HELLENIC BANK GROUP. Condensed Consolidated Financial Statements

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2 HELLENIC BANK GROUP Condensed Consolidated Financial Statements for the nine-month period ended 30 September 2016

3 HELLENIC BANK GROUP Condensed Consolidated Financial Statements for the nine-month period ended 30 September 2016 Contents Page Condensed Consolidated Income Statement for the nine-month period ended 30 September Condensed Consolidated Income Statement for the three-month period from 1 July 2016 to 30 September Condensed Consolidated Statement of Comprehensive Income for the nine-month period ended 30 September Condensed Consolidated Statement of Comprehensive Income for the three-month period from 1 July 2016 to 30 September Condensed Consolidated Statement of Financial Position at 30 September Condensed Consolidated Statement of Changes in Equity for the nine-month period ended 30 September Condensed Consolidated Statement of Cash Flows for the nine-month period ended 30 September Notes to the Condensed Consolidated Financial Statements

4 HELLENIC BANK GROUP Condensed Consolidated Income Statement for the nine-month period ended 30 September 2016 Continuing operations Note Nine-month period ended 30 September '000 '000 Turnover Net interest income Net income from fees, commissions, net gains on disposal and revaluation of foreign currencies and financial instruments and other income Total net income Total expenses 6 ( ) ( ) Profit from ordinary operations before impairment losses and provisions to cover credit risk Impairment losses and provisions to cover credit risk 7 (64.109) (59.130) Profit before taxation Taxation 8 (9.248) (981) Profit for the period from continuing operations Discontinued operations Profit from discontinued operations after taxation Profit for the period Profit attributable to: Shareholders of the parent company from continuing operations Shareholders of the parent company from discontinued operations Non-controlling interest Profit for the period Basic and diluted earnings per share ( cent) 10 2,3 3,3 Basic and diluted earnings per share ( cent) from continuing operations 10 2,3 0,7 3

5 HELLENIC BANK GROUP Condensed Consolidated Income Statement for the three-month period from 1 July 2016 to 30 September 2016 Three-month period from 1 July to 30 September '000 '000 Turnover Net interest income Net income from fees, commissions, net gains on disposal and revaluation of foreign currencies and financial instruments and other income Total net income Total expenses (35.498) (37.320) Profit from ordinary operations before impairment losses and provisions to cover credit risk Impairment losses and provisions to cover credit risk (15.359) (12.120) Profit before taxation Taxation (351) (1.736) Profit for the period Profit attributable to: Shareholders of the parent company from continuing operations Shareholders of the parent company from discontinued operations Non-controlling interest Profit for the period

6 HELLENIC BANK GROUP Condensed Consolidated Statement of Comprehensive Income for the nine-month period ended 30 September 2016 Note Nine-month period ended 30 September 2016 ' '000 Profit for the period Other comprehensive (expenses)/income Items that will not be reclassified in the income statement Taxation relating to components of other comprehensive income (31) (50) (31) (50) Items that are or may be reclassified subsequently in the income statement Surplus on revaluation of investments in equity and debt securities available for sale Transfer to the income statement on disposal of investments in equity available for sale (12.381) (315) Amortisation of revaluation of reclassified debt securities available for sale 13 (582) (901) (7.890) (254) Other comprehensive expenses for the period net of taxation (7.921) (304) Total comprehensive (expenses)/income for the period (2.962) Total comprehensive (expenses)/income for the period attributable to: Shareholders of the parent company from continuing operations (3.500) 982 Shareholders of the parent company from discontinued operations (3.500) Non-controlling interest (2.962)

7 HELLENIC BANK GROUP Condensed Consolidated Statement of Comprehensive Income for the three-month period from 1 July 2016 to 30 September 2016 Three-month period from 1 July to 30 September 2016 ' '000 Profit for the period Other comprehensive income/(expenses) Items that will not be reclassified in the income statement Taxation relating to components of other comprehensive income 28 (39) 28 (39) Items that are or may be reclassified subsequently in the income statement Surplus on revaluation of investments in equity and debt securities available for sale Transfer to the income statement on disposal of investments in equity available for sale -- (1) Amortisation of revaluation of reclassified debt securities available for sale (189) (278) Other comprehensive income for the period net of taxation Total comprehensive income for the period Total comprehensive income for the period attributable to: Shareholders of the parent company Non-controlling interest

8 HELLENIC BANK GROUP Condensed Consolidated Statement of Financial Position at 30 September 2016 Assets 30 September 31 December Note '000 '000 Cash and balances with Central Banks Placements with other banks Loans and advances to customers Debt securities 12, Equity securities & Collective Investment Units Property, plant and equipment Intangible assets Tax receivable Deferred tax asset Other assets Total assets Liabilities Deposits by banks Amounts due to Central Banks Customer deposits and other customer accounts Tax payable Deferred tax liability Other liabilities Loan capital Equity Share capital Reserves Equity attributable to shareholders of the parent company Non-controlling interest Total equity Total liabilities and equity Contingent liabilities and commitments I. A. Georgiadou Chairwoman of Board of Directors H.L. Pijls Chief Executive Officer L. Papadopoulos Chairman of the Audit Committee of the Board A. Rouvas Group Chief Financial Officer 7

9 HELLENIC BANK GROUP Condensed Consolidated Statement of Changes in Equity for the nine-month period ended 30 September 2016 Attributable to shareholders of the parent company Share capital (Note 19) Reduction of share capital reserve Share premium reserve Revenue reserve Translation reserve Revaluation reserve (Note 20) Total Non-controlling interest Total '000 '000 '000 '000 '000 '000 '000 '000 '000 Balance 1 January ( ) Total comprehensive income/(expenses) for the period net of taxation Profit for the period Other comprehensive (expenses)/income (7.968) (7.968) 47 (7.921) Transfer of excess depreciation on revaluation surplus (219) (8.187) (3.500) 538 (2.962) 30 September ( )

10 HELLENIC BANK GROUP Condensed Consolidated Statement of Changes in Equity for the nine-month period ended 30 September 2016 Attributable to shareholders of the parent company Share capital (Note 19) Reduction of share capital reserve Share premium reserve Revenue reserve Translation reserve Revaluation reserve (Note 20) Own shares reserve Total Noncontrolling interest Total '000 '000 '000 '000 '000 '000 '000 '000 '000 '000 Balance 1 January ( ) (1.604) Total comprehensive income/(expenses) for the period net of taxation Profit for the period Other comprehensive expenses (284) -- (284) (20) (304) Transfer of excess depreciation on revaluation surplus (219) (503) Disposal of own shares (1.062) Transactions with shareholders Contributions and distributions Dividends paid (2.063) (2.063) Issue of shares from the exercise of rights Expenses from issue of shares (36) (36) -- (36) (2.063) September ( )

11 HELLENIC BANK GROUP Condensed Consolidated Statement of Cash Flows for the nine-month period ended 30 September 2016 Cash flow from operating activities Note Nine-month period ended 30 September '000 '000 Profit for the period Adjustments to profit for the period Operating profit before working capital changes Working capital changes ( ) Cash flow (used in)/from operations ( ) Tax paid (372) (416) Net cash flow (used in)/from operating activities ( ) Cash flow from investing activities Disposal of discontinued operations, net of cash disposed of Income from investments in debt and equity securities Net (additions)/disposals/maturity of investment in debt and equity securities ( ) Additions less proceeds from disposal of property, plant and equipment and intangible assets (7.892) (6.536) Proceeds from disposal of assets held for sale Net cash flow from/(used in) investing activities ( ) Cash flow from financing activities Subsidiary dividends paid to non-controlling interest -- (2.063) Proceeds from the issue of share capital Proceeds from disposal of own shares Repayment of loan capital (41.800) -- Expenses from issue of shares -- (36) Interest paid on loan capital (460) (685) Net cash flow (used in)/from financing activities (42.260) Net decrease in cash and cash equivalents ( ) ( ) Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period

12 Notes to the Condensed Consolidated Financial Statements The Condensed Consolidated Financial Statements for the nine-month period ended 30 September 2016 have not been audited by the external auditors of the Group. 1. General information Hellenic Bank Public Company Limited (the Bank ) was incorporated in Cyprus and is a public company in accordance with the provisions of the Companies Law Cap. 113, the Cyprus Stock Exchange Laws and Regulations and the Income Tax Laws. The Bank s registered office is located at 200, Corner of Limassol and Athalassa Avenues, 2025 Strovolos, P.O. Box 24747, 1394 Nicosia. The Bank is the holding company of Hellenic Bank Group (the Group ). The principal activity of the Group is the provision of a wide range of banking and financial services, which include financial, investment and insurance services, as well as custodian and factoring services. The Condensed Consolidated nine-month Financial Statements (hereafter refer to as Financial Statements ) comprise of the Financial Statements of Hellenic Bank Public Company Limited and its subsidiary companies, which together are referred to as the Group. 2. Significant accounting policies 2.1 Basis of preparation The Financial Statements have been prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting as adopted by the European Union and should be read in conjunction with the Audited Consolidated Financial Statements for the year ended 31 December The Financial Statements are presented in Euro ( ), which is the functional currency of the Bank. All figures have been rounded to the nearest thousand, except where otherwise indicated. 2.2 Comparatives The comparative figures included in the Financial Statements are restated, where considered necessary, to conform with changes in the presentation of the current period. 2.3 Adoption of new and revised International Financial Reporting Standards (IFRSs) and interpretations The accounting policies adopted in respect of items considered material in relation to the Financial Statements are consistent with the accounting policies adopted in the Annual Report and Financial Statements for the year ended 31 December 2015, except for the adoption of new and revised standards, interpretations and amendments to existing standards with effect from the 1 st of January The adoption of new and revised IFRSs, interpretations and amendments to existing standards did not have a material effect on the Financial Statements of the Group. 11

13 Notes to the Condensed Consolidated Financial Statements 2. Significant accounting policies (continued) 2.4 Standards and interpretations not yet effective On 24 th of July 2014, the International Accounting Standards Board (IASB) published the final version of IFRS 9 Financial Instruments which will replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 abolishes the four categories of classification of financial assets and they are classified under one of the three measurement categories: amortised cost, fair value through other comprehensive income and fair value through profit or loss. The new standard is effective for periods beginning on or after 1 st of January 2018 with early adoption permitted, if the Group decides so. IFRS 9 changes significantly the way provisions for impairment are calculated, since it involves losses in relation to events that have occurred, as well as part of losses that are expected to occur in the future ( expected credit loss ). Particular criteria are established to determine for which loans expected credit losses that may occur in the next 12 months will be recognised and for which loans expected credit losses that may occur by the final payment of these loans will be recognised. The Group is currently evaluating the impact of the standard on its Financial Statements. 3. Use of estimates and judgements The preparation of Financial Statements requires Management to make use of judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. The estimates and underlying assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances and the results of which form the basis of making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Therefore, they involve risks and uncertainties as they relate to events and depend on circumstances that will occur in the future. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and in future periods if the revision affects both current and future periods. The accounting policies that are deemed critical to the Group s results and financial position and which involve significant estimates and judgments are set out below: 3.1 Provision for impairment of loans and advances to customers The Group reviews the loans and advances to customers to assess whether impairment losses should be recognised in the income statement and accumulated in an impairment loss reserve. The Group assesses whether there is objective evidence of impairment of the loan portfolio on an individual and collective basis. Indicatively, the following events may be considered by the Group as an evidence of impairment. However, one event alone may not constitute evidence of impairment while the absence of a specific event does not preclude the existence of impairment: 1) Credit facilities classified as non-performing 2) Restructured credit facilities included in performing loans and advances 3) Significant and sustained reduction of total income/future cash flows of the borrower 4) Apparent deterioration of the debt servicing capacity of the borrower 5) The possibility of the debtor's insolvency 6) Significant reduction in the value of collateral 7) Credit facilities which are impaired 12

14 Notes to the Condensed Consolidated Financial Statements 3. Use of estimates and judgements (continued) 3.1 Provision for impairment of loans and advances to customers (continued) 8) Credit facilities with internal credit rating that represents high credit risk 9) Credit facilities which are pending renewal, violating the relevant credit policy of the Bank 10) Macroeconomic indications that may affect the expected future cash flows of the borrowers such as increase in unemployment rates and decline in real estate prices. The loan portfolio which is assessed on an individual basis includes significant loans of economic groups that are above certain thresholds set by the Bank in accordance with the provisions of the Central Bank of Cyprus Directive on Loan Impairment and Provisioning Procedures as well as all credit facilities to: (i) Shareholders with holdings in excess of 10% of the Bank s share capital and their connected persons. (ii) Members of the Management Body of the Bank and their connected persons. (iii) Managers of the Bank and their connected persons. The amount of impairment loss on the value of loans and advances to customers which are examined on an individual basis, is measured as the difference between the carrying amount of the credit facility and the present value of estimated future cash flows, discounted at the credit facility s original effective interest rate. In cases where the interest rate of the loan is variable, the original effective interest rate is measured with reference to the initial margin corresponding to the current base variable interest rate and the current variable interest rate. The estimated future cash flows are based on assumptions about a number of factors and therefore the actual losses may be different. To determine the amount of impairment loss on the value of loans and advances to customers, judgment is involved regarding the amount and timing of estimated future cash flows. The estimated future cash flows include any expected cash flows from the borrowers operations, any other sources of funds and the expected proceeds from the liquidation of collateral, where applicable. The timing of these cash flows is estimated on a case by case basis. Where the future expected cash flows relate to realisation of the property collateral, the expected amount to be received at the point of liquidation is estimated taking into account the projected property prices at the time of liquidation, net of any selling, taxes and other expenses to be incurred by the Bank in relation to the repossession and the disposal of the collateral. Loans and advances assessed on an individual basis and for which no impairment loss is recognised are assessed on a collective basis for losses that have been incurred but not yet identified. Loans and advances that are below the materiality threshold are assessed on a collective basis for probable losses. For the calculation of impairment loss on a collective basis, loans and advances are grouped based on similar credit risk characteristics and appropriate models are applied that take into account the recent historical loss experience of each group with similar credit risk characteristics adjusted for current conditions using appropriate probabilities of default and loss given default. Restructured facilities are classified in separate group with higher risk parameters. These calculations include estimates and the use of judgment to supplement, assess and adjust accordingly the historical information and past experience events which determine the parameters and calculation of impairment losses as at the reporting date. The main assumptions used to estimate loss given default relate to the treatment of property collateral such as the time needed for collateral liquidation and the force sale discount at the point of liquidation. For loans and advances assessed individually, the specifics of each case are taken into consideration in determining the property parameters. For collectively assessed loans, the Bank assumes a liquidation period that depends on the status of the customer. For performing loans, the liquidation period assumption is 6 years. For non-performing exposures a segmentation is carried out depending on the ageing of the loans in the default status and different liquidation periods are assumed which result in an average of approximately 5 years. The liquidation haircut assumption in the collective assessment is 25%. Accumulated impairment losses of the Group's loans and advances are inherently uncertain due to their sensitivity to economic and credit conditions of the environment in which the Group operates. Conditions are affected by many factors with a high degree of interdependency and there is not one single factor to which these conditions are particularly sensitive. It is possible for the actual conditions in the next financial year to 13

