CPB: Nine-month reults 2004
16/11/2004 14:30
SYNOPSIS OF RESULTS
The financial results of the Group for the nine months ended 30.09.04 are very satisfactory. The profit before provisions reached C£59,8 m recording an increase of 23,2% compared to the corresponding period last year. The profit attributable to the shareholders rose by 99,8% to C£16,0 m compared to C£8,0 m for the same period in the previous year.
Operating income increased by 15,3% compared to the same period in 2003. Net interest income, which comprises the biggest part of operating income, grew by 16,0% compared to the same period last year. It should be stressed that this increase is particularly satisfactory because it has been achieved despite the fact that from the beginning of 2004 stricter Central Bank of Cyprus regulations have been in force regarding the categorisation of non-performing loans and the suspension of interest. In particular, interest receivable on advances, which are more than 6 months in arrears (instead of 9 months which was in effect until the end of 2003), is no longer recognised as income in the Income Statement.
The Group’s operating expenses grew by 11,2% in comparison with the corresponding period last year. It should be noted that operating expenses include the C£1,7 m fine paid by the Bank to the Committee for the Protection of Competition. Excluding this non-repetitive amount, the increase in operating expenses was contained to 9,4% over the same period last year. Operating expenses have been contained to a great extent as a result of the Group’s strategy for restriction of the operational expenses. The restraint of operating expenses together with the increase of the operating income resulted in an improvement of the Group Cost/Income ratio from 66,38% in 2003 to 63,51% as at 30.09.04.
The Group’s provisions for impairment of advances have been stabilised at C£35,1 m, despite of the enforcement of the aforementioned stricter Central Bank of Cyprus regulations regarding the categorisation of non-performing loans.
Until 30.09.2004, a total of C£4,9 m has been transferred from the Investments Revaluation Reserve to the Income Statement due to impairment in the value of certain available-for-sale investments. It should be stressed that this transfer has not caused any change in Shareholders’ Equity (i.e. capital and reserves) or distributable profit because the revaluation of these investments in the Group’s balance sheet has always been at market value.
Laiki Group has managed to achieve a considerably improved profitability for the first nine months of 2004, despite the difficult economic conditions that have prevailed. The fact that the Cyprus economy is now growing at an accelerating rate and seems to have essentially recovered makes us more optimistic about the future. It is anticipated that the Group’s profitability for the whole of 2004 will be significantly better compared to 2003.
ANALYSIS OF OPERATING INCOME
The Group operating income rose by 15,3% compared to the same period of 2003. Net interest income grew by 16,0% compared to the same period last year, despite the fact that from the beginning of 2004 stricter regulations by the Central Bank of Cyprus regarding the suspension of interest have been in effect. According to the new regulations, interest receivable on advances which are more than 6 months in arrears (instead of 9 months as was the regulation until the end of 2003) and which are not fully secured with tangible securities, is suspended. Due to the Group’s intensive efforts to improve the quality of its advances portfolio and to increase the recoveries from non-performing advances, the increase in the amount of interest suspension has been significantly contained.
The Group’s net interest margin has recorded a very satisfactory increase and reached 2,93% (annualised) at 30.09.04 compared to 2,79% at 31.12.03. These rates have been calculated after the suspension of interest. That is, the 2004 percentage was calculated based on the new stricter regulations compared to the ones that were in force in 2003.
The Group has achieved a substantial increase in its net interest margin. This was the result of both the application of a more rational pricing policy (which takes into account the risks undertaken) and of the increase of the interest income following the recent increase of interest rates for the Cyprus pound. The increase in interest rates had a positive impact on net interest income, as it improved the Group’s returns on liquid funds and deposits, due to their structure, which, to a great extent, is of a fixed-term nature.
The Group’s commissions recorded an increase of 9,8% compared to the same period last year. The economic activities and commercial transactions in Cyprus have recovered. The Group also recorded increased commission income from the sale of overseas investment products.
