Bank of Cyprus announced net loss of €1.8 billion for the first six months of 2013 compared to €134 million last year, due to disposal of its Greek operations that resulted in a loss on disposal of €1,4 bn and increased provisions for impairment of loans.

The results of the first six months of 2013 reflect the consequences of the Eurogroup decisions on 25 March 2013, when the Cypriot government and the Eurogroup reached an agreement on a financial assistance facility of up to €10 bn to be granted to Cyprus, conditioned upon the implementation of an extensive programme of policy reform.

A Memorandum of Understanding (MoU) has been agreed between the Republic of Cyprus and the Troika (European Commission, European Central Bank and the International Monetary Fund) on a package of measures for the years 2013-2016.

In its statement on 25 March 2013, the Eurogroup noted that Laiki (second largest bank in Cyprus) would be resolved, that Bank of Cyprus (Bank) would be recapitalised via a bail-in of its depositors and that none of the programme’s money would be used for the Bank’s recapitalisation. Deposits over 100,000 euro held at the Bank lost 47.5% of their value, after being converted into bank shares.

For the acquisition of Laiki’ operations the Bank issued shares to Laiki amounting to 18,1% of the Bank’s share capital.

Loss before restructuring expenses, discontinued operations and the disposal of Greek operations totalled €314 mn.

Provisions for impairment of loans were €539 mn, with the provisioning charge accounting for 3,9% of gross loans on an annualised basis. The elevated provisioning reflects the continued deterioration in the loan portfolio due to the advancing recession and the ongoing reduction in collateral values in Cyprus.

Profit before impairments and restructuring costs was €215 mn.

Total expenses were €285 mn with staff costs and other operating costs €173 mn and €112 mn respectively and the cost to income ratio at 57,0%.

Total Income for the six months ended 30 June 2013 was €500 mn, with Net Interest Income (NII) at €430 mn and Net Interest Margin (NIM) at 3,17%. Both NII and NIM are affected by the bail-in of depositors which impacted the Bank’s deposit base and its cost of deposits. Total income was negatively affected by losses related to foreign exchange and other financial instruments (€26 mn) as well as by revaluation losses from investment properties (€34 mn).

At 30 June 2013, gross loans and deposits were €28,3 bn and €17,0 bn respectively, with a net loans to deposits ratio of 140%. Following the acquisition of certain assets and insured deposits, as well as Emergency Liquidity Assistance (ELA) funding of €9 bn of Cyprus Popular Bank Public Co Ltd (Laiki), the Group’s funding from the ELA reached €11,15 bn at 30 June 2013.

Loans in arrears for more than 90 days (90+ DPD ratio accounted for 38,8% of gross loans compared to 27,4% at 31 December 2012. The provision coverage ratio of 90+ DPD was 42%. Non-performing loans based on the new Directive of the Central Bank of Cyprus accounted for 36,0% of gross loans. Loan quality deterioration continues into the second half of 2013 affected by the challenging economic and operating conditions in the Bank’s primary market, Cyprus.

Following its recapitalisation through a bail-in of depositors, the Bank’s core tier 1 capital ratio and its total capital ratio were restored to 10,5% and 10,7% respectively, as at 30 June 2013.

“The Group’s Core Tier 1 capital ratio has been restored to 10,5%. The restructuring plans are underway and the Group is taking decisive steps to deal with non-performing loans, strengthen risk management and defend its deposit franchise”, said Group Chief Executive Officer  John Patrick Hourican,

“Although the Group faces some unprecedented challenges, we are clear on what needs to be done. Our priority remains to restore investor and customer confidence in the Bank. This can only be achieved through our focusing on arresting asset quality deterioration, making progress on non-core disposals and maintaining capital ratios so as to build a strong platform for the safe return of depositors to the Bank,” he added.

The Group has prepared a Restructuring Plan which was approved by the Central Bank of Cyprus in November 2013.

The Restructuring plan defines the strategic objectives and actions the Bank should take to create a safer, smaller, more focused institution capable of supporting the recovery of the Cypriot economy.

The main goals are rebuilding trust and confidence of both depositors and investors, and preserving the Bank’s status as the cornerstone of the domestic economy, continuing to support both businesses and households.

The Bank also aims to manage effectively its portfolio of assets and withstand further external shocks and economic turbulence.

Smoothly integrating ex-Laiki Bank operations, maximising synergies and bottom-line impact for the combined entity through the realisation of synergies and enhancing the capital adequacy of the Group by internally generating capital through profitability, deleveraging and disposal of non-core assets, are also among the top priorities of the Group.