15 Notes to the Condensed Consolidated Financial Statements 3. Use of estimates and judgements (continued) 3.1 Provision for impairment of loans and advances to customers (continued) differ significantly from the assumptions made during the current year, so that the carrying amount of loans and advances to be adjusted significantly. 3.2 Provisions for pending litigations or complaints and/or claims or cases subject to arbitration proceedings The Group examines whether reliable estimates can be made for amounts which an outflow of resources embodying economic benefits to settle present obligations (legal or constructive) of the Group is probable as a result of a past event, in order to assess whether a provision must be recognised in the Group s income statement and reflected in the Group s administrative and other expenses. The amounts recognised as provisions are the best estimates of the expenditure required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the facts and circumstances of any pending litigations or complaints and/or claims or case subject to arbitration proceedings. Any provision recognised does not constitute an admission of wrongdoing or legal liability. The Group obtains legal advice on the value of the provision of specific complaints and/or claims and arbitration. Where the effect of the time value of money is material, the amount of the provision is the present value of the estimated future expenditures expected to be required to settle the obligation. When a separate liability is measured, the most likely outcome may be considered the best estimate of the liability. 3.3 Impairment of goodwill and investments in subsidiaries The process of identifying and evaluating impairment of goodwill and investments in subsidiaries is inherently uncertain because it requires significant Management judgement in making a series of estimates, the results of which are highly sensitive to the assumptions used. The review of impairment represents Management s best estimate of the factors below. Firstly, significant Management judgement is required in estimating the future cash flows of the acquired entities. The values are sensitive to the cash flows projected for the periods for which detailed forecasts are available, and to assumptions regarding the long-term pattern of sustainable cash flows thereafter. The cash flow forecasts are compared with actual performance and verifiable economic data in future years. However, the cash flow forecasts necessarily and appropriately reflect Management s view of future business prospects. Additionally, the cost of capital used to discount future cash flows, can have a significant effect on the entity s valuation. Any impairment of goodwill of the acquired entities affects the Group's results while any impairment of investments in subsidiaries affects the Bank's results. 3.4 Fair value of investments The best evidence of fair value of investments is a quoted price in an actively traded market. If the market for a financial instrument is not active, a valuation technique is used. The majority of valuation techniques employed by the Group use only observable market data and thus the reliability of the fair value measurement is relatively high. The Group uses only models with unobservable inputs for the valuation of non-listed investments. In these cases, the Group takes into account, amongst others, the net positions of the entities in which the investment has been made, as well as estimates of the Group s Management to reflect uncertainties in fair values resulting from the lack of data and significant adverse changes in technology, market, economic or legal environment in which the entity operates. 14

16 Notes to the Condensed Consolidated Financial Statements 3. Use of estimates and judgements (continued) 3.5 Impairment of available for sale investments Available for sale investments in equity securities are impaired when there has been a significant or prolonged decline in their fair value below cost. In such a case, the total loss previously recognised in equity is recognised in the consolidated income statement. The determination of what is significant or prolonged requires judgment by Management. The factors which are taken into account in these estimates include the percentage reduction in the cost or impaired cost, as well as the net positions of the entities. Available for sale investments in debt securities are impaired when there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the investment and the loss event (or events) has an impact on the estimated future cash flows of the investment. The identification of impairment requires judgment by Management. An individual assessment of impairment is carried out on debt securities whose fair value as at the date of the financial position has significantly decreased as well as the issuer has been downgraded. 3.6 Stock of properties held for sale Volatility in the markets is reflected in the real estate market with negative impact on both the volume and value of property transactions. Under these circumstances, the degree of uncertainty is greater than that which exists in a more active market for determining the market value of properties. Stock of properties held for sale are measured at the lower of cost and net realisable value (NRV). NRV is determined by Management at each reporting date and calibrated to valuations, carried out at regular intervals, by professionally qualified valuers based on market conditions for their existing use. 3.7 Taxation The Group is subject to corporation tax in the countries in which it operates. Estimates are required in determining the provision for corporation taxes as at the date of the financial position. There is the possibility of a change in the tax treatment of impairment losses on the value of loans and advances other than those concerning customers individually assessed, as indicated in correspondence from the office of the Commissioner of Taxation and contrary to the policy applied by the Bank to date. Where the final tax is different from the amounts initially recognised in the income statement, such differences will impact the tax expense, the tax liabilities and deferred tax assets or liabilities of the period in which the final tax is agreed with the relevant tax authorities. Deferred tax assets arising from tax losses are recognised based on judgements on the ability to generate future taxable profits. These judgements are based on available information including historical data, improved macroeconomic estimates, the reduction in deposit rates, the stabilisation of the non-performing exposures and the expected increase in operations based on the strategic plan of the Group. It is therefore probable that the Bank will generate future taxable profits against which these assets can be utilised. The applicable tax rate is 12,5%. 4. Segmental analysis For management purposes, the Group is organised into two operating segments based on the provision of services, as follows: Banking and financial services segment - principally providing banking and financial services, including financing and investment services, as well as custodian and factoring services. Insurance services segment - principally providing life and general insurance services in Cyprus. The table below presents income, expenses, impairment losses and provisions to cover credit risk, profit/(loss) before taxation and information on assets regarding the Group's operating segments. 15

17 Notes to the Condensed Consolidated Financial Statements 4. Segmental analysis (continued) Banking & Financial services Nine-month period ended 30 September Insurance Services Nine-month period ended 30 September Inter-segment transactions/balances Nine-month period ended 30 September Total Nine-month period ended 30 September Turnover (2.235) (9.339) Net interest income (35) Net income from fees, commissions, net gains on disposal and revaluation of foreign currencies and financial instruments and other income (496) (7.544) Total net income (496) (7.579) Total expenses ( ) ( ) (5.536) (5.840) ( ) ( ) Profit /(loss) from ordinary operations before impairment losses and provisions to cover credit risk (430) (7.520) Impairment losses and provisions to cover credit risk (64.109) (59.130) (64.109) (59.130) Profit/(loss) before taxation (430) (7.520) Banking & Financial services Insurance Services Inter-segment transactions/balances Total 30 September December September December September December September December Total assets (30.283) (29.273)

18 Notes to the Condensed Consolidated Financial Statements 5. Net income from fees, commissions, net gains on disposal and revaluation of foreign currencies and financial instruments and other income During 2015 Visa Inc. expressed an interest in acquiring the 100% of the issued and outstanding share capital of Visa Europe Limited. On 21 st June 2016, the acquisition of Visa Europe by Visa Inc. was completed. Upon the completion of the transaction, the gain on disposal of Visa Europe shares amounted to 14,0 million and recognised in the income statement of the Bank. The deal valued Visa Europe at approximately 18,37 billion and the proportion attributable to Hellenic Bank was split and valued as follows: I. Cash consideration of 11 million received upon closing date. II. Preferred stock in Visa Inc.: The value of the convertible shares received was estimated by converting each of the Series C Visa Inc. shares into 13,952 Class A Common Stock at closing price on 30 June Due to the conversion of the shares taking place on the 12 th anniversary of the closing date of the agreement after settling any unresolved and outstanding cover claims, it was considered prudent to apply a haircut of 50% on the calculated value of the shares. As at 30 June 2016, Visa Inc. shares were valued at 1,9 million. III. Deferred cash payment: The amount of deferred cash payment due to the Bank amounts to 1,0 million. The value of the deferred payment that was accounted for is 0,9 million and represents the net present value of the estimated due amount which will be paid shortly after the 3 rd anniversary of the closing date of the agreement. 6. Total expenses Consultancy and other professional services fees The Board of Directors of the Bank proceeded with the appointment of international advisory firms to provide advisory services in a wide range of issues relating to the Bank s operations. For the nine-month period ended 30 September 2016, an amount of 4,7 million (30 September 2015: 10,1 million) was charged to the income statement. Provisions for pending litigations or complaints and/or claims There are risks and uncertainties surrounding the facts and circumstances of any litigations or complaints and/or claims. The amount recognised as a provision is based on the Group s best estimates of the expenditure required to settle the present obligation as at 30 September For the nine-month period ended 30 September 2016, an amount of 0,8 million (30 September 2015: 4,1 million) was charged to the income statement. Central Bank of Cyprus Penalty Administrative expenses include an amount of that relates to a financial penalty issued by the Central Bank of Cyprus (CBC) on 13 July 2016, relating to controls omissions and weaknesses in the implementation of due diligence measures and customer identification procedures, as part of the Bank s antimoney laundering and know-your-customer framework. The historical shortcomings were identified in an audit conducted by the CBC in September 2014 and related to the preceding years. The penalty does not relate to any identification of incidents of suppression of proceeds from any illegal activities. The penalty paid was discounted by 15% after Hellenic Bank agreed to settle in a timely manner. Hellenic Bank has made significant progress in rectifying these issues, following an independent review and subsequent restructuring of part of its business initiated since September 2014 and overseen by the Board of Directors. As part of this restructuring, a number of client accounts have been closed. At the same time, the Bank is continuing repositioning its International Banking Division strategy reflecting the changing regulatory environment with specific focus on anti-money laundering issues. Impairment of stock of properties held for sale For the nine-month period ended 30 September 2016, provision for impairment of stock of properties held for sale of 2,6 million (30 September 2015: 0,1 thousand) was charged to the income statement. 17

19 Notes to the Condensed Consolidated Financial Statements 7. Impairment losses and provisions to cover credit risk 30 September 2016 ' September 2015 '000 Impairment losses on the value of loans and advances (see Note 11) Provisions to cover credit risk for contractual commitments and guarantees (2.570) Taxation September 2016 ' September 2015 '000 Corporation tax (532) (540) Taxes withheld at source (55) (14) Deferred tax (8.661) (427) (9.248) (981) According to the Income Tax Law 118(I)/2002 as amended, the Bank s profit and that of its subsidiaries in Cyprus, is subject to corporation tax at the rate of 12,5%. Tax losses of Group companies in Cyprus can be offset against taxable profits of other Group companies in Cyprus and any tax losses not utilised can be carried forward and offset against the same entity s taxable profits of the next five years. As of 1 st January 2015 onwards cross-border relief is allowed only in the case of losses of an EU subsidiary that has exhausted all other possibilities to use the said losses in its country of tax residence. Profits earned by subsidiary companies and permanent establishments outside Cyprus are subject to taxation at the rates applicable in the country in which the operations are carried out. Tax exemptions, allowances, deductions and offsets pursuant to Articles 8, 9, 10 and 13 of the Income Tax Law 118(I)/2002 are taken into consideration for the calculation of the tax liability. According to the provisions of the Special Contribution for the Defence of the Republic Law, Companies that do not distribute 70% of their profits after tax, as these profits are defined by this Law, during the two years following the end of the year to which the profits refer, will be deemed to have distributed this amount as dividend. Special contribution for defence at 17% will be payable on such deemed dividends to the extent that the shareholders (individuals and companies), at the end of the period of two years from the end of the fiscal year to which the profits refer, are Cyprus residents for the purposes of this Law. The amount of the deemed dividend distribution is reduced by any actual dividend already distributed in respect of the year to which the profits refer. The special contribution for defence is paid by the Bank on behalf of the shareholders. A deferred tax asset, according to IFRS, shall be recognised for the carry forward of unused tax losses to the extent that it is probable that future taxable profit will be available against which the unused tax losses can be utilised. Deferred tax assets arising from tax losses are recognised based on judgements on the ability to generate future taxable profits. These judgements are based on available information including historical data, improved macroeconomic estimates, the reduction in deposit rates, the stabilisation of the nonperforming exposures and the expected increase in operations based on the strategic plan of the Group. It is therefore probable that the Bank will generate future taxable profits against which these assets can be utilised. The applicable tax rate is 12,5%. An amount of 8,5 million deferred tax asset arising from tax losses was derecognised and charged to the income statement for the nine-month period ended 30 September

20 Notes to the Condensed Consolidated Financial Statements 9. Profit from discontinued operations after taxation On the 6 th of February 2015, the Bank proceeded with the disposal of its subsidiary Borenham Holdings Limited. Borenham Holdings Limited owned 100% of the share capital of the Russian company Limited Liability Company Format Invest, owner of the building facilities of its former Russian banking subsidiary Limited Liability Company Commercial Bank Hellenic Bank. The effect of the discontinued operations on the Group s results is presented below and is analysed as follows: Nine-month period ended 30 September Note Discontinued operations Turnover Net interest income Net income from fees, commissions, net gains on disposal and revaluation of foreign currencies and financial instruments and other income Total net income Total expenses -- (60) Loss before taxation -- (60) Taxation Loss after taxation -- (60) Profit on disposal of subsidiary company Profit for the period Basic and diluted earnings per share ( cent) ,6 19

21 Notes to the Condensed Consolidated Financial Statements 9. Profit from discontinued operations after taxation (continued) Russia Segment - Borenham Holdings Limited Nine-month period ended 30 September Discontinued operations Turnover Net interest income Net income from fees, commissions, net gains on disposal and revaluation of foreign currencies and financial instruments and other income Total net income Total expenses -- (60) -- (60) Profit on disposal of subsidiary company Profit for the period The profit resulted from the sale of the subsidiary s assets and liabilities, under the signed agreement on the 6 th of February 2015, which constitutes the difference between the net payable amount and the carrying amount of the Net Assets is analysed as follows: Assets '000 Cash and balances with Central Banks 30 Property, plant and equipment Other assets 53 Total Assets Liabilities Intercompany loan undertaken by new company shareholders Other liabilities Total Liabilities Net Liabilities 834 Disposal consideration Profit on disposal of subsidiary company

22 Notes to the Condensed Consolidated Financial Statements 9. Profit from discontinued operations after taxation (continued) The effect of the discontinued operations on the Condensed Consolidated Statement of Cash Flows was as follows: Nine-month period ended 30 September 2016 ' '000 Cash flows from discontinued operations Net cash from investing activities Net cash used in operating activities -- (863) Net cash flows for the period Basic and diluted earnings per share Nine-month period ended 30 September Basic and diluted earnings per share Profit attributable to shareholders of the parent company ( thousand) Average number of shares in issue during the period (thousand) Basic and diluted earnings per share ( cent) 2,3 3,3 Nine-month period ended 30 September Basic and diluted earnings per share from continuing operations Profit attributable to shareholders of the parent company from continuing operations ( thousand) Average number of shares in issue during the period (thousand) Basic and diluted earnings per share from continuing operations ( cent) 2,3 0,7 Nine-month period ended 30 September Basic and diluted earnings per share from discontinued operations Profit attributable to shareholders of the parent company from discontinued operations ( thousand) Average number of shares in issue during the period (thousand) Basic and diluted earnings per share from discontinued operations ( cent) -- 2,6 For the calculation of the basic and diluted profit per share for the period ended 30 September 2015, the average number of shares issued is adjusted in accordance with IAS 33 to take into account the issue of shares during 2015 and the reverse split of the share capital. As at 30 September 2016 there were no options or instruments convertible into new shares and so basic and diluted earnings per share are the same. 21