The Group’s foreign exchange income grew by 20,2% compared to the same period last year. It should be noted that during the first nine months of the previous year the Group’s foreign exchange income was considerably reduced because of the war in Iraq, which had a negative impact on the tourist inflow to Cyprus and caused a slowdown of the activities in international financial markets. During the first nine months of 2004 the foreign exchange income of the Group recovered considerably.
The Group’s other income, which consists mainly of income from insurance operations, rose by 31,6% compared to the same period last year. The recovery of the Group’s insurance sector continues at a fast pace, despite the continuing recession in the life insurance industry in Cyprus (due to the reduced demand for investment type products). The profitability of the Group’s insurance sector has recorded a considerable increase mainly due to savings both in direct costs (such as reinsurance costs and claims), as well as in operating costs.
ANALYSIS OF OPERATING EXPENSES
The Group’s operating expenses increased by 11,2% compared to the corresponding period of the previous year. It should be noted that the Group’s expenses for the nine-month period ended 30.09.04 have been burdened with a non-repetitive charge of C£1,7 m, which relates to the Bank’s share of the fine levied to the three major commercial banks by the Committee for the Protection of Competition. Excluding this amount, the increase in operating costs was contained to 9,4% over the same period last year.
Staff costs, which comprise 62% of Group operating expenses, rose by 7,4% compared to the same period last year. Staff costs in Cyprus recorded the highest increase, 8,1%, compared to the same period last year. The increase was anticipated due to the annual salary increments and to the employer’s contributions for retirement benefits entailed by the collective agreements in force.
The Group’s depreciation and amortisation costs showed an increase of 12,5%, compared to the corresponding period last year, which is mainly due to the revision made at the end of 2003, in the write-off period of the goodwill relating to the acquisition of the Paneuropean Insurance Group. The reduction in the amortisation period increases the yearly charge for amortisation.
The Group’s other expenses rose by 13,3% compared to the same period in 2003. Although the Group is in phase of international expansion, there is simultaneously a strategy in force for continuous control of operating expenses.
ANALYSIS OF PROFIT BY GEOGRAPHICAL AREA
The contribution of the overseas operations to the total Group profit before provisions reached 25,4% at 30.09.04 compared to 24,9% at 30.09.03. Profit before provisions has grown at particularly satisfactory rates in all the geographical areas of the Group’s operations. The reasons for the very good increase in the profit before provisions from the operations in Cyprus have already been explained.
Greek operations
In a continuously changing and competitive economic environment our Group in Greece has managed to set up a dynamic and steadily developing presence.
The increase in profitability is considered to be very satisfactory, especially when taking into account that our Group is in a growing phase. Group profit before provisions in Greece advanced by 19,2%, whilst the increase in profit after tax reached 83,6%. It must be emphasised that the quality of the portfolio of advances of the Group in Greece remains particularly satisfactory and provisions are equally satisfactory.
The operating expenses of the Group in Greece have presented restrained increases of 7,9%, despite the fact that the Bank continues its significant investments in the expansion of the branch network and in technological upgrading (electronic banking etc.). The Bank’s branch network consists of 45 branches compared to 37 at 30.09.03. The number of employees rose to 782 from 732 at 30.09.03.
The restraint of operating expenses in conjuction with the increase in operating income led to a reduction of the Cost/Income ratio from 71,3% at 30.09.03 to 69,4% as at 30.09.04.
Our Group in Greece offers a complete range of financial products and services. Apart from the Bank, which holds a market share of approximately 1,5% of the basic banking operations, the Group has successfully penetrated in the sectors of Leasing and Factoring, with market shares of 7,3% and 5% respectively. In more specialised areas such as export factoring, Laiki Factoring holds a market share of 17,2% and ranks second in this particular market.
The two insurance companies of the Group (in the life and general insurance business) have further reinforced the Group’s presence in the bancassurance sector in Greece, offering through the Bank’s network attractive and flexible products that satisfy clients’ needs. The companies have managed to become profitable in a very short time since their establishment.
The expansion of the Bank in Greece is expected to continue at a fast pace with the aim to increase the number of branches to approximately 60 by the end of 2006. Special emphasis is placed on the expansion of the retail banking operations and in the further enhancement of the small and medium size companies clientele.
