occur fromSeptember 2019 to mid-November 2019. During the forth quarter of 2019 BOC PCL, will offer restructuringsolutions to the applicants and simultaneously the applications will be reviewed and approved by theGovernment. The first payment of the state subsidy installment is expected to occur between December2019 and April 2020.

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Consolidated Condensed Interim FinancialStatements for the six months ended

30 June2019

BANK OF CYPRUS HOLDINGS GROUPInterim Consolidated Income Statement

Six months ended30 June

20192018

(represented)*

Notes €000 €000

Continuing operations

Turnover 3487,145 521,469

Interest income 251,805 286,581

Income similar to interest income 26,683 26,296

Interest expense (50,415) (78,016)

Expense similar to interest expense (23,964) (22,777)

Net interest income 204,109 212,084

Fee and commission income 87,467 85,282

Fee and commission expense (12,955) (4,946)

Net foreign exchange gains 14,117 18,039

Net gains on financial instrument transactions and disposal/dissolution of subsidiaries andassociates 8 12,155 37,378

Insurance income net of claims and commissions 30,036 25,094

Net (losses)/gains from revaluation and disposal of investment properties (1,349) 1,165

Net gains on disposal of stock of property 17,747 20,266

Other income 15,679 11,276

367,006 405,638

Staff costs 9 (114,244) (104,670)

Special levy on deposits on credit institutions in Cyprus and contribution to SingleResolution Fund (12,477) (12,073)

Other operating expenses 9 (112,967) (102,292)

127,318 186,603

Net gains on derecognition of financial assets measured at amortised cost 5,429 19,381

Credit losses to cover credit risk on loans and advances to customers 10 (108,911) (252,953)

Credit losses of other financial instruments 10 (7,367) (3,331)

Impairment of non-financial instruments 10 (11,585) (10,117)

Profit/(loss) before share of profit from associates and remeasurement 4,884 (60,417)

Remeasurement of investment in associate classified as held for sale 19 (25,943) -

Share of profit from associates 36 5,312 4,520

Loss before tax from continuing operations (15,747) (55,897)

Income tax 11 115,144 (3,890)

Profit/(loss) after tax from continuing operations 99,397 (59,787)

Discontinued operations

Profit after tax from discontinued operations 7 - 4,010

Profit/(loss) for the period 99,397 (55,777)

Attributable to:

Owners of the Company-continuing operations profit/(loss) 97,398 (58,058)

Owners of the Company-discontinued operations profit - 4,010

Total profit/(loss) attributable to the owners of the Company 97,398 (54,048)

Non-controlling interests-continuing operations profit/(loss) 1,999 (1,729)

Total profit/(loss) attributable to non-controlling interests 1,999 (1,729)


Basic and diluted profits/(losses) per share attributable to the owners of theCompany (€ cent)-continuing operations 12

21.8 (13.0)

Basic and diluted profits/(losses) per share attributable to the owners of theCompany (€ cent) 12

21.8 (12.1)

* For comparative represented information refer to Note 3.1.

25

BANK OF CYPRUS HOLDINGS GROUPInterim Consolidated Statement of Comprehensive Income


20192018

(represented)

Notes €000 €000


Other comprehensive income (OCI)

OCI that may be reclassified in the consolidated income statement insubsequent periods

Fair value reserve (debt instruments)Net gains/(losses) on investments in debt instruments measured at fairvalue through OCI (FVOCI) 14,426 (10,455)

Transfer to the consolidated income statement on disposal - (19,787)

14,426 (30,242)

Foreign currency translation reserve(Loss)/profit on translation of net investments in foreign branches andsubsidiaries (7,200) 4,017

Profit/(loss) on hedging of net investments in foreign branches andsubsidiaries 14 8,279 (3,859)

Transfer to the consolidated income statement on dissolution/disposal offoreign branches and subsidiaries (426) (48)

653 110

Total OCI that may be reclassified in the consolidated incomestatement in subsequent periods 15,079 (30,132)