23 Notes to the Condensed Consolidated Financial Statements 11. Loans and advances to customers As of 1 st January 2016, gross values of impaired loans are booked on a non-interest accrual basis. The amount of contractual interest that was not accrued for the nine-month period ended 30 September 2016 amounted to 128,6 million. In previous years gross impaired loans included contractual interest accrued. The Bank announced on the 13 th of September 2016 that, within its normal course of business, it entered into an agreement with the European Bank for Reconstruction and Development ( EBRD ) to participate in an EBRD A/B loan granted to Hellenic Telecommunications Organization ( OTE ). EBRD provided a 339 million syndicated loan to OTE to support its investment plans. The financing consists of an EBRD A loan of 150 million as part of a 339 million A/B loan and an additional financing of 189 million granted by Participants in the B loan. Hellenic Bank s participation in the B loan is in the amount of 20 million. The Mandated Lead Arranger on this syndicated loan is the National Bank of Greece S.A. The Lead Arrangers are HSBC Bank plc and Hellenic Bank, while BNP Paribas S.A., Nomura International plc, Alpha Bank Albania, Piraeus Bank SA and Cordiant participate as Arrangers. EBRD currently owns 5,38% of the issued share capital of Hellenic Bank. Accumulated impairment losses on the value of loans and advances: 30 September 2016 ' December 2015 '000 Loans and advances to customers Accumulated impairment losses ( ) ( ) Individual impairment losses 30 September 2016 ' December 2015 '000 1 January Net write-offs of loan impairment losses ( ) ( ) Interest accrued on impaired loans Charge for the period/year Unwinding of discount (45.630) (75.551) Exchange difference ( ) September/31 December Collective impairment losses 1 January Net write-offs of loan impairment losses (3.415) (2.670) Release for the period/year (1.580) (15.122) Exchange difference (9) 926 (5.004) (16.866) 30 September/31 December Accumulated impairment losses

24 Notes to the Condensed Consolidated Financial Statements 11. Loans and advances to customers (continued) Impaired loans and advances Represent the loans and advances for which the Group determines that there is objective evidence for impairment as a result of one or more loss events occurring after initial recognition and which have an impact on the estimated future cash flows. These loans and advances are classified Grade 3 (high risk) based on the Group s credit risk assessment system. Loans with renegotiated terms due to the deterioration of the financial position of the customer are usually considered impaired, if the Group determines that, according to the loan contractual terms, non-repayments of the total principal and contractual interest due is possible. Interest income on the present value of estimated future cash flows discounted at the original effective interest rate of the loan corresponds to the unwinding of discount and is recognised in the income statement. For the nine-month period ended 30 September 2016 the unwinding of discount recognised in the income statement, amounted to 45,6 million (30 September 2015: 56,0 million). Non-impaired loans and advances The loans and advances which were not found to be impaired, are presented in risk categories based on the credit risk assessment system of the Group. The risk categories are as follows: Grade 1 (Low Risk): An immediate ability to repay the credit facility is assumed. Grade 2 (Medium Risk): The probability of indirect recovery of the credit facility is assumed. Grade 3 (High Risk): The debtor presents a higher risk compared to Grade 1 and 2 on the existence of direct and indirect recovery of the credit facility. Past due but not impaired loans and advances Represent non-impaired loans and advances for which the contractual interest or principal repayments are past due and the Group determines that there is no objective evidence of impairment by taking into account, among others, the value of available collateral. Collateral On the basis of the Group s policy, the amount of credit facilities granted should be based on the repayment capacity of the relevant counterparties. Furthermore, policies are applied for the hedging and mitigation of credit risk through the holding of collateral. These policies define the types of collaterals held and the methods for estimating their fair value. The main collaterals held by the Group include mortgage interests over property, pledging of cash, government and bank guarantees, charges over business assets as well as personal and corporate guarantees. Property collateral relates to immovable commercial, residential and land real estate collateral. The open market value is indexed to today using publicly available indices. The value of tangible collateral for loans and advances classified as impaired both under Collective and Individual assessments amounted to million as at 30 September 2016 (31 December 2015: million). The value of tangible collateral for loans and advances past due but not impaired amounted to 166,1 million as at 30 September 2016 compared to 295,1 million as at 31 December Forborne Exposures According to the European Banking Authority s (EBA) technical standards, forborne exposures are (i) exposures which involve changes in their terms and/or conditions and (ii) the forbearance measures consist of concessions towards a debtor which aim to address existing or anticipated difficulties on the part of the borrower to service debt in accordance with the current repayment schedule. Changes in the terms and 23

25 Notes to the Condensed Consolidated Financial Statements 11. Loans and advances to customers (continued) conditions of a contract that do not occur because the customer is not able to meet the terms and conditions of the contract due to financial difficulties do not constitute forbearance measures (see details below). The most significant prerequisite for the forbearance of an exposure is the existence of customer repayment ability i.e. the customer is viable. The Bank s Forbearance Policy includes the terms and conditions on which the Bank determines whether or not a renegotiated repayment schedule shall be granted. The forbearance measures to be taken and their duration thereof are determined on the basis of specific customer information, based on the prevailing economic conditions and in accordance with relevant legislation or regulatory Directives. The monitoring of forborne loans is performed by both, Business Units and the Credit Risk Management Department. Every effort is taken by the Bank for the proper assessment of the new repayment schedule on the basis of the forbearance measures, in order to avoid a new default. Non-performing and forborne exposures according to the European Banking Authority s (EBA) technical standards The European Banking Authority (EBA) published in 2014 its technical standards with respect to nonperforming and forborne exposures. Exposures include all debt instruments (loans and advances and debt securities) and off-balance sheet exposures, except those held for trading exposures. As per the EBA technical standards, the following are considered as Non-Performing Exposures (NPEs) : (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Material exposures that are over 90 days past due, The debtor is assessed as unlikely to pay its credit obligations in full without realisation of collateral, regardless of the existence of any past-due amount or of the number of days past due, Exposures in respect of which a default is considered to have occurred in accordance with Article 178 of Regulation (EU) No 575/2013, Exposures of debtors against whom legal action has been taken by the Bank or exposures of bankrupt debtors, Exposures that are found impaired as per the applicable accounting framework, Forborne exposures reclassified from NPE status that were NPE at forbearance or became NPE after forbearance and which are re-forborne while under probation (the probation period for forborne exposures begins once the contract is considered as performing and lasts for two years minimum), Forborne exposures reclassified from NPE status that were NPE at forbearance or became NPE after forbearance (the probation period for forborne exposures begins once the contract is considered as performing and lasts for two years minimum) that present arrears 30 days past due while under probation, Further to the above the all-embracing criteria apply as follows: (a) for debtors classified as retail debtors as per the EU Regulation 575/2013, when the Bank has on-balance sheet exposures to a debtor that are material and are past due by more than 90 days the gross carrying amount of which represents more than 20% of the gross carrying amount of all on-balance sheet exposures to that debtor, all on and off-balance sheet exposures to that debtor shall be considered as non-performing and (b) for debtors classified as non-retail debtors as per the EU Regulation 575/2013, when the Bank has any on-balance sheet exposures to a debtor that are non-performing (if the exposure is non-performing due to over 90 days past due it must pass the materiality thresholds), all on and offbalance sheet exposures to that debtor shall be considered as NPE. Else, only exposures that are non-performing will be classified as such. 24

26 Notes to the Condensed Consolidated Financial Statements 11. Loans and advances to customers (continued) The below materiality thresholds apply only for the NPE criterion of arrears over 90 days past due; For exposures to debtors classified as Retail as per the EU Regulation 575/2013: For term loans: if the past due amount of each exposure is over 500 the exposure shall be classified as material. For overdrafts/current accounts: if the past due amount or the excess of the exposure exceeds 500 or 10% of the limit approved by the Bank the exposure shall be classified as material. For exposures to debtors not classified as Retail as per the EU Regulation 575/2013: If the total excesses/past dues of debtors exceed or exceed 10% of their total on balance sheet exposures then all the exposures of the debtor shall be classified as material. If as per the above the exposures are not classified as material, then they may be classified as performing NPEs even if they present arrears over 90 days past due. Exposures may be considered to have ceased being non-performing when all of the following conditions are met: (a) the situation of the debtor has improved to the extent that full repayment, according to the original or when applicable the modified conditions, is likely to be made; (b) the debtor does not have any amount past-due by more than 90 days. When forbearance measures are extended to non-performing exposures or to exposures which had been non-performing at forbearance or became non-performing after forbearance, the exposures may be considered to have ceased being non-performing only when all the following conditions are met: (a) (b) (c) (d) the extension of forbearance does not lead to the recognition of impairment or default; one year has passed since the forbearance measures were extended; there is not, following the forbearance measures, any past-due amount or concerns regarding the full repayment of the exposure according to the post-forbearance conditions. the debtor does not have any amount past-due by more than 90 days. As per EBA technical standards evidence of a concession towards a debtor which aim to address existing or anticipated difficulties on the part of the borrower to service debt in accordance with the current repayment schedule, includes: (a) (b) (c) the modification of the previous terms and conditions of a contract would not have been granted had the debtor not been in financial difficulties; a difference in favour of the debtor between the modified and the previous terms of the contract; cases where a modified contract includes more favourable terms than other debtors with a similar risk profile could have obtained from the same institution. Examples of exposures that should be classified as forborne as per the new EBA technical standards include: (a) (b) (c) Exposures that were non-performing at forbearance. Exposures that were past due more than 30 days anytime within 3 months prior to forbearance. Forbearance measures such as partial write-offs. 25

27 Notes to the Condensed Consolidated Financial Statements 11. Loans and advances to customers (continued) The forbearance classification shall be discontinued when all of the following conditions are met: (a) (b) (c) (d) the contract is considered as performing, including if it has been reclassified from the non-performing category after an analysis of the financial condition of the debtor showed it no longer met the conditions to be considered as non-performing, a minimum 2 year probation period has passed from the date the forborne exposure was considered as performing, regular payments of more than an insignificant aggregate amount of principal or interest have been made during at least half of the probation period, none of the exposures to the debtor is more than 30 days past-due at the end of the probation period. Based on the above categories, loans and advances to customers of the Group, are presented as follows: Loans and advances to customers 30 September December Carrying amount Impaired: Grade 3 (high risk) Individual impairment losses ( ) ( ) Carrying amount Of which loans with forbearance measures Past due but not impaired: Grade 1 (low risk) Grade 2 (medium risk) Grade 3 (high risk) Carrying amount Past due comprises: 0+ up to 30 days up to 60 days up to 90 days days Carrying amount Of which loans with forbearance measures Neither past due nor impaired: Grade 1 (low risk) Grade 2 (medium risk) Grade 3 (high risk) Carrying amount Of which loans with forbearance measures Balances after individual impairment losses Collective impairment losses (28.583) (33.587) Total carrying amount

28 Notes to the Condensed Consolidated Financial Statements 11. Loans and advances to customers (continued) The movement of the net carrying amount of the Group s impaired loans and advances to customers is as follows: 30 September 31 December January Transfer to non-impaired loans and advances during the period/year ( ) ( ) Net movement of impaired loans and advances (49.842) (51.014) Loans and advances classified as impaired during the period/year September/31 December The Group s loans and advances with forbearance measures are analysed below: 30 September December September After individual impairment December Trade Construction and Real Estate Manufacturing Tourism Other sectors Retail The tangible collateral relating to loans and advances with forbearance measures amounted to million as at 30 September 2016 (31 December 2015: million). Non-Performing Exposures (NPEs) According to the CBC directive on Loan Impairment and Provisions Practices (February 2014), the credit institutions are obliged to announce Table A as presented below. The non-performing exposures portfolio of the Group as at 30 September 2016 amounted to million (31 December 2015: million). The ratio of NPEs to gross loans was 57,1% (31 December 2015: 59,2%). The coverage of the NPEs by provisions 1 (coverage ratio) was 49,9% as at 30 September 2016 (31 December 2015: 50,1%). 1 Individual and collective impairment losses. 27

29 Notes to the condensed consolidated financial statements 11. Loans and advances to customers (continued) Analysis of loan portfolio according to the counterparty sector as at 30 September 2016 Table Α of which nonperforming exposures Total loan portfolio of which exposures with forbearance measures of which on nonperforming exposures Cumulative Impairment losses of which nonperforming exposures of which exposures with forbearance measures of which on nonperforming exposures Loans and advances* General Governments Other financial corporations Non-financial corporations of which: Small and Medium-sized enterprises of which: Commercial real estate By sector 1. Construction Wholesale and retail trade Real estate activities Accommodation and food service activities Manufacturing Other sectors Households of which: Residential mortgage loans of which: Credit for consumption * Non-including loans and advances to central banks and credit institutions. 28

30 Notes to the Condensed Consolidated Financial Statements 11. Loans and advances to customers (continued) Analysis of loan portfolio according to the counterparty sector as at 31 December 2015 Table Α of which nonperforming exposures Total loan portfolio of which exposures with forbearance measures of which on nonperforming exposures Cumulative Impairment losses of which nonperforming exposures of which exposures with forbearance measures of which on nonperforming exposures Loans and advances* General Governments Other financial corporations Non-financial corporations of which: Small and Medium-sized enterprises of which: Commercial real estate By sector 1. Construction Wholesale and retail trade Real estate activities Accommodation and food service activities Manufacturing Other sectors Households of which: Residential mortgage loans of which: Credit for consumption * Non-including loans and advances to central banks and credit institutions. 29

31 Notes to the Condensed Consolidated Financial Statements 12. Debt Securities Securities held for trading Listed Securities held to maturity 30 September 2016 ' December 2015 ' Listed Securities classified as loans and receivables Listed Securities available for sale Listed Unlisted Provisions for impairment (30) (74) Analysis of Debt securities by sector: Concentration by sector: September 2016 ' December 2015 '000 Governments Banks Other sectors As at 30 September 2016 the Group s exposure in Cyprus Government Bonds amounted to thousand (31 December 2015: thousand). The category Other sectors mainly consists of debt securities of supranational organisations. 30

32 Notes to the Condensed Consolidated Financial Statements 12. Debt Securities (continued) The Group closely monitors developments in the international markets so that any measures needed to reduce credit risk are promptly taken. The monitoring of exposure in countries of high risk is centralised through systems that fully and on an ongoing basis cover all material exposures to these countries such as interbank placements, debt securities, other investments, etc. Also, maximum acceptable levels are specified according to the rankings of the countries and taking into account their credit ratings, political, economic and other factors. For the classification of a country as High Risk country, the credit ratings of the countries, the bond implied ratings which incorporate information about credit spreads of government bonds as well as other available financial data of the countries, are primarily considered. Some of the debt securities listed in the table below, based on the three level hierarchy depending on the source of data used to determine fair value, are classified in Level 2 and 3. The table below shows the Group's exposure to investments in debt securities in countries with high credit risk, at the reporting date: Nominal value Book value Market value Cyprus: Government Bonds Ireland: Bank bonds On 30 th of September 2016 the Group did not have any exposures with issuers from Greece, Spain, Hungary, Italy, Portugal, Slovenia, Pakistan, Brazil, Turkey, South Africa, Russia, Kazakhstan, Egypt, Ukraine or Vietnam. 13. Reclassification of debt securities On the 1 st of January 2009, the Group proceeded with a review of its intention for the holding of debt securities and consequently of its policy for classifying them under the various categories. As a result of this review, a number of debt securities, which were included in the held for trading and available for sale categories, were reclassified to the held to maturity and loans and receivables categories. For the years 2010 to 2015, as well as the nine-month period ending 30 September 2016, there has been no other reclassification of debt securities in other categories. All reclassified held for trading debt securities had matured by Reclassification of available for sale investments In accordance with the provisions of the amended IAS 39, the Group has reclassified certain available for sale debt securities to loans and receivables, in view of the fact that there was no active market for these debt securities and the Group did not have the intention to sell these securities in the foreseeable future. 31