The Group in Greece, by fully exploiting the vast technological leadership, experience and substructure of the Group in Cyprus, will continue to invest substantially in electronic banking and alternative service channels, areas of strategic importance for the future.
Operations in Australia and the United Kingdom
The Group’s Bank in Australia continues its particularly satisfactory profitable course, despite the fact that it is still at a stage of development. The Bank now operates seven branches and two more are expected to open in the forthcoming months. The number of employees increased from 66 at 30.09.03 to 87 at 30.09.04.
In the United Kingdom, the profitability of the Group’s branches for the first nine months of the year was also very satisfactory having risen by 16,7%. Our bank operates six branches and employs 161 persons in the United Kingdom.
Using the successful implementation of electronic banking in Cyprus, as a stepping-stone, eBanking service for individuals has recently become international and now covers all the countries where the Group has a presence with banking operations. The service is offered to customers in Greece, the United Kingdom and Australia with exactly the same form already offered to customers in Cyprus, providing use friendliness, easy access and many transaction possibilities.
PROVISION FOR IMPAIRMENT OF ADVANCES
The provision for impairment of advances amounted to C£35,1 m, a decrease of 5,0% compared to the same period last year, despite the fact that from the beginning of 2004 the Central Bank of Cyprus has put into effect stricter regulations regarding the categorisation of advances as non-performing. Specifically, advances in arrears for more than six months, which are not fully covered by tangible securities are now categorised as non-performing, compared to the nine months’ arrears criterion, which was in effect until the end of 2003.
The change in the regulations of the Central Bank of Cyprus, in conjunction with the Group’s even stricter approach (in view of the even more stringent regulations that will apply from 01.01.05, i.e. the suspension of interest on advances which are more than 3 months in arrears ) led to the increase of non-performing loans in the first quarter of 2004. The Group’s percentage of non-performing loans to total advances (excluding cumulative interest in suspense) at 30.09.04 reached 12,2% compared to 12,1% at 30.06.04 and 12,4% at 31.03.04.
BALANCE SHEET ANALYSIS
Advances
The Group’s advances reached C£3,6 bln recording an annual increase of 7,7%. This increase is satisfactory given the subdued demand for advances in Cyprus and the Group’s efforts to upgrade the quality of its advances portfolio.
The advances of the Group in Greece recorded an annual increase of 13,3% and reached C£973 m with significant increases in consumer lending, residential lending and small and medium-size companies lending.
The increase in advances in the UK and Australia was also very satisfactory with a growth rate of 9,9% and 29,2% respectively.
Customer deposits
The Group’s customer deposits recorded an annual increase of 9,6% and amounted to C£4,5 bln. The Group’s deposits displayed a satisfactory increase taking into account the intense competition prevailing in depository products and the depositors’ tendency to seek higher yielding alternatives.
The customer deposits of the Group in Greece recorded a very satisfactory annual increase of 17%.
The Group’s banking operations in the United Kingdom and Australia also showed very satisfactory increases of 12,1% and 37,6% respectively.
PROSPECTS
The impact to the Cyprus economy resulting from our accession to the European Union will undoubtedly be positive in the long-term. The process of modernisation and restructuring of the economy will be expedited and it is expected that productivity and efficiency will be improved in all sectors. Furthermore, better prospects will be created for the improvement of the stability conditions in the economy and the investment and development activities will be reinforced.
The challenges as well as the opportunities that are presented in the new competitive environment have led the Group to invest in technology systems, which increase productivity and allow better management of the Group’s resources and of the risks undertaken. In addition, the intense efforts of the Group to improve the quality of its advances portfolio have started to bear fruit. The Group aims at the containment of non-performing loans and of interest suspension, within the scope of the even stricter regulations of the Central Bank of Cyprus, which will come into effect in the near future.
As far as the Group profitability prospects for the whole of 2004 are concerned, the current indications and the very positive trend of the Group’s profitability ratios (as shown above) lead to the conclusion that under the existing financial and geopolitical conditions profitability is expected to be significantly improved compared to 2003.