OCI not to be reclassified in the consolidated income statement insubsequent periods

Fair value reserve (equity instruments)Share of net gains/(losses) from fair value changes of associates 4,199 (1,935)

Net gains on investments in equity instruments designated at FVOCI 236 2,857

4,435 922

Property revaluationDeferred tax

11 29 17

Actuarial (losses)/gains on the defined benefit plansRemeasurement (losses)/gains on defined benefit plans (2,149) 2,784

Total OCI not to be reclassified in the consolidated income statementin subsequent periods 2,315 3,723

Other comprehensive income/(loss) for the period net of taxation 17,394 (26,409)

Total comprehensive income/(loss) for the period 116,791 (82,186)

Attributable to:Owners of the Company 114,770 (80,453)

Non-controlling interests 2,021 (1,733)

Total comprehensive income/(loss) for the period 116,791 (82,186)

26

BANK OF CYPRUS HOLDINGS GROUPInterim Consolidated Statement of Changes in Equity

Attributable to shareholders of the Company

Share capital(Note 24)

Share premium(Note 24)

Treasuryshares

(Note 24)

Retained earningsProperty

revaluationreserve

Financial instrumentsfair value reserve

Life insurancein-forcebusinessreserve

Foreigncurrency

translationreserve

Total

Other equityinstruments

Non-controllinginterests

Total equity

€000 €000 €000 €000 €000 €000 €000 €000 €000 €000 €000 €000

1 January 2019 44,620 1,294,358 (21,463) 591,941 79,433 15,289 101,001 16,151 2,121,330 220,000 25,998 2,367,328

Profit for the period - - - 97,398 - - - - 97,398 - 1,999 99,397

Other comprehensive(loss)/income after tax forthe period

- - - (2,149) 22 18,846 - 653 17,372 - 22 17,394

Total comprehensiveincome after tax for theperiod

- - - 95,249 22 18,846 - 653 114,770 - 2,021 116,791

Increase in value of in-forcelife insurance business - - - (4,114) - - 4,114 - - - - -

Tax on decrease in value ofin-force life insurancebusiness - - - 514 - - (514) - - - - -

Payment of coupon to AT1holders (Note 24)

- - - (13,447) - - - - (13,447) - - (13,447)

30 June 2019 44,620 1,294,358 (21,463) 670,143 79,455 34,135 104,601 16,804 2,222,653 220,000 28,019 2,470,672

28

BANK OF CYPRUS HOLDINGS GROUPInterim Consolidated Statement of Changes in Equity

Attributable to shareholders of the Company

Share capital(Note 24)

Share premium(Note 24)

Treasuryshares

(Note 24)

Accumulated lossesProperty

revaluationreserve

Financial instrumentsfair value reserve

Other reservesLife insurance in-

force businessreserve

Foreign currencytranslation

reserveTotal

Non-controllinginterests

Total equity

€000 €000 €000 €000 €000 €000 €000 €000 €000 €000 €000 €000

1 January 2018 44,620 2,794,358 (21,463) (527,128) 92,878 54,485 6,059 105,651 36,098 2,585,558 31,150 2,616,708

Impact of adopting IFRS 9at 1 January 2018

- - - (299,150) - (8,470) - - - (307,620) - (307,620)

Restated balance at 1January 2018

44,620 2,794,358 (21,463) (826,278) 92,878 46,015 6,059 105,651 36,098 2,277,938 31,150 2,309,088

Loss for the period - - - (54,048) - - - - - (54,048) (1,729) (55,777)

Other comprehensiveincome/(loss) after tax forthe period

- - - 2,784 17 (29,316) - - 110 (26,405) (4) (26,409)

Total comprehensive(loss)/income for the period

- - - (51,264) 17 (29,316) - - 110 (80,453) (1,733) (82,186)

Increase in value of in-forcelife insurance business - - - (515) - - - 515 - - - -

Tax on increase in value ofin-force life insurancebusiness - - - 65 - - - (65) - - - -