33 Notes to the Condensed Consolidated Financial Statements 13. Reclassification of debt securities (continued) The carrying amount and fair value of the reclassified debt securities is presented below: 1 January September 2016 Carrying amount Carrying and fair value amount Fair value Available for sale debt securities reclassified as loans and receivables Had the Group not reclassified the available for sale debt securities to loans and receivables on the 1 st of January 2009, the Group s equity would have included losses from change in fair value of these debt securities of thousand that would have been included in the revaluation reserve for available for sale investments. In addition, on the 1 st of January 2009, the Group reclassified certain available for sale debt securities, that it intends to hold to maturity, to the held to maturity category. The carrying amount of these debt securities transferred on the 1 st of January 2009 amounted to million. On 30 th of September 2016 the carrying value of these remaining bonds amounted to thousand (31 December 2015: thousand). As a result of the above decision, for the period ended 30 September 2016, an amount of 582 thousand (30 September 2015: 901 thousand), being amortisation of revaluation of reclassified debt securities available for sale, was transferred from the investment revaluation reserve to the income statement. 14. Property, plant and equipment and intangible assets Property, plant and equipment '000 Intangible assets '000 Net book value 1 January Additions less disposals Depreciation/amortisation (3.318) (1.036) Net book value 30 September Deferred Tax Asset Deferred taxation arises from: 30 September December Property revaluation differences and differences between depreciation and capital allowances 1 1 Tax losses Movement of Deferred taxation: 2016 Balance 1 January Effect on income statement Balance 30 September '000 '000 '000 Property revaluation differences and differences between depreciation and capital allowances Tax losses (8.465) (8.465)

34 Notes to the Condensed Consolidated Financial Statements 15. Deferred Tax Asset (continued) 2015 Balance 1 January Effect on income statement Balance 31 December '000 '000 '000 Property revaluation differences and differences between depreciation and capital allowances 159 (158) 1 Tax losses As at 30 September 2016, the deferred tax asset of 49,6 million which arises from tax losses and is based on the Bank s assessment of the current and future profitability, relates to accumulated tax losses of 397 million which expire within 5 years. 16. Other assets As at 30 September 2016, the other assets amounted to thousand of which thousand relate to stock of properties held for sale. Out of stock of properties held for sale, thousand relate to assets acquired in satisfaction of debt and the remaining 701 thousand relate to assets not in use. The Group s movement of assets from customers debt settlement on 30 September 2016 is presented as follows: Banking & Financial Insurance services Services Total '000 '000 '000 1 January Additions Disposals (1.351) -- (1.351) Impairment losses (2.615) (34) (2.649) 30 September Properties acquired from customers debt settlement amounting to thousand, are held by subsidiary special purpose vehicles (SPVs) which were formed with the purpose of holding and managing these immovable properties acquired under these arrangements. As at 30 September 2016, the properties held by these SPVs were included in stock of properties held for sale. 17. Amounts due to Central Banks 30 September 2016 ' December 2015 '000 Between one and five years On 5 th of June 2014, in pursuing its price stability mandate, the Governing Council of the European Central Bank (ECB) decided to introduce measures to enhance the functioning of the monetary policy transmission mechanism by supporting lending to the real economy. One particular measure announced by the ECB in relation to achieving this objective, was the decision of ECB to conduct a series of targeted longer-term refinancing operations (TLTROs) over a period of two years. In implementing this plan, the Governing Council aimed to support bank lending to the non-financial private sector, meaning households and nonfinancial corporations, in the Eurozone member states. This measure did not propose to deal with lending to households for the purposes of house purchases. Under the scheme, banks were entitled to an initial 33

35 Notes to the Condensed Consolidated Financial Statements 17. Amounts due to Central Banks (continued) borrowing allowance equal to 7% of a specific part of their loans in two parts, in September and December The Bank participated in the TLTRO program in December 2014 by borrowing 236 million at an interest rate of 0,15% for 4 years. On 29 th of June 2016, the Bank proceeded with the full early repayment of the TLTRO borrowing. 18. Loan capital Tier 1 Capital 30 September 2016 ' December 2015 '000 Convertible Capital Securities 1-CCS Convertible Capital Securities 2-CCS Tier 2 Capital Non-Convertible Bonds Non-Convertible Bonds Full details/terms of issue of the Bonds and Securities of the Bank are included in the Prospectus and the Supplementary Prospectuses of each issue. Convertible Capital Securities 1/ Convertible Capital Securities 2 (CCS 1/CCS 2) Pursuant to the terms of the Prospectus dated 30 September 2013, CCS1/CCS2 holders may exercise the right to convert the CCS1/CCS2 into ordinary shares, during the periods between January and July of each year ( the Conversion Period ) with the first Conversion Period commencing on 15 January 2016 and the last Conversion Period commencing on 15 July If a CCS1/CCS2 holder exercises his Right to convert, any interest accrued ceases to be calculated and becomes due until the end of the conversion period during which the holder has exercised voluntary conversion, according to the provisions of Paragraph 10.B.(d) of Part IV/B/III and 11.B.(d) of Part IV/C/III of the prospectus. The first Conversion Period for 2016 for CCS1/CCS2 commenced on 15 January 2016 and ended on 29 January The Bank did not receive a Voluntary Conversion Application from any CCS1/CCS2 holder. The second Conversion Period for 2016 for CCS1/CCS2 commenced on 15 July 2016 and ended on 29 July The Bank did not receive a Voluntary Conversion Application from any CCS1/CCS2 holder. Non-Convertible Bonds 2016 In implementing the provisions of the Prospectus dated 11 th May 2006, the Bank proceeded on the 1 st of July 2016 with the full redemption of Bonds 2016 (HBDF). Following the redemption of the Bonds, any obligations the Bank may otherwise had in relation to all or any of the Bonds and the holders thereof ceased to apply. The interest on the Bonds for the period from the 1 st April 2016 to 30 June 2016 with a rate of 1,257% was paid on 1 st July Individuals entitled to receive the interest payment were all registered holders of the Bonds as at 23 rd of June 2016 (record date). Bonds last cum-interest trading date was the 21 st of June

36 Notes to the Condensed Consolidated Financial Statements 19. Share capital 30 September Number of shares (thousand) 31 December Number of shares (thousand) Authorised million shares 0,50 each Issued Fully paid shares 30 September 2016 '000 Number of shares (thousand) 31 December 2015 '000 Number of shares (thousand) 1 January Allotment of unexercised 2014 rights Reverse split ( ) Issue of shares to EBRD Total issued share capital During the nine-month period to 30 September 2016 there was no movement to the Bank s issued or authorised share capital. As at 30 September 2016, fully paid shares were in issue, with a nominal value of 0,50 each (2015: shares with a nominal value 0,50 each). 20. Revaluation reserves 30 September 2016 ' December 2015 '000 Property revaluation reserve 1 January Deferred taxation on revaluation of property (31) (41) Transfer to revenue reserve of excess depreciation on revaluation surplus (219) (317) September 2016 ' December 2015 '000 Revaluation reserve of available for sale securities 1 January Revaluation of equity securities (482) Revaluation of debt securities Amortisation of revaluation of reclassified debt securities (582) (1.492) Transfer to the income statement on disposal of investments in equity available for sale (12.381) -- Impairment losses on equity transferred to the income statement -- (315) Total revaluation reserves

37 Notes to the Condensed Consolidated Financial Statements 21. Contingent liabilities and commitments Contingent liabilities The Group is engaged in various legal proceedings and regulatory matters arising out of its normal business operations, where an obligation is created for which an outflow of resources embodying economic benefits is possible. The existence of these obligations will be confirmed only by the occurrence, or non-occurrence, of one or more uncertain future events not wholly within the control of the Group. Hence the effect of the outcome of these matters cannot be predicted with certainty but may impact the Group s financial results. The Group is of the opinion that there are adequate defences in place for a successful outcome, in the course of the relevant proceedings. It is not practicable to provide an aggregate estimate of potential liability for such legal proceedings as a class of contingent liabilities. Capital Commitments At 30 September 2016, the Group s commitments for capital expenditure, not recognised in the statement of financial position, amounted to thousand (31 December 2015: thousand). 22. Fair value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its nonperformance risk. The Group measures the fair value of an instrument using the quoted price in an active market, when available, for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. If there is no quoted price in an active market, then the Group uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the main factors that market participants would take into account in pricing a transaction. Fair value of financial instruments The table below presents the analysis of the Group s financial instruments measured at fair value on the basis of the three-level hierarchy by reference to the source of data used to derive the fair values. The levels of hierarchy of fair value are as follows: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Data other than quoted prices included within Level 1 that is observable for the asset or liability, either directly or indirectly. Level 3: Import data for the asset or liability that is not based on observable market data (nonobservable import data). 36

38 Notes to the Condensed Consolidated Financial Statements 22. Fair value (continued) 30 September 2016 Level 1 Level 2 Level 3 Total '000 '000 '000 '000 Financial assets Derivatives: Foreign currency forwards Options Interest rate swaps Currency swaps Other financial assets at fair value through profit or loss Debt securities: Banks Other issuers Equity securities Investments available for sale Debt securities: Government Banks Other issuers Equity securities Collective investments units Total September 2016 Level 1 Level 2 Level 3 Total '000 '000 '000 '000 Financial liabilities Derivatives: Foreign currency forwards Options Interest rate swaps Currency swaps Total

39 Notes to the Condensed Consolidated Financial Statements 22. Fair value (continued) 31 December 2015 Level 1 Level 2 Level 3 Total '000 '000 '000 '000 Financial assets Derivatives: Foreign currency forwards Options Interest rate swaps Currency swaps Other financial assets at fair value through profit or loss Debt securities: Banks Other issuers Equity securities Investments available for sale Debt securities: Government Banks Other issuers Equity securities Collective investments units Other Assets -Equity held for sale Total December 2015 Level 1 Level 2 Level 3 Total '000 '000 '000 '000 Financial liabilities Derivatives: Foreign currency forwards Options Interest rate swaps Currency swaps Total

40 Notes to the Condensed Consolidated Financial Statements 22. Fair value (continued) The tables below present the movement of financial instruments categorised at Level 3 hierarchy: Investments available for sale Shares Debt securities Equity securities held for sale Total '000 '000 '000 '000 1 January Gains recognised in consolidated income statement in the category Net gains on disposal and revaluation of foreign currencies and financial instruments Additions Disposals (12.381) (12.381) Transfer -- (31) -- (31) 30 September Investments available for sale Shares Debt securities Equity securities held for sale Total '000 '000 '000 '000 1 January Gains recognised in consolidated income statement in the category Net gains on disposal and revaluation of foreign currencies and financial instruments Repayments (1.630) (1.630) Disposals -- (2.609) -- (2.609) Gains recognised in consolidated statement of comprehensive income in the category Surplus on revaluation of available for sale equity and debt securities December For the valuation at fair value of the investments in equity securities which are classified as Level 3, a valuation method based on the company's equity at which the investment in shares is held as well as estimates of the Management of the Group have been used. Investments in debt securities, classified in Level 3, were valued using unobservable data that reflect however the assumptions that market participants would make to assess the value of an asset or a liability, based on the best available information under current conditions. On 30 th September 2016 the fair value of investments in debt securities classified in the category Assets held to maturity and which are not measured at fair value amounted to thousand (31 December 2015: thousand) and in the three-level hierarchy would be classified as Level 1. Also the fair value of investments in debt securities classified in the category Loans and receivables and which are not measured at fair value, amounted to thousand (31 December 2015: thousand) and in the three-level hierarchy would be classified as Level 2. The fair value of loans and advances to customers is based on the present value of expected future cash flows. Future cash flows have been based on the future expected loss rate per loan category, taking into account expectations in the credit quality of the borrowers. The discount rate includes components that capture: the funding cost and cost of capital of the Group and an adjustment for the future cost of risk. 39

41 Notes to the Condensed Consolidated Financial Statements 22. Fair value (continued) The fair value of Group loans and advances to customers not measured at fair value on 30 th September 2016 amounted to million, carrying amount 30 September million (31 December 2015: million, carrying amount 31 December 2015: million) and have been classified at Level Related party transactions Members of the Board of Directors and connected persons Connected persons include the spouse, the children, the parents and the companies in which Directors hold, directly or indirectly, at least 20% of the voting rights at a general meeting. 30 September 2016 ' December 2015 '000 Loans and advances 14 8 Tangible securities 17 6 Deposits Additionally, at 30 September 2016, there were contingent liabilities and commitments in respect of Members of the Board of Directors and their connected persons in the form of documentary credits, guarantees and unused limits amounting to 154 thousand which did not exceed 1% of the Bank s net assets (31 December 2015: 324 thousand). For the period ended 30 September 2016 there was no interest income in relation to Members of the Board of Directors and their connected persons (30 September 2015: nil), while interest expense in respect of Members of the Board of Directors and their connected persons amounted to 7 thousand (30 September 2015: 7 thousand). Emoluments and fees of Members of the Board of Directors Emoluments and fees of Members of the Board of Directors: 30 September 2016 ' September 2015 '000 Emoluments and benefits in executive capacity Employer s contributions for social insurance, etc Retirement benefits 11 8 Total emoluments for Executive Directors Fees Employer s contributions Non Executive Directors 8 7 Other transactions with Members of the Board of Directors and related parties The sales of insurance policies for the period ended 30 September 2016 by the Group s subsidiary, Pancyprian Insurance Ltd, to Members of the Board and their connected persons as defined above, amounted to 10 thousand (30 September 2015: 7 thousand), while sales of insurance policies by the Group s subsidiary, Hellenic Alico Life Insurance Company amounted to 8 (30 September 2015: 18). For the period ended 30 September 2016, non-interest income amounting to 1 thousand was received which relates to Members of the Board of Directors and their connected persons. 40