The financial results of the Group for the nine months ended 30.09.04 are very satisfactory. The profit before provisions reached C£59,8 m recording an increase of 23,2% compared to the corresponding period last year. The profit attributable to the shareholders rose by 99,8% to C£16,0 m compared to C£8,0 m for the same period in the previous year.
Operating income increased by 15,3% compared to the same period in 2003. Net interest income, which comprises the biggest part of operating income, grew by 16,0% compared to the same period last year. It should be stressed that this increase is particularly satisfactory because it has been achieved despite the fact that from the beginning of 2004 stricter Central Bank of Cyprus regulations have been in force regarding the categorisation of non-performing loans and the suspension of interest. In particular, interest receivable on advances, which are more than 6 months in arrears (instead of 9 months which was in effect until the end of 2003), is no longer recognised as income in the Income Statement.
The Group’s operating expenses grew by 11,2% in comparison with the corresponding period last year. It should be noted that operating expenses include the C£1,7 m fine paid by the Bank to the Committee for the Protection of Competition. Excluding this non-repetitive amount, the increase in operating expenses was contained to 9,4% over the same period last year. Operating expenses have been contained to a great extent as a result of the Group’s strategy for restriction of the operational expenses. The restraint of operating expenses together with the increase of the operating income resulted in an improvement of the Group Cost/Income ratio from 66,38% in 2003 to 63,51% as at 30.09.04.
The Group’s provisions for impairment of advances have been stabilised at C£35,1 m, despite of the enforcement of the aforementioned stricter Central Bank of Cyprus regulations regarding the categorisation of non-performing loans.
Until 30.09.2004, a total of C£4,9 m has been transferred from the Investments Revaluation Reserve to the Income Statement due to impairment in the value of certain available-for-sale investments. It should be stressed that this transfer has not caused any change in Shareholders’ Equity (i.e. capital and reserves) or distributable profit because the revaluation of these investments in the Group’s balance sheet has always been at market value.
Laiki Group has managed to achieve a considerably improved profitability for the first nine months of 2004, despite the difficult economic conditions that have prevailed. The fact that the Cyprus economy is now growing at an accelerating rate and seems to have essentially recovered makes us more optimistic about the future. It is anticipated that the Group’s profitability for the whole of 2004 will be significantly better compared to 2003.
ANALYSIS OF OPERATING INCOME
The Group operating income rose by 15,3% compared to the same period of 2003. Net interest income grew by 16,0% compared to the same period last year, despite the fact that from the beginning of 2004 stricter regulations by the Central Bank of Cyprus regarding the suspension of interest have been in effect. According to the new regulations, interest receivable on advances which are more than 6 months in arrears (instead of 9 months as was the regulation until the end of 2003) and which are not fully secured with tangible securities, is suspended. Due to the Group’s intensive efforts to improve the quality of its advances portfolio and to increase the recoveries from non-performing advances, the increase in the amount of interest suspension has been significantly contained.
The Group’s net interest margin has recorded a very satisfactory increase and reached 2,93% (annualised) at 30.09.04 compared to 2,79% at 31.12.03. These rates have been calculated after the suspension of interest. That is, the 2004 percentage was calculated based on the new stricter regulations compared to the ones that were in force in 2003.
The Group has achieved a substantial increase in its net interest margin. This was the result of both the application of a more rational pricing policy (which takes into account the risks undertaken) and of the increase of the interest income following the recent increase of interest rates for the Cyprus pound. The increase in interest rates had a positive impact on net interest income, as it improved the Group’s returns on liquid funds and deposits, due to their structure, which, to a great extent, is of a fixed-term nature.
The Group’s commissions recorded an increase of 9,8% compared to the same period last year. The economic activities and commercial transactions in Cyprus have recovered. The Group also recorded increased commission income from the sale of overseas investment products.