Transfer of realised profitson disposal of properties - - - 3,361 (3,361) - - - - - - -

Transfer of propertyrevaluation reserve andother reserve of subsidiaryto retained earnings - - - 14,014 (7,955) - (6,059) - - - - -

Decrease in share capital ofsubsidiary - - - (554) - - - - - (554) (395) (949)

Transfer of loss on disposalof FVOCI equityinvestments to accumulatedlosses - - - (67) - 67 - - - - - -

Increase in non-controllinginterests due to change inshareholding of subsidiary

- - - 705 - - - - - 705 16,596 17,301

30 June 2018 44,620 2,794,358 (21,463) (860,533) 81,579 16,766 - 106,101 36,208 2,197,636 45,618 2,243,254

29

BANK OF CYPRUS HOLDINGS GROUPInterim Consolidated Statement of Cash Flows


20192018

(represented)

Net cash flow from operating activities Note €000 €000

Loss before tax from continuing operations (15,747) (55,897)

Profit before tax from discontinued operations 7 - 4,934

Share of profit from associates 36 (5,312) (4,520)

Credit losses to cover credit risk on loans and advances to customers and net gains on derecognition of financialassets measured at amortised cost 103,482 233,572

Depreciation of property and equipment and amortisation of intangible assets 17,462 12,013

Change in value of in-force life insurance business (4,114) (515)

Credit losses of other financial instruments 10 7,367 3,331

Amortisation of discounts/premiums, catch-up adjustment on debt securities and interest on debt securities (15,546) (11,883)

Dividend income (139) (143)

Net gains on disposal of investments at FVOCI and amortised cost - (19,787)

(Profit)/loss from revaluation of debt securities designated as fair value hedges (13,416) 94

Interest on funding from central banks - 3

Interest on subordinated loan stock 11,567 11,567

Impairment of stock of property 10 11,585 10,106

Remeasurement of investment in associate classified as held for sale 19 25,943 -

Loss on disposal/dissolution of subsidiaries/associates - 145

Net gains on disposal of stock of property (17,747) (20,266)

Net losses/(gains) from revaluation of investment properties and investment properties held for sale 44 (1,238)

105,429 161,516

Net increase in loans and advances to customers and other accounts (239,065) (268,760)

Net (decrease)/increase in customer deposits and other accounts (272,430) 590,977

(406,066) 483,733

Tax paid (912) (1,470)

Net cash (used in)/from operating activities (406,978) 482,263

Cash flows from investing activities

Purchases of debt securities and equity securities (277,244) (226,103)

Proceeds on disposal/redemption of investments:

- debt securities 9,523 235,062

- equity securities - 5,030

Interest received from debt securities 9,726 7,441

Dividend income from equity securities 139 143

Proceeds on disposal of subsidiaries and associates 139,760 2,083

Proceeds on disposal of the Helix portfolio 1,140,231 -

Purchases of property and equipment (3,889) (5,476)

Purchases of intangible assets (6,878) (9,738)

Proceeds on disposals of property and equipment and intangible assets 252 1,778

Proceeds on disposals of investment properties and investment properties held for sale 11,945 6,500

Net cash from investing activities 1,023,565 16,720

Cash flow from financing activities

Payment of AT1 coupon 24 (13,447) -

Net repayment of funding from central banks - (100,000)

Interest on subordinated loan stock (21,080) (22,258)

Interest on funding from central banks - (3)

Principle elements of lease payments (4,682) -

Net proceeds from increase in non-controlling interests due to change in the shareholding of subsidiary - 17,596

Net cash used in financing activities (39,209) (104,665)

Net increase in cash and cash equivalents 577,378 394,318

Cash and cash equivalents

1 January 4,804,844 4,280,231

Foreign exchange adjustments (2,385) 2,857

Net increase in cash and cash equivalents 577,378 394,318

30 June 27 5,379,837 4,677,406

30

BANK OF CYPRUS HOLDINGS GROUPInterim Consolidated Statement of Cash Flows

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