42 Notes to the Condensed Consolidated Financial Statements 23. Related party transactions (continued) Key Management personnel who are not Directors and their connected persons Key Management personnel are those persons who have the authority and the responsibility for the planning, management and control of the Banks operations, directly or indirectly. The Group, according to the provisions of IAS 24 considers as Key Management personnel the General Managers of the Bank who were not Directors, the members of the Asset and Liability Committee (ALCO) as well as management personnel who refer directly to the Chief Executive Officer. Connected persons include spouses, minor children and companies in which the Key Management personnel who were not Directors hold, directly or indirectly, at least 20% of the voting rights at a general meeting. 30 September 2016 ' December 2015 '000 Loans and other advances Tangible securities Deposits Emoluments of Key Management personnel of the Group The emoluments of Key Management personnel who were not Directors were: 30 September 2016 ' September 2015 '000 Emoluments of Key Management personnel who were not Directors: Salaries and other short term benefits Employer s contributions for social insurance etc Retirement benefits Amounts paid on termination It should be noted that due to changes in the Bank s organizational structure as described in note 30 of these financial statements, the number of key management personnel decreased and consequently their disclosed exposures/transactions with the Bank. During the nine-month period ended 30 September 2015, the contracts of employment between 5 Key Management personnel and the Bank were terminated by mutual consent. The parties agreed to a consideration for the termination of the contract of employment, in cash and in kind, amounting in total to around 942 thousand. The Bank also paid to the 5 Key Management personnel the total amount of their accrued rights. During the first quarter of 2016, the contract of employment between one Key Management personnel and the Bank was terminated by mutual consent. The parties agreed to a consideration for the termination of the contract of employment, in cash and in kind, amounting in total approximately 252 thousand. The Bank also paid to the Key Management personnel the total amount of his accrued rights. In addition, on 30 September 2016, there were contingent liabilities and commitments to Key Management personnel who were not Directors and their connected persons amounting to 250 thousand (31 December 2015: 335 thousand). 41

43 Notes to the Condensed Consolidated Financial Statements 23. Related party transactions (continued) Interest income in relation to Key Management personnel and their connected persons for the period ended 30 September 2016 amounted to 10 thousand (30 September 2015: 13 thousand), while interest expense in relation to Key Management personnel and their connected persons amounted to 26 thousand (30 September 2015: 93 thousand). The sales of insurance policies for the period ended 30 September 2016 by the Group s subsidiary, Pancyprian Insurance Ltd, to Key Management personnel and their connected persons, as defined above, amounted to 20 thousand (30 September 2015: 19 thousand) while the sales of insurance policies by the Group s subsidiary, Hellenic Alico Life Insurance Company amounted to 14 thousand (30 September 2015: 21 thousand). Shareholders with significant influence and their connected persons Pursuant to the provisions of IAS 24, related parties are considered, among others, the Shareholders who have significant influence to the Bank or/and hold directly or indirectly more than twenty percent (20%) of the nominal value of the issued capital of the Bank. Connected persons include the entities controlled by Shareholders with significant influence as they are defined above. 30 September 2016 ' December 2015 '000 Loans and advances Tangible securities Deposits On 30 September 2016, there were contingent liabilities and commitments in relation to Shareholders with significant influence and connected persons in the form of documentary credits, guarantees and unused limits amounting to 347 thousand (31 December 2015: 513 thousand). Interest income in relation to Shareholders and connected persons for the period ended 30 September 2016 amounted to nil (30 September 2015: nil) while the corresponding interest expense was 2 thousand (30 September 2015: 56 thousand). Other transactions with Shareholders with significant influence and their connected persons During the period ended 30 September 2016, there were no purchases of goods and services by Shareholders with significant influence and their connected persons as defined above (30 September 2015: nil). In addition, the sales of insurance policies by the Group's subsidiary, Pancyprian Insurance Ltd, to Shareholders with significant influence and their connected persons as defined above, amounted to 123 thousand (30 September 2015: 107 thousand). On 30 September 2016, Shareholders with significant influence and their connected persons had in their possession Convertible Capital Securities 2 (CCS2) amounting to 15,7 million (31 December 2015: 15,7 million). For the period ended 30 September 2016 non-interest income amounting to 88 thousand was received which relates to Shareholders with significant influence and their connected persons. All transactions with Members of the Board of Directors, Key Management personnel, Shareholders with significant influence and their connected persons are at an arm s length basis. Regarding the Key Management personnel, facilities have been granted based on current terms as those applicable to the rest of the Group s personnel. 42

44 Notes to the Condensed Consolidated Financial Statements 24. Economic Environment Economic Environment and Group operations in Cyprus Cyprus exited the Memorandum of Understanding at the end of March 2016, having successfully completed the Economic Adjustment Programme (E.A.P) agreed with the country s international lenders in March Cyprus has implemented important fiscal reforms under its macroeconomic adjustment programme. Fiscal developments have largely out-performed the primary balance targets that were set at the beginning of the programme. Structural reforms, some of them in the fiscal area, are set to contribute to ensuring strong fiscal governance in the post-programme period. The better than expected outcome in the economy, together with the gradual restructuring taking place in the banking sector, have created and maintained an environment of improved confidence. The above developments are reflected in the recent upgrades of the country s and the largest domestic banks credit rating by international rating agencies. Fitch Ratings upgraded the long-term rating of Cyprus by one notch to BB- with a positive outlook in October In September 2016, Standard and Poor s, also, upgraded Cyprus long-term rating by one notch to BB with a positive outlook. Moreover, in August 2016, Moody s has changed its outlook on the Cypriot banking system to positive from stable. As a result of the above, and the minimum credit rating requirement of the ECB s quantitative easing programme, the Cyprus Bonds will qualify for the programme when Cyprus returns to investment grade. In July 2016, the Republic of Cyprus, accessed international capital markets for the first time after the completion of the economic adjustment programme, with an issue of a seven year bond of 1 billion at a yield of 3,8%. The commitment regarding the implementation of the Economic Adjustment Programme has been the cornerstone in steering the economy out of recession. The economy has been exhibiting robust growth since the beginning of 2015, with real GDP growth increasing by 2,7% during the first half of The course of the steady recovery path is reflected in the labor market, which tends to follow the recovery with a time lag. The deflation observed from the first months of 2013 has started diminishing in magnitude, with the price level in 2016 expected to decline by 1%, compared with a decrease of 1,5% in The expansion of the economy was mainly driven by rising private consumption amid negative inflation and supported by the depreciation of the Euro and the low oil prices. During the first half of 2016, private consumption grew by 2,4%, compared with the corresponding period of Over the same period, investment grew by 19,2%, primarily due to investment in transport equipment, while investment in construction also increased by 13,6%. From a sectoral point of view, growth was supported by resilient export performance in the services sectors of tourism and professional business. Specifically, tourist arrivals for the period January-August increased by 19,2%, compared with the corresponding period of 2015 and at the same time, revenues from tourism increased by 14,9% for the period January-July 2016 compared with the corresponding period of The housing market continued its adjustment in the course of 2016, bringing the cumulative fall in prices since mid-2008 to 31,7% (Central Bank of Cyprus s Property Price Index). During the first nine months of 2016, property sales recorded a new increase according to Land Registry data. Specifically, for the relevant period, the number of properties sold recorded an increase of 32% to against during the corresponding period a year ago. Cyprus' macroeconomic outlook is positive and is accompanied by a significant increase in real gross domestic product in the first half of 2016, the reduction in unemployment and further improvement of key domestic indicators since the beginning of the year. Despite the important steps taken towards restoring the economic climate, some degree of uncertainty remains, as the country still has certain issues to resolve, such as the high volume of non-performing exposures (NPEs), high unemployment and delays in the advancement of structural reforms. The high private indebtedness levels that have led to deleveraging and increased NPEs, continue to pose significant risks to the stability of the domestic banking system and to the outlook for the economy, especially via developments in property prices. From an exogenous perspective, the country s economy may be negatively influenced due to weaker than expected growth in the Euro area and a slowdown in output growth in the UK and further depreciation of the pound against the Euro, as a result of increased uncertainty following the UK referendum. Also, possible deterioration of the Russian economic outlook and the increased geopolitical tensions in the Middle East and Eastern Mediterranean, could trigger adverse spillovers to economic confidence, tourism and consequently 43

45 Notes to the Condensed Consolidated Financial Statements 24. Economic Environment (continued) to the aggregate economic activity. On the other hand, geopolitical tensions in neighboring counties render Cyprus as a safer tourist destination and could therefore counterbalance, to a significant extent, the potential reduction in tourist traffic from UK. Additionally, developments over a potential reunification of Cyprus along with the exploitation of Cyprus natural resources are being closely monitored in order to assess the potential prospects that are being developed. Consequences of the recent developments The Cyprus banking sector has gone through a reformation phase and is now in a strengthened capital and liquidity position. Its size has been reduced to a moderate 3,8 times the GDP or about the EU average. Foreign exposures have been eliminated and domestic operations form the main focus. While decisive steps were taken and swift progress has been achieved throughout the banking sector, the high share of NPEs is impacting both on the banks balance sheets as well as on their ability to extend credit to the economy. The Bank has managed to navigate successfully through the banking crisis. It has maintained throughout the crisis its reputation for stability and trust and is concentrating in its strengthening and better focusing of its market positioning. Meanwhile, the Bank maintains sufficient liquidity to allow it to exploit opportunities while maintaining its focus on organic growth. The Bank has the ability to finance creditworthy businesses and households, helping in the restoration of the country s economy. The Bank estimates that there is potential and opportunities in various sectors of the economy. The focus of new loans will be companies that increase the competitiveness and productivity of the country, such as in the sectors of commercial activities, tourism, agriculture, European programs and specific projects on energy and shipping. At the same time, loans to the retail sector will be geared toward mortgages, small loans to new customers and supporting current clients who are deemed viable. The high levels of NPEs pose major risks to the stability of the banking system and to the outlook for the economy. Ineffective implementation of the new insolvency and foreclosure legal framework could delay the resumption of healthy credit conditions and robust economic growth. Unavoidably, the high level of NPΕs causes an erosion of the Banks income and may cause additional provisions and effectively reduced profit from ordinary operations. At the same time the Bank recognises that the real estate market which is a significant driver of the provisions for impairment of customer loans continues to be subdued and puts further pressure on the profitability. Within the framework of tackling the Bank s loan portfolio quality the Group is focusing on restructuring loans in a sustainable manner and on mutually beneficial terms. The Board of Directors and the Management of the Bank are taking decisive actions to address the high level of NPEs, including debts to assets swaps, in order to ensure improved performance, sustainable profitability and growth. 25. Correspondent Banks The Bank carries its activities involving foreign currency through correspondent banks for the respective currencies. For the major currencies, the Bank maintains three bank relationships for USD, including one which is a full service relationship servicing all customers, three full bank relationships for GBP, four bank relationships for RUB including two which are a full service relationship, and two full bank relationships for CHF. 44

46 Notes to the Condensed Consolidated Financial Statements 26. Capital Base and Adequacy The Capital Adequacy Ratios of the Group and the Bank as at 30 September 2016 under Pillar I (transitional basis) were as follows: Capital Adequacy Ratios 30 September 2016 Group 30 June December September 2016 Bank 30 June December 2015 Capital Adequacy Ratio 17,66% 17,15% 18,13% 17,61% 17,10% 18,12% Tier 1 Ratio 17,42% 16,90% 17,68% 17,37% 16,85% 17,66% Common Equity Tier 1 (CET 1) 14,37% 13,92% 14,75% 14,33% 13,88% 14,73% The increase in Common Equity Tier 1 Ratio compared to 30 June 2016 was mainly due to the decrease in risk weighted assets (RWA) being driven by balance sheet movement. The decrease in Common Equity Tier 1 Ratio compared to 31 December 2015 was mainly due to: - gradual elimination of transitional provisions towards full phase application of Regulation (EU) No 575/2013 on the calculation of Own Funds (effect of 38 basis points decrease), - increased risk weighting classification due to adoption of the Central Bank of Cyprus s recommendation (5 April 2016) and respective European Banking Authority s (EBA) recommendation, regarding the risk weight to be assigned to high risk exposures (effect of 73 basis points decrease), - decrease in CET1 as a result of the decrease in retained earnings and accumulated other comprehensive income (effect of 16 basis points decrease), - decreased RWA (effect of 89 basis points increase) mainly as a result of the decrease of the investment assets. The Group s RWA amounted to million as at 30 September 2016 (30 June 2016: million, 31 December 2015: million). The additional RWA stemming from the increased risk weighting classification mentioned above, amounted to 214 million (out of the RWA as at 31 December 2015). As at 30 September 2016 the Leverage Ratio for the Group was 9,42% (Bank: 9,40%) compared to 9,24% (Bank: 9,23%) as at 30 June 2016 and 9,05% (Bank: 9,04%) as at 31 December 2015, as calculated in accordance with the Regulation (EU) No 2015/62 of the European Parliament and Council dated 10 th of October The CET 1 ratio on a fully loaded basis for the Group was formed at 13,60% (Bank: 13,55%) compared to 13,18% (Bank: 13,14%) as at 30 June 2016 and 13,53% (Bank: 13,51%) as at 31 December The Leverage Ratio on a fully loaded basis for the Group was formed at 9,17% (Bank: 9,15%) compared to 9,00% (Bank: 8,98%) as at 30 June 2016 and 8,60% (Bank: 8,59%) as at 31 December As from 20 November 2015 the Bank is required to maintain, on a consolidated basis, a CET1 capital ratio of 11,75%, as such ratio is defined in Regulation (EU) No 575/2013 of the European Parliament and of the Council. Notification to ECB is required if the Bank does not, or is likely not to, exceed by 25 basis points the CET1 minimum capital requirement of 11,75% listed in the ECB notification. In addition, the Bank is prohibited from paying out dividends to shareholders until 31 December The decision was based on the Supervisory Review and Evaluation Process (SREP) conducted pursuant to Article 4(1)(f) of Regulation (EU) No 1024/2013 on the information available on 31 December 2014, and any other relevant information received after that date. The supervisory review and evaluation process has been conducted under the lead of the ECB. Refer to note 27 for the minimum capital requirements that are applicable as from 1 January