The Group’s foreign exchange income grew by 20,2% compared to the same period last year. It should be noted that during the first nine months of the previous year the Group’s foreign exchange income was considerably reduced because of the war in Iraq, which had a negative impact on the tourist inflow to Cyprus and caused a slowdown of the activities in international financial markets. During the first nine months of 2004 the foreign exchange income of the Group recovered considerably.
The Group’s other income, which consists mainly of income from insurance operations, rose by 31,6% compared to the same period last year. The recovery of the Group’s insurance sector continues at a fast pace, despite the continuing recession in the life insurance industry in Cyprus (due to the reduced demand for investment type products). The profitability of the Group’s insurance sector has recorded a considerable increase mainly due to savings both in direct costs (such as reinsurance costs and claims), as well as in operating costs.
ANALYSIS OF OPERATING EXPENSES
The Group’s operating expenses increased by 11,2% compared to the corresponding period of the previous year. It should be noted that the Group’s expenses for the nine-month period ended 30.09.04 have been burdened with a non-repetitive charge of C£1,7 m, which relates to the Bank’s share of the fine levied to the three major commercial banks by the Committee for the Protection of Competition. Excluding this amount, the increase in operating costs was contained to 9,4% over the same period last year.
Staff costs, which comprise 62% of Group operating expenses, rose by 7,4% compared to the same period last year. Staff costs in Cyprus recorded the highest increase, 8,1%, compared to the same period last year. The increase was anticipated due to the annual salary increments and to the employer’s contributions for retirement benefits entailed by the collective agreements in force.
The Group’s depreciation and amortisation costs showed an increase of 12,5%, compared to the corresponding period last year, which is mainly due to the revision made at the end of 2003, in the write-off period of the goodwill relating to the acquisition of the Paneuropean Insurance Group. The reduction in the amortisation period increases the yearly charge for amortisation.
The Group’s other expenses rose by 13,3% compared to the same period in 2003. Although the Group is in phase of international expansion, there is simultaneously a strategy in force for continuous control of operating expenses.
ANALYSIS OF PROFIT BY GEOGRAPHICAL AREA
The contribution of the overseas operations to the total Group profit before provisions reached 25,4% at 30.09.04 compared to 24,9% at 30.09.03. Profit before provisions has grown at particularly satisfactory rates in all the geographical areas of the Group’s operations. The reasons for the very good increase in the profit before provisions from the operations in Cyprus have already been explained.
Greek operations
In a continuously changing and competitive economic environment our Group in Greece has managed to set up a dynamic and steadily developing presence.
The increase in profitability is considered to be very satisfactory, especially when taking into account that our Group is in a growing phase. Group profit before provisions in Greece advanced by 19,2%, whilst the increase in profit after tax reached 83,6%. It must be emphasised that the quality of the portfolio of advances of the Group in Greece remains particularly satisfactory and provisions are equally satisfactory.
The operating expenses of the Group in Greece have presented restrained increases of 7,9%, despite the fact that the Bank continues its significant investments in the expansion of the branch network and in technological upgrading (electronic banking etc.). The Bank’s branch network consists of 45 branches compared to 37 at 30.09.03. The number of employees rose to 782 from 732 at 30.09.03.
The restraint of operating expenses in conjuction with the increase in operating income led to a reduction of the Cost/Income ratio from 71,3% at 30.09.03 to 69,4% as at 30.09.04.
Our Group in Greece offers a complete range of financial products and services. Apart from the Bank, which holds a market share of approximately 1,5% of the basic banking operations, the Group has successfully penetrated in the sectors of Leasing and Factoring, with market shares of 7,3% and 5% respectively. In more specialised areas such as export factoring, Laiki Factoring holds a market share of 17,2% and ranks second in this particular market.
The two insurance companies of the Group (in the life and general insurance business) have further reinforced the Group’s presence in the bancassurance sector in Greece, offering through the Bank’s network attractive and flexible products that satisfy clients’ needs. The companies have managed to become profitable in a very short time since their establishment.
The expansion of the Bank in Greece is expected to continue at a fast pace with the aim to increase the number of branches to approximately 60 by the end of 2006. Special emphasis is placed on the expansion of the retail banking operations and in the further enhancement of the small and medium size companies clientele.