47 Notes to the Condensed Consolidated Financial Statements 26. Capital Base and Adequacy (continued) The minimum CET 1 ratio set by the ECB for Hellenic Bank Group of 11,75% is covered by the Group s CET1 ratio of 14,37%. The CET 1 ratio of 11,75% includes: (i) the minimum CET 1 ratio required to be maintained at all times under Article 92(1)(a) of Regulation (EU) No 575/2013; (ii) the CET 1 ratio required to be held in excess of that minimum Common Equity Tier 1 ratio and to be maintained at all times in accordance with Article 16(2)(a) of Regulation (EU) No 1024/2013; and (iii) the capital conservation buffer required under Article 129 of Directive 2013/36/EU as implemented in the national law of the Republic of Cyprus. Τhe Bank was designated as an Other Systemically Important Institution (O-SII) 2. On 7 November 2016, CBC notified the Bank that it must maintain an O-SII buffer of 1% of its total risk exposure amount calculated in accordance with Article 92(3) of Regulation (EU) No 575/2013, on an individual and consolidated basis. The O-SII buffer will be phased-in gradually over four years, starting from 1 st January 2019 at 0,25% and increasing by 0,25% every year thereafter, until being fully implemented (1,0%) on 1 st January The O- SII buffer shall consist of and shall be supplementary to CET1. The CBC, in accordance with its macro-prudential policy, has set the counter-cyclical capital buffer at 0%, for the period 1 July 2016 to 30 September 2016 and also for the period 1 October 2016 to 31 December Supervisory Review and Evaluation Process (SREP) In September 2016 the Bank was notified by ECB of its draft decision in establishing prudential requirements. The ECB decision is based on the SREP conducted pursuant to Article 4(1)(f) of Regulation (EU) No 1024/2013 with reference date 31 December 2015, and also having regard to any other relevant information received thereafter. The Bank is required to maintain, on a consolidated basis, an Overall Capital Requirement (OCR) of 14,0%. The OCR includes: the minimum Pillar I own funds requirements of 8% in accordance with Article 92 (1) of CRR (of which the minimum Pillar I capital ratios to be satisfied are Common Equity Tier 1 (CET1) ratio of 4,5%, Tier 1 ratio 6% and total capital ratio 8%), an own funds requirement of 3,5% for Pillar II requirements (to be met with CET1 Capital) and the combined buffer requirement which currently includes the Capital Conservation buffer of 2,5% in accordance with the Cyprus Banking law and in line with the provisions of the CRD IV (to be met with CET 1 capital). Resulting from the above, the Group s minimum CET1, Tier 1 and total capital ratios are set at 10,5%, 12% and 14% respectively. Additionally, the ECB has set an additional Pillar II capital guidance buffer to be kept in the form of CET 1 capital. The new minimum capital requirements shall apply from 1 January These requirements are subject to the final confirmation from ECB, which is expected before the year-end. 28. Bank Recovery and Resolution Directive (BRRD) The Bank within the framework of the Bank Recovery and Resolution Directive (BRRD) is subject to the minimum requirement for own funds and eligible liabilities (MREL). The regulatory authorities are currently in the process of establishing the MREL requirement on a case-by-case basis. 29. Decisions of the Annual General Meeting of the Shareholders of Hellenic Bank Public Company Limited The 42 nd Annual General Meeting ( AGM ) of the Shareholders of the Bank, which was held on Wednesday 25 th May 2016, was attended by 85 shareholders, either physically or by proxy, representing shares, being 78,91% of the issued share capital of the Bank. The AGM examined and approved the Directors Report, the Financial Statements and the Auditors Report for the year ended 31 st December According to the CBC policy on the designation of O-SII institutions and the determination of the O-SII buffer requirement, which is based on the provisions of the Macroprudential Oversight of Institutions Law of 2015 (Law 6(I) of 2015) and the EBA guidelines. 46

48 Notes to the Condensed Consolidated Financial Statements 29. Decisions of the Annual General Meeting of the Shareholders of Hellenic Bank Public Company Limited (continued) Ms Marianna Pantelidou Neophytou, Mr Ioannis A. Matsis, Dr Evripides A. Polykarpou and Mr Andrew Charles Wynn were re-elected as Members of the Board of Directors, following voting by poll. Mr Stephen John Albutt was elected as a new Member of the Board of Directors. The election of Mr. Stephen John Albutt was approved by the Central Bank of Cyprus / European Central Bank and his appointment is effective as from the 21 st of September The AGM examined and approved the Remuneration Policy Report for the year 2015 and fixed the Remuneration of the Directors for the year 2016 at the same level as last year. In accordance with section 153(2) of the Companies Law Cap. 113, and in view of the fact that (i) no notice was received by the Bank for the appointment of another auditor or requesting the removal of the current auditors of the Bank; and (ii) KPMG Limited remain qualified and wish to be reappointed as Auditors of the Bank, KPMG Limited were automatically re-appointed as Auditors of the Bank for The AGM decided that the Board of Directors be authorised to fix the remuneration of the Auditors. The AGM also examined and approved the Amendment of Regulations 1, 57,87, 112, 126 & 127 of the Articles of Association of the Bank and approved a number of special resolutions. The AGM additionally approved, that the Board of Directors is authorised to exercise all powers of the Bank to establish an employee long-term incentive plan and for such purpose allot and/or issue to such employees of the Bank (including, without limitation, executive members of the Board of Directors, other than the Bank s Chief Executive Officer), up to an aggregate of ordinary shares in the Bank of a nominal value of 0,50 each. The long term incentive plan will be a performance-based share plan, with performance-based share awards being granted to employees for the period March 2017 to March Detailed announcement of the decisions of the AGM is available on the Bank s official site Changes in the Bank s organisational structure On the 3 rd of August 2016 the Bank announced the decision of its Chief Financial Officer, Mr Antonis Rouvas, to leave the Bank for personal reasons. The Bank has initiated the process for his replacement in cooperation with international recruitment agencies who specialise in recruiting high caliber professionals. Mr Rouvas will remain in his current position and continue to support the Bank until the completion of the replacement process. The Bank also announced the revision of the Group s organisational structure designed to meet the challenges of the competitive environment and to streamline/empower the Executive Committee, which will comprise of the following members: Henricus Lambertus (Bert) Pijls- Executive Director/Chief Executive Officer, Chairman of the Executive Committee Georgios Fereos-Executive Director/Group General Manager, Group Corporate Development Kyriaki Papadopoulou-Group General Manager, Group Arrears Management Division Phivos Stasopoulos-Group General Manager Business & Insurance George Karageorgis-Group General Manager, Retail & International Banking Vladislav Botic-Chief Operating Officer Antonis Rouvas (until his replacement)-chief Financial Officer Stefano Capodagli-Chief Risk Officer (as of September 2016) Mr. Nicos Hadjimarkou took over CEO/Single Mechanism Office in September The heads of the independent control functions (risk management, internal audit, compliance and information security) continue to report to the relevant Board Committees. 47

49 Notes to the Condensed Consolidated Financial Statements 31. Events after the reporting period European Deposit Insurance Scheme (EDIS) As of 1 st of January 2016, the European Union within the Banking Union framework has put forward a third pillar, a deposit insurance scheme (EDIS-European Deposit Insurance Scheme) which will gradually take over the national depositors quarantee scheme. The first pillar of the Banking Union consists of a common framework for supervision of banks implemented by the Single Supervisory Mechanism (SSM); the second pillar consists of a common framework for bank resolution implemented by the Single Resolution Mechanism (SRM). The SRM provides that the Single Resolution Fund (SRF) will be built up over a period of 8 years with 'ex-ante' contributions from the banking industry. Currently, in case of a bank failure, the EU legislation ensures that all deposits up to are protected, through their national deposit guarantee scheme (DGS). However, national DGS can be vulnerable to national bank crisis. EDIS provides a stronger and more uniform degree of insurance cover for all retail depositors in the Banking Union, ensuring that the depositors confidence will be protected even if the entire nation is under stress. Currently, all Member States have deposit guarantee schemes as the Deposit Guarantee Scheme Directive requires all deposit-taking banks in the EU to be a member of a national DGS. National schemes would continue to co-exist alongside EDIS. EDIS would be established in three sequential stages: The first stage would be a re-insurance scheme and would apply for 3 years until In this stage, a National Guarantee Scheme will have access to EDIS funds only after exhausting its own resources. EDIS funds will provide extra funds only up to a certain level. In order to limit moral hazard and avoid first-mover advantages, a DGS can only benefit from EDIS in this stage if it has met its requirements and filled its national fund to the required level, and only if those funds have been fully depleted. The second stage would be a co-insurance scheme and would apply for 4 years until For this phase, a national scheme would not have to be exhausted before accessing EDIS. EDIS will contribute from first euro of loss and would absorb a progressively larger share of any losses over the 4-year period in the event of a pay-out or resolution procedure. Access to EDIS would continue to be dependent on compliance by national DGS with the required funding levels. In the final stage, EDIS would fully insure deposits and would cover all liquidity needs and losses in the event of a pay-out or resolution procedure. Based on the above developments, the Bank received on the 28 th April 2016 a notification from the CBC stating that its 2016 contribution to SRF amounted to 3,1 million and was payable until 27 June The 2016 annual contribution was paid by the Ministry of Finance from the annual contributions payable by credit institutions for the special levy imposed in accordance with the provisions of Special Levy on Credit Institutions Law of 2011 to Regarding this ex ante contribution, a draft Law was subimitted which amended Article 5 "Declaration and tax payment" by adding a new paragraph providing for the deduction of the amount of contributions to the National Resolution fund and to the Single Resolution Fund from the amount of special levy. Also, the draft Law amended Article 13 "Transfer of revenue derived from the imposition of special levy to the Recapitalisation Fund" in order to transfer the revenue from the special levy to the Recapitalisation Fund, each year, until the amount of 175 million euros is collected (which will be used for the settlement of an equivalent loan advanced from the Republic of Cyprus for the recapitalization of Cooperative Central Bank). During November 2016, the above Draft Law with subject Special Levy on Credit Institutions Law (Amended) 2016 was presented before the House of Representatives were it was voted against by the majority. Listing at the Cyprus Stock Exchange new ordinary shares On the 24 th of November 2016 the Bank announced the listing of new ordinary shares which were issued to the Chief Executive Officer as part of his variable remuneration. Detailed announcement is available on the Bank s official site 48

50 Notes to the Condensed Consolidated Financial Statements 32. Approval of Financial Statements The Condensed Consolidated nine-month Financial Statements were approved by the Board of Directors on the 28 th of November

51 COMMENTARY Group Results for the nine-month period ended 30 September November 2016 Building a stronger bank, by making further progress in our strategic priorities 9M 2016 financial performance summary Profit before provisions of 78,3 million, up by 26% compared to 9M 2015 Profit after tax from continuing operations of 5,0 million, compared to 1,9 million for 9M 2015 Profit attributable to the Bank s shareholders at 4,5 million, compared to 6,1 million for 9M Strong and liquid balance sheet Common Equity Tier 1 (CET 1) ratio bolstered by 45 basis points during 3Q2016 to 14,37%, resulting in to a total capital adequacy ratio of 17,66%; Capital ratios significantly above minimum regulatory requirements as confirmed by the draft Supervisory Review and Evaluation Process (SREP) Ample liquidity reflecting a solid deposit franchise; Low ratio of loans to deposits of 50% enables business expansion Executing the Fix and Build strategy Non-performing exposures (NPEs) reduced for the fourth consecutive quarter to million (down by 11% YoY), their lowest level post December 2014 NPEs ratio reduced to 57,1%, compared to 61,2% a year earlier NPEs provision coverage at 50%, while taking into account tangible collateral, overall NPEs coverage increases to 112% High loan restructuring activity, with 490 million of restructurings 2 during 9M 2016 Improving lending momentum, with 240 million of new lending approved during 9M 2016 Increased net interest margin of 2,1%, compared to 2,0% of December 2015 Commenting on the Group s financial results, Mr. Bert Piljs, the Group s Chief Executive Officer, stated: We have made further progress executing our strategic priorities in the third quarter of We reduced NPEs for a fourth consecutive quarter to their lowest level post December We completed almost half a billion of restructurings during the first three quarters of 2016 and the loan restructuring momentum remains strong, with an increased number of restructuring agreements in the pipeline. We continue to explore all available options in an effort to decisively address problematic loans, using a tool case of sustainable solutions such as debt to asset swaps, balance reductions, maturity extensions, grace periods, instalment reductions and servicing support. We bolstered the Group s CET1 ratio by 45 basis points to 14,37% due to lower risk weighted assets and organic capital generation, and the Group s capital ratios are comfortably above the minimum regulatory requirements. We recorded profits for a third consecutive quarter in 2016, with profit after tax for 3Q2016 of 3,9 million. A very low loans to deposits ratio enables our lending expansion and about 240 million loans were approved since the beginning of the year, supporting creditworthy households and businesses. 1 9M 2015 profit attributable to the Bank s shareholders included a one-off amount of 4,8 million relating to the discontinued operations. 2 As per European Bank Authority (EBA) definition - client basis. Commentary - Group Results for the nine-month period ended 30 September

52 1. RESULTS OVERVIEW Profit for the nine-month period ended 30 September 2016 amounted to 5,0 million (9M-2015: 6,7 million). Profit from ordinary operations before impairment losses and provisions to cover credit risk for the nine-month period ended 30 September 2016 amounted to 78,3 million, registering an increase of 26% compared to 62,0 million for the respective nine-month period of The increase was mainly due to the 14,0 million gain from the disposal of the Visa Europe Limited shares included in 2Q2016. The one off Visa shares gain was the main reason for the 46% decrease on a Quarter on Quarter basis (QoQ), where profitability before impairment losses and provisions to cover credit risk reached 19,6 million in 3Q2016 and 36,0 million in 2Q2016. Adjusting the profit before impairment losses and provisions to cover credit risk of 2Q2016 to exclude the one off gain on disposal, the reduction in profitability is 11%. Income Statement ( 000) 9M M Q2016 2Q2016 QoQ 1Q2016 Profit from ordinary operations before impairment losses and provisions to cover credit risk % % Taxation (9.248) (981) +843% (351) (8.453) -96% (444) Profit for the period from continuing operations % % 692 Profit from discontinued operations % % - Profit for the period % % 692 Profit attributable to the shareholders of the parent company % % 335 Profit attributable to the Bank s shareholders for the nine-month period ended 30 September 2016 amounted to 4,5 million and included a charge of derecognised deferred tax asset of 8,5 million arising from tax losses which was posted in 2Q2016. In the nine-month period ended 30 September 2015, profit attributable to the Bank s shareholders amounted to 6,1 million and included a profit of 4,8 million from discontinued operations that related to the disposal of a building owned by the Group in Moscow, following the sale of its Russian banking subsidiary in INCOME STATEMENT 2.1 Net interest income (NII) Net Interest Income ( 000) 9M M Q2016 2Q2016 QoQ 1Q2016 Interest income % % Interest expense (28.079) (49.994) -44% (9.312) (9.597) -3% (9.170) Net interest income % % Net interest income for the nine-month period ended 30 September 2016 reached 110,7 million, recording a 2% increase compared to the corresponding period ended 30 September The substantial decrease in interest expense due to the decrease of deposit rates in 2016 compared to 2015, had a positive impact on the net interest income. Reduction in interest income is mainly due to lower lending rates and due to the decreased balance of the impaired portfolio. Net interest income in 3Q2016 was lower by 3% compared to 2Q2016, mainly due to the decreased unwinding of discount on the impaired portfolio in 3Q2016. The Group s net interest margin for the nine-month period ended 30 September 2016 amounted to 2,1% (9M-2015: 2,0%). Commentary - Group Results for the nine-month period ended 30 September