The Group in Greece, by fully exploiting the vast technological leadership, experience and substructure of the Group in Cyprus, will continue to invest substantially in electronic banking and alternative service channels, areas of strategic importance for the future.
Operations in Australia and the United Kingdom
The Group’s Bank in Australia continues its particularly satisfactory profitable course, despite the fact that it is still at a stage of development. The Bank now operates seven branches and two more are expected to open in the forthcoming months. The number of employees increased from 66 at 30.09.03 to 87 at 30.09.04.
In the United Kingdom, the profitability of the Group’s branches for the first nine months of the year was also very satisfactory having risen by 16,7%. Our bank operates six branches and employs 161 persons in the United Kingdom.
Using the successful implementation of electronic banking in Cyprus, as a stepping-stone, eBanking service for individuals has recently become international and now covers all the countries where the Group has a presence with banking operations. The service is offered to customers in Greece, the United Kingdom and Australia with exactly the same form already offered to customers in Cyprus, providing use friendliness, easy access and many transaction possibilities.
PROVISION FOR IMPAIRMENT OF ADVANCES
The provision for impairment of advances amounted to C£35,1 m, a decrease of 5,0% compared to the same period last year, despite the fact that from the beginning of 2004 the Central Bank of Cyprus has put into effect stricter regulations regarding the categorisation of advances as non-performing. Specifically, advances in arrears for more than six months, which are not fully covered by tangible securities are now categorised as non-performing, compared to the nine months’ arrears criterion, which was in effect until the end of 2003.
The change in the regulations of the Central Bank of Cyprus, in conjunction with the Group’s even stricter approach (in view of the even more stringent regulations that will apply from 01.01.05, i.e. the suspension of interest on advances which are more than 3 months in arrears ) led to the increase of non-performing loans in the first quarter of 2004. The Group’s percentage of non-performing loans to total advances (excluding cumulative interest in suspense) at 30.09.04 reached 12,2% compared to 12,1% at 30.06.04 and 12,4% at 31.03.04.
BALANCE SHEET ANALYSIS
Advances
The Group’s advances reached C£3,6 bln recording an annual increase of 7,7%. This increase is satisfactory given the subdued demand for advances in Cyprus and the Group’s efforts to upgrade the quality of its advances portfolio.
The advances of the Group in Greece recorded an annual increase of 13,3% and reached C£973 m with significant increases in consumer lending, residential lending and small and medium-size companies lending.
The increase in advances in the UK and Australia was also very satisfactory with a growth rate of 9,9% and 29,2% respectively.
Customer deposits
The Group’s customer deposits recorded an annual increase of 9,6% and amounted to C£4,5 bln. The Group’s deposits displayed a satisfactory increase taking into account the intense competition prevailing in depository products and the depositors’ tendency to seek higher yielding alternatives.
The customer deposits of the Group in Greece recorded a very satisfactory annual increase of 17%.
The Group’s banking operations in the United Kingdom and Australia also showed very satisfactory increases of 12,1% and 37,6% respectively.
PROSPECTS
The impact to the Cyprus economy resulting from our accession to the European Union will undoubtedly be positive in the long-term. The process of modernisation and restructuring of the economy will be expedited and it is expected that productivity and efficiency will be improved in all sectors. Furthermore, better prospects will be created for the improvement of the stability conditions in the economy and the investment and development activities will be reinforced.
The challenges as well as the opportunities that are presented in the new competitive environment have led the Group to invest in technology systems, which increase productivity and allow better management of the Group’s resources and of the risks undertaken. In addition, the intense efforts of the Group to improve the quality of its advances portfolio have started to bear fruit. The Group aims at the containment of non-performing loans and of interest suspension, within the scope of the even stricter regulations of the Central Bank of Cyprus, which will come into effect in the near future.
As far as the Group profitability prospects for the whole of 2004 are concerned, the current indications and the very positive trend of the Group’s profitability ratios (as shown above) lead to the conclusion that under the existing financial and geopolitical conditions profitability is expected to be significantly improved compared to 2003.