53 2.2 Non-interest income Non-interest Income ( 000) 9M M Q2016 2Q2016 QoQ 1Q2016 Net fee and commission income % % Net gain on disposal and revaluation of foreign currencies and financial instruments % % Other income % % Total non-interest income % % Total non-interest income for the nine-month period ended 30 September 2016 amounted to 75,4 million, recording an increase of 11% compared to the corresponding period ended 30 September This increase was mainly due to the increase in Net gain on disposal and revaluation of foreign currencies and financial instruments which is explained with the gain of 14,0 million from the disposal of the shares in Visa Europe Limited included in the nine-month period ended 30 September Excluding the gain of 14,0 million, net gain on disposal and revaluation of foreign currencies and financial instruments amounted to 10,7 million and is in line with the corresponding period ended 30 September Net fee and commission income for the nine-month period ended 30 September 2016 amounted to 37,2 million and recorded a decrease of 12% compared to the nine-month period ended 30 September The decrease was mainly due to lower card interchange fees and reduced commission income from incoming and outgoing payments in the international business division due to the Bank s efforts to reposition the said business. Total non-interest income in 3Q2016 amounted to 19,1 million and decreased by 44% compared to the 34,3 million of 2Q2016, which was boosted by the one-off gain of 14,0 million from the disposal of the shares in Visa Europe Limited. 2.3 Expenses Expenses ( 000) 9M M Q2016 2Q2016 QoQ 1Q2016 Staff costs % % Administrative and other expenses % % Depreciation and amortisation % % Total expenses % % The total expenses for the nine-month period ended 30 September 2016 amounted to 107,8 million, down by 6% compared to the 114,2 million of the respective nine-month period ended 30 September 2015, mainly due to decreases in administrative and other expenses. Total expenses for 3Q2016 amounted to 35,5 million in line with 2Q2016. Staff costs for the nine-month period ended 30 September 2016 represented the 56,8% of the Group s total expenses (30 September 2015: 52,2%), showing an increase of 3% compared to the respective nine-month period ended 30 September The increase was mainly due to the increase in the number of employees from to 1.630, mainly due to recruitment of additional employees at the Arrears Management, Corporate Development and Risk Management Unit. Staff costs for 3Q2016 represented 57,8% (2Q2016: 57,0%) of the Group s total expenses showing 2% increase compared to 2Q2016. Total administrative and other expenses for the nine-month period ended 30 September 2016 amounted to 42,2 million, down by 17% compared to the 51,0 million for the corresponding nine-month period ended 30 September The decrease was mainly due to lower cost of advisory services and lower charge for provisions for pending litigations or complaints (about 5,5 million for the nine-month period ended 30 September 2016, compared to 14,2 million for the period ended 30 September 2015). Commentary - Group Results for the nine-month period ended 30 September

54 The administrative and other expenses for 3Q2016 amounted to 13,4 million, showing a decrease of 2% compared to the 13,7 million of 2Q2016, which 2Q2016 were affected by the one-off penalty 3 of 1 million imposed by the Central Bank of Cyprus (CBC). During 3Q2016, the administrative and other expenses included cost of advisory services of 1,9 million (2Q2016: 1,1 million) and provisions for pending litigations or complaints of 0,1 million (2Q2016: 0,4 million). The cost to income ratio for the nine-month period ended 30 September 2016 was 57,9%, compared to the 64,8% for the nine-month period ended 30 September For 3Q2016, the cost to income ratio was 64,5% compared to 49,5% in 2Q2016. Adjusting for the gain on disposal of the Visa Europe Limited shares, the cost to income ratio for the nine-month period ended 30 September 2016 was 62,6% (30 September 2015: 64,8%) and for 2Q2016 was 61,6%. 2.4 Impairment losses and provisions to cover credit risk Impairment losses and provisions ( 000) 9M M Q2016 2Q2016 QoQ 1Q2016 Impairment losses on the value of loans and advances Provisions to cover credit risk for contractual commitments and guarantees % % (2.570) % % (3.711) Total impairment losses and provisions % % For the nine-month period ended 30 September 2016, the total provision charge for impairment losses to cover credit risk amounted to 64,1 million showing an increase of 8% in comparison to the respective nine-month period ended 30 September The provision charge for impairment losses to cover credit risk for 3Q2016 amounted to 15,4 million, down by 43% on a QoQ basis. The decrease was mainly attributable to the decreasing balance of the impaired portfolio and to the increase in the value of the tangible collateral. The cost of risk for the nine-month period ended 30 September 2016 was 2,1% (FY2015: 2,3%, 9M-2015: 1,8%). 3. STATEMENT OF FINANCIAL POSITION As at 30 September 2016, the Group s total assets amounted to 7,0 billion, down by 5% compared to 31 December This was mainly due to the decrease in cash and balances with Central Banks and more specifically due to the decrease in the Bank s placement with European Central Bank (ECB) by 60 million, decrease in deposits with other banks as well as the decrease of the loans. 3.1 Deposits and Loans The Bank maintained a net loans to deposits ratio of 50,0% as at 30 September 2016 (31 December 2015: 50,4%) Deposits Customer deposits amounted to 6,0 billion as at 30 September 2016 (31 December 2015: 6,1 billion). They comprised of 4,5 billion deposits in Euro and 1,5 billion deposits in foreign currencies, mostly US Dollars. Trends in customer deposits reflect the Bank s strategy to maintain a low cost of deposits taking into account the Bank s strong liquidity position with excess customer deposits. The Bank s deposits market share 4 as at 30 September 2016 was 12,7% (31 December 2015: 13,5%). 3 CBC financial penalty relating to controls omissions and weaknesses in the implementation of due diligence measures and customer identification procedures identified in 2014 and related to preceding years. The penalty does not relate to any identification of incidents of suppression of proceeds from any illegal activities. Hellenic Bank has made significant progress in rectifying these issues, following an independent review and subsequent restructuring of part of its business initiated since 2014 and overseen by the Board of Directors. At the same time, the Bank is continuing repositioning its International Banking Division strategy reflecting the changing regulatory environment with specific focus on anti-money laundering issues. 4 Source: Central Bank of Cyprus and Hellenic Bank. Commentary - Group Results for the nine-month period ended 30 September

55 The composition of the customer deposits portfolio by currency was as follows: Deposits by currency 30 September June December 2015 Euro 76% 75% +100 bps 73% +300 bps US Dollars 21% 21% - 23% -200 bps GBP 2% 2% - 2% - Rubles 1% 1% - 1% - Other currencies 0% 1% -100 bps 1% -100 bps The composition of the customer deposits portfolio by deposit category was as follows: Composition of customer deposits portfolio 30 September June December 2015 Demand Deposits 48% 48% - 49% -100 bps Time Deposits 39% 40% -100 bps 39% - Savings Deposits 10% 9% +100 bps 9% +100 bps Notice Deposits 3% 3% - 3% - The composition of the customer deposits portfolio based on the customer s country of origin was as follows: Deposits by depositors country of origin 30 September June December 2015 Cyprus 52% 52% - 50% +200 bps Russia 19% 20% -100 bps 23% -400 bps Other countries of European Union 16% 16% - 16% - Other European countries 7% 7% - 6% +100 bps Other countries 6% 5% +100 bps 5% +100 bps Loans Total new lending for the nine-month period ended 30 September 2016 reached 240,5 million (30 June 2016: 152,0 million). The Bank continued providing lending to creditworthy businesses and households while examining other growth opportunities. Gross loans as at 30 September 2016 amounted to million (31 December 2015: million) recording a decrease of 5% from 31 December As of 1 st January 2016, gross values of impaired loans are booked on a non interest accrual basis, whereas in previous years gross impaired loans included contractual interest accrued. The amount of contractual interest that was not accrued for the nine-month period ended 30 September 2016 amounted to 128,6 million. During the nine-month period ended 30 September 2016 exposures of 129,5 million were written off. Adjusting for this amount, gross loans suggest a decrease of 2% compared to 31 December The Bank s loan market share 5 as at 30 September 2016 was 7,7% (31 December 2015: 7,0%). The composition of the loans and advances to customers was as follows (net of provisions for impairment): Composition of loan portfolio 30 September June December 2015 Retail 30% 29% +100 bps 30% - Construction and Real Estate 24% 24% - 24% - Other 16% 17% -100 bps 17% -100 bps Trade 16% 15% +100 bps 15% +100 bps Manufacturing 7% 7% - 7% - Tourism 7% 8% -100 bps 7% - 5 Source: Central Bank of Cyprus and Hellenic Bank. Commentary - Group Results for the nine-month period ended 30 September

56 3.2 Loan Portfolio Quality Non Performing Exposures Non-Performing Exposures (NPEs)* (in million) 30 September June December % % NPEs (%) of gross loans 57,1% 57,7% -60 bps 59,2% -210 bps Coverage ratio 49,9% 50,2% -25 bps 50,1% -13 bps *In FY2015 NPEs include suspended interest not recognised in the income statement. Committed efforts to resolve problematic loans continued. The level of NPEs has been reduced for a fourth consecutive quarter to million at 30 September 2016, down by 4% compared to 30 June 2016 and by 8% compared to 31 December Terminated loans included in NPEs amounted to million as at 30 September 2016 (31 December 2015: million). Gross loans with forbearance measures as at 30 September 2016 amounted to million (31 December 2015: million). During the nine-month period ended 30 September 2016 the Bank continued focusing on the restructuring of NPEs, using a toolset of sustainable solutions, such as debt to asset swaps, balance/instalment reductions, extensions of maturity, grace periods, servicing support, etc. An amount of 489,6 million 6 relating to total customers exposures, was restructured during the nine-month period ended 30 September 2016, while an amount of 129,5 million was written off as part of the whole curing process. The stock of properties held for sale, which are mostly from customers debt settlement, amounted to 73,4 million as at 30 September 2016 (30 June 2016: 70,4 million, 31 December 2015: 71,2 million). The ratio of NPEs to gross loans as at 30 September 2016 was reduced to 57,1% (30 June 2016: 57,7%, 31 December 2015: 59,2%). Including the contractual interest on impaired loans not accrued of 128,6 million, the ratio of NPEs to gross loans was 58,4% (30 June 2016: 58,5%). Accumulated impairment losses 7, amounted to million as at 30 September 2016 (30 June 2016: million, 31 December 2015: million) and represented 28,5% of the total gross loans (30 June 2016: 29,0%, 31 December 2015: 29,6%). The coverage of the NPEs by provisions 7 (coverage ratio) was 49,9% as at 30 September 2016 (30 June 2016: 50,2%, 31 December 2015: 50,1%), with the overall coverage taking into account tangible collaterals 8 totalling 111,9%. 6 As per EBA definition - client basis. 7 Individual and collective impairment losses. 8 Based on open market values (capped at client exposure). Commentary - Group Results for the nine-month period ended 30 September

57 The NPEs as at 30 September 2016 based on the counterparty sector are analysed below: Analysis of Non-Performing Exposures (NPEs) 30 September 2016 Provisions Coverage (% of NPEs) 30 June December 2015 million % of total million % of total million % of total Total Non-Performing Exposures % 50% % % of which Non-financial corporations: % 48% % % Construction % 42% % % Wholesale and retail trade % 56% % % Real estate activities 159 7% 47% 168 7% 181 7% Accommodation and food service activities 139 6% 40% 154 6% 181 7% Manufacturing 106 4% 50% 116 5% 117 5% Other sectors % 55% % 243 9% of which Households: % 55% % % of which Residential mortgage loans 227 9% 39% % % of which Credit for consumption 138 6% 76% 138 6% 143 5% Note: Numbers may not add up due to rounding 3.3 Investment Assets The total value of investment assets amounted to 3,7 billion (31 December 2015: 4 billion) and represented 52,9% of the total assets of the Group at 30 September 2016 (31 December 2015: 54,2%). Investment assets are comprised of cash and balances with Central Banks, placements with other banks, investments in bonds, investments in shares and collective investment units. The Group s cash and placements with other banks and Central Banks amounted to 2,7 billion at 30 September 2016 (31 December 2015: 2,9 billion), and included a placement of 1,9 billion with the European Central Bank (31 December 2015: 1,9 billion). Most foreign currency placements were with P1 rated banks 9. The Group s investments in bonds amounted to 1,0 billion (31 December 2015: 1,0 billion) at 30 September 2016, which represented 14,3% of total assets (31 December 2015: 14,1%). They comprised mainly of Cyprus Government Bonds and supranational organisations debt securities. The 42% of debt securities were Aaa rated 10. The Cyprus Government bonds held by the Group at 30 September 2016 amounted to 550 million (31 December 2015: 394 million) of which 374 million will mature within 5 and 10 years, 40 million within 1 and 5 years and the remaining 136 million within a period of less than 1 year. At 30 September 2016, the carrying amount of investments in bonds, based on their issuer, is analysed as follows: Investment in Bonds - m Governments Bonds - m Other Cyprus Supranational USA - 82 Canada - 13 Germany - 20 Banks64 Government 690 Netherlands - 19 Israel Prime-1 short term rating by Moody s. 10 Moody s ratings or Moody s ratings equivalents - based on the Regulation (EU) 575/2013 (CRR) and the Directive 2013/36/EU (CRD IV) for the RWA calculation (as per Section 4, Article 138 of the regulation). Commentary - Group Results for the nine-month period ended 30 September

58 3.4 Capital Base and Adequacy The Capital Adequacy Ratios of the Group and the Bank as at 30 September 2016 under Pillar I (transitional basis) were as follows: Capital Adequacy Ratios 30 September 2016 Group 30 June December September 2016 Bank 30 June December 2015 Capital Adequacy Ratio 17,66% 17,15% 18,13% 17,61% 17,10% 18,12% Tier 1 Ratio 17,42% 16,90% 17,68% 17,37% 16,85% 17,66% Common Equity Tier 1 (CET 1) 14,37% 13,92% 14,75% 14,33% 13,88% 14,73% The increase in Common Equity Tier 1 Ratio compared to 30 June 2016 was mainly due to the decrease in risk weighted assets (RWA) being driven by balance sheet movement. The decrease in Common Equity Tier 1 Ratio compared to 31 December 2015 was mainly due to: - gradual elimination of transitional provisions towards full phase application of Regulation (EU) No 575/2013 on the calculation of Own Funds (effect of 38 basis points decrease), - increased risk weighting classification due to adoption of the Central Bank of Cyprus s recommendation (5 April 2016) and respective EBA s recommendation, regarding the risk weight to be assigned to high risk exposures (effect of 73 basis points decrease), - decrease in CET1 as a result of the decrease in retained earnings and accumulated other comprehensive income (effect of 16 basis points decrease), - decreased RWA (effect of 89 basis points increase) mainly as a result of the decrease of the investment assets. The Group s RWA amounted to million as at 30 September 2016 (30 June 2016: million, 31 December 2015: million). The additional RWA stemming from the increased risk weighting classification mentioned above, amounted to 214 million (out of the RWA as at 31 December 2015). As at 30 September 2016 the Leverage Ratio for the Group was 9,42% (Bank: 9,40%) compared to 9,24% (Bank: 9,23%) as at 30 June 2016 and 9,05% (Bank: 9,04%) as at 31 December 2015, as calculated in accordance with the Regulation (EU) No 2015/62 of the European Parliament and Council dated 10 th of October The CET 1 ratio on a fully loaded basis for the Group was formed at 13,60% (Bank: 13,55%) compared to 13,18% (Bank: 13,14%) as at 30 June 2016 and 13,53% (Bank: 13,51%) as at 31 December The Leverage Ratio on a fully loaded basis for the Group was formed at 9,17% (Bank: 9,15%) compared to 9,00% (Bank: 8,98%) as at 30 June 2016 and 8,60% (Bank: 8,59%) as at 31 December As from 20 November 2015 the Bank is required to maintain, on a consolidated basis, a CET 1 capital ratio of 11,75%, as such ratio is defined in Regulation (EU) No 575/2013 of the European Parliament and of the Council. Notification to ECB is required if the Bank does not, or is likely not to, exceed by 25 basis points the CET1 minimum capital requirement of 11,75% listed in the ECB notification. In addition, the Bank is prohibited from paying out dividends to shareholders until 31 December The decision was based on the Supervisory Review and Evaluation Process (SREP) conducted pursuant to Article 4(1)(f) of Regulation (EU) No 1024/2013 on the information available on 31 December 2014, and any other relevant information received after that date. The supervisory review and evaluation process has been conducted under the lead of the ECB. Refer to paragraph 3.5 for the minimum capital requirements that are applicable as from 1 January Commentary - Group Results for the nine-month period ended 30 September

59 The minimum CET 1 ratio set by the ECB for Hellenic Bank Group of 11,75% is covered by the Group s CET1 ratio of 14,37%. The CET 1 ratio of 11,75% includes: (i) the minimum CET 1 ratio required to be maintained at all times under Article 92(1)(a) of Regulation (EU) No 575/2013; (ii) the CET 1 ratio required to be held in excess of that minimum Common Equity Tier 1 ratio and to be maintained at all times in accordance with Article 16(2)(a) of Regulation (EU) No 1024/2013; and (iii) the capital conservation buffer required under Article 129 of Directive 2013/36/EU as implemented in the national law of the Republic of Cyprus. Τhe Bank was designated as an Other Systemically Important Institution (O-SII) 11.On 7 November 2016, CBC notified the Bank that it must maintain an O-SII buffer of 1% of its total risk exposure amount calculated in accordance with Article 92(3) of Regulation (EU) No 575/2013, on an individual and consolidated basis. The O- SII buffer will be phased-in gradually over four years, starting from 1 st January 2019 at 0,25% and increasing by 0,25% every year thereafter, until being fully implemented (1,0%) on 1 st January The O-SII buffer shall consist of and shall be supplementary to CET1. The CBC, in accordance with its macro-prudential policy, has set the counter-cyclical capital buffer at 0%, for the period 1 July 2016 to 30 September 2016 and also for the period 1 October 2016 to 31 December Supervisory Review and Evaluation Process (SREP) In September 2016, the Bank was notified by ECB of its draft decision in establishing prudential requirements. The ECB decision is based on the SREP conducted pursuant to Article 4(1)(f) of Regulation (EU) No 1024/2013 with reference date 31 December 2015, and also having regard to any other relevant information received thereafter. The capital ratios of the Group, are significantly above minimum regulatory requirements based on the draft SREP as shown below: Capital Adequacy Ratios 30 September 2016 Draft SREP Capital cushion Capital Adequacy Ratio 17,66% 14,00% +3,66% Tier 1 Ratio 17,42% 12,00% +5,42% Common Equity Tier 1 (CET 1) 14,37% 10,50% +3,87% Additionally, the ECB has set an additional Pillar II capital guidance buffer to be kept in the form of CET 1 capital. The new minimum capital requirements shall apply from 1 January These requirements are subject to the final confirmation from ECB, which is expected before the year-end Bank Recovery and Resolution Directive (BRRD) The Bank within the framework of the Bank Recovery and Resolution Directive (BRRD) is subject to the minimum requirement for own funds and eligible liabilities (MREL). The regulatory authorities are currently in the process of establishing the MREL requirement on a case-by-case basis. 11 According to the CBC policy on the designation of O-SII institutions and the determination of the O-SII buffer requirement, which is based on the provisions of the Macroprudential Oversight of Institutions Law of 2015 (Law 6(I) of 2015) and the EBA guidelines. Commentary - Group Results for the nine-month period ended 30 September

60 4. STRATEGIC TARGETS AND OUTLOOK The Bank s strategy focuses on two aspects: Fix and Build. The Fix aspect of the strategy predominantly relates to the reduction of the high level of NPEs. The Build aspect of the strategy relates to the growth of the loan portfolio and furthering the customer relationships, be those of deposit or lending nature. It also relates to advancements in technology and enhancement of the customer service, as well as simplification of procedures and processes. The Bank is continuing repositioning its International Banking Division strategy reflecting the changing regulatory environment with specific focus on anti-money laundering issues. Further, in order to meet the challenges of the competitive environment and streamline/empower the Executive Committee, the Bank revised its Group organisational structure. The economy has been exhibiting robust growth since the beginning of 2016, with real GDP growth increasing by 2,8% on an annual basis during 3Q2016. The better than expected performance of the economy, along with the gradual restructuring of the banking sector, created and maintained an environment of improved confidence. The rise in deposits for the banking system as a whole, combined with deleveraging of the market, results in a declining loan-to-deposit ratio, suggesting positive effects on growth of the economy. From a sectoral point of view, growth in 2016 is particularly driven by the tourism sector, which performed particularly well throughout 2016, along with a continued strong growth in the business and professional services sectors. The course of the steady recovery path is reflected in the labour market, which tends to follow the recovery with a time lag, and consolidates the climate of confidence and stability. The above developments are reflected in the recent upgrades of the country s and the largest domestic banks credit rating by international rating agencies. At the same time, the high percentage of NPEs remains the biggest challenge for the banking sector and the economy at large, since the successful strategic reduction in their levels will reduce the additional burden on the profitability of the banks, with all the positive consequences stemming from this for the financial system itself and the economy. It is encouraging that the first positive results from the application of all relevant actions are becoming visible. As part of implementing its strategic targets, the Group is focused on supporting the economy s recovery and contributing towards sustainable economic growth. The Bank maintains sufficient liquidity to exploit opportunities while maintaining its focus on organic growth. In order to undertake this, a key priority is to address the high level of NPEs, which continue to affect the Group s interest income and to pressure profitability through elevated provisions. At the same time the Bank recognises that the real estate market continues to be subdued, with changes in property prices affecting collateral values and, hence, provisions for impairments. The economic recovery is expected to accelerate the pace of tackling NPEs. Within the framework of tackling the Bank s loan portfolio quality, the Group is focusing on restructuring loans in a sustainable manner and on mutually beneficial terms using a toolset of sustainable solutions, such as debt to asset swaps, balance/instalment reductions, extensions of maturity, grace periods, servicing support, etc. The Bank has managed to navigate successfully through the banking crisis. It has maintained throughout the crisis its reputation for stability and trust and is concentrating on strengthening and better focusing of its market positioning. Through its focus on its Fix and Build initiatives, the Group has all the ingredients to continue the implementation of its strategy. At the same time the environment remains fragile and volatile and the Bank will remain vigilant of developments to turn them into opportunities both in Cyprus and internationally. Commentary - Group Results for the nine-month period ended 30 September

61 5. APPENDIX GROUP INCOME STATEMENT ( million) 9M M Q2016 2Q2016 QoQ 1Q2016 Interest income 138,8 158,2-12% 45,3 46,6-3% 46,9 Interest expense (28,1) (50,0) -44% (9,3) (9,6) -3% (9,2) Net interest income 110,7 108,2 +2% 36,0 37,0-3% 37,7 Fee and commission income 40,6 45,8-11% 13,0 13,4-4% 14,2 Fee and commission expense (3,4) (3,6) -3% (1,1) (1,1) -4% (1,2) Net fee and commission income 37,2 42,2-12% 11,9 12,3-4% 13,0 Net gains on disposal and revaluation of foreign currencies and financial instruments 24,7 11,0 +124% 3,9 17,0-77% 3,7 Other income 13,5 14,7-8% 3,3 5,0-34% 5,3 Total net income 186,1 176,2 +6% 55,1 71,3-23% 59,7 Staff costs (61,2) (59,6) +3% (20,5) (20,1) +2% (20,6) Depreciation and amortisation (4,4) (3,6) +22% (1,5) (1,4) +7% (1,4) Administrative and other expenses (42,2) (51,0) -17% (13,5) (13,7) -2% (15,0) Total expenses (107,8) (114,2) -6% (35,5) (35,3) +1% (37,0) Profit from ordinary operations before impairment losses and provisions to cover credit risk Impairment losses and provisions to cover credit risk 78,3 62,0 +26% 19,6 36,0-46% 22,7 (64,1) (59,1) +8% (15,4) (27,2) -43% (21,6) Profit before taxation 14,2 2,9 +396% 4,2 8,9-53% 1,1 Taxation (9,2) (1,0) +843% (0,4) (8,5) -96% (0,4) Profit for the period from continuing 5,0 1,9 +163% 3,9 0,4 +836% 0,7 operations Profit for the period from discontinued 4,8-100% operations after tax Profit for the period 5,0 6,7-26% 3,9 0,4 +836% 0,7 Non-controlling interest (0,5) (0,6) -21% (0,1) (0,0) +119% (0,4) Profit attributable to the shareholders of the parent company 4,5 6,1-27% 3,8 0,4 +917% 0,3 Note: Numbers may not add up due to rounding Key performance Indicators 30 September December June 2016 Common Equity Tier 1 (CET 1) 14,37% 14,75% -38 bps 13,92% +45 bps Non performing Exposures (NPEs) (%) of gross loans 57,1% 59,2% -210 bps 57,7% -60 bps Coverage ratio 49,9% 50,1% -13 bps 50,2% -25 bps Net Interest Margin 2,1% 2,0% +13 bps 2,1% +1 bps Cost to income ratio 57,9% 59,3% // 12 55,2% +275 bps Cost to income ratio adjusted 13 62,6% n/a n/a 61,8% +86 bps 12 //: Non-comparable. 13 Cost to income ratio adjusted to exclude the 14 million profit from the sale of the investment in Visa Europe Limited. Commentary - Group Results for the nine-month period ended 30 September

62 5. APPENDIX GROUP STATEMENT OF FINANCIAL POSITION ( million) 30 September December 2015 Cash and balances with Central Banks % Placements with other banks % Loans and advances to customers % Debt securities % Equity securities and collective investment units % Property, plant and equipment % Intangible assets % Tax receivable % Deferred tax asset % Other assets % Total assets % Deposits by banks % Amounts due to Central Banks % Customer deposits and other customer accounts % Tax payable % Deferred tax liability % Other liabilities % Loan capital % Share capital % Reserves % Non-controlling interest % Total liabilities and equity % Contingent liabilities and commitments % Note: Numbers may not add up due to rounding Basic Financial Position highlights ( million) 30 September December June 2016 Gross loans % % Loans (net of provisions for impairment) % % Investment assets % % Total assets % % Deposits % % Shareholders Funds % % Risk Weighted Assets (RWA) % % Notes to the Group results for the nine-month period ended 30 September 2016: The Condensed Consolidated Financial Statements for the nine-month period ended 30 September 2016 have not been audited by the external auditors of the Group. The Condensed Consolidated Financial Statements and the presentation of the financial results for the nine-month period ended 30 September 2016 have been posted on the Group s website on the internet at the page (Investor Relations). Commentary - Group Results for the nine-month period ended 30 September

63 Hellenic Bank: Building a stronger bank, by making further progress in our strategic priorities Non-performing exposures (NPEs) reduced for the fourth consecutive quarter (down by 11% YoY) NPEs ratio reduced to 57,1%, compared to 61,2% a year earlier Profit from continuing operations 5,0 million, compared to 1,9 million for 9M million of restructurings during 9M million of new lending approved during 9M 2016 Common Equity Tier 1 (CET 1) ratio bolstered by 45 basis points during 3Q 2016 to 14,37%, resulting in a total capital adequacy ratio of 17,66%, well above the minimum regulatory requirement Hellenic Bank was profitable for the third consecutive quarter during 2016, reporting a profit from continuing operations of 5,0 for the nine-month period ended 30 September The Bank is supporting the recovery of Cyprus economy and approved 240 million of new lending during the first nine months of During the same period, the Bank also completed further restructurings of 490 million. Overall, the Bank is on the right track, and this is proven by the strong capital adequacy ratio of 17,66%. NPEs Committed efforts to resolve problematic loans continued. The level of NPEs has been reduced for a fourth consecutive quarter to million at 30 September 2016, down by 4% compared to 30 June 2016 and by 8% 1

64 compared to 31 December The ratio of NPEs to gross loans as at 30 September 2016 was reduced to 57,1% (30 June 2016: 57,7%, 31 December 2015: 59,2%, 30 September 2016: 61,2%). Strong Capital Position The Group maintains robust capital adequacy ratios, above the minimum required by the relevant Regulatory Authorities. As at 30 th September 2016, the Common Equity Tier 1 (CET 1) ratio stood at 14,37%, compared to the minimum CET 1 ratio of 10,50% set by the ECB (as per draft SREP). At 30 September 2016, the Group s Capital Adequacy Ratio was 17,66% and the Tier 1 ratio was 17,42%. Strong Liquidity During the first nine months of 2016 the Group maintained its strong liquidity position. The net loan to deposits ratio stood at 50% as at 30 th September On 30 th September 2016, total deposits amounted to 6,0 billion while total gross loans reached 4,2 billion. Expenses The total expenses for the nine-month period ended 30 September 2016 amounted to 107,8 million, down by 6% compared to the 114,2 million of the respective nine-month period ended 30 September 2015, mainly due to decreases in administrative and other expenses. The cost to income ratio for the nine-month period ended 30 September 2016 was 57,9%, compared to the 64,8% for the nine-month period ended 30 September Moving Forward The Management s focus remains on the handling of the still high level of NPEs, the growth of the loan portfolio and proceed with advancements in technology and enhancement of the customer service, as well as simplification of procedures and processes. The Group is focusing on restructuring loans in a sustainable manner and on mutually beneficial terms using a toolset of sustainable solutions. The economic recovery is expected to accelerate the pace of tackling NPEs As part of implementing its strategic targets, the Group is focused on supporting the economy s recovery and contributing towards sustainable economic growth. The Bank maintains sufficient liquidity to exploit opportunities while maintaining its focus on organic growth. 28 th November

65 Statement by Mr Bert Pijls CEO: We have made further progress executing our strategic priorities in the third quarter of We reduced NPEs for a fourth consecutive quarter to their lowest level post December We completed almost half a billion of restructurings during the first three quarters of 2016 and the loan restructuring momentum remains strong, with an increased number of restructuring agreements in the pipeline. We continue to explore all available options in an effort to decisively address problematic loans, using a tool case of sustainable solutions such as debt to asset swaps, balance reductions, maturity extensions, grace periods, instalment reductions and servicing support. We bolstered the Group s CET1 ratio by 45 basis points to 14,37% due to lower risk weighted assets and organic capital generation, and the Group s capital ratios are comfortably above the minimum regulatory requirements. We recorded profits for a third consecutive quarter in 2016, with profit after tax for 3Q2016 of 3,9 million. A very low loans to deposits ratio enables our lending expansion and about 240 million loans were approved since the beginning of the year, supporting creditworthy households and businesses. 3