Bank of Cyprus: Aphrodite Beckons

Bouncing back from the Cypriot financial crisis in 2012-2013, BOCH has and continues to transform itself back to being a high-quality national banking champion. This journey back has included a successful asset quality clean up (with NPL levels today <2% and a 60% reduction in REMU, its forclosed real estate unit) and strong cost efficiency improvements (to 35-40% cost income levels after big cuts to both branches and FTE). Since those darker crisis days, BOCH has also rid itself of almost all Russian-related exposures and seen the exit of the Cypriot Government as a shareholder in November 2024. The recovery story is similar to that of the Greek banks but with less investor attention. The reintroduction of Bank of Cyprus trading on the Athens Stock Exchange in Sept 2024 (after being listed for 7 years on the LSE) is viewed as a positive for its profile and liquidity.

BOCH has the right skillset to deliver outperforming ROE's and strong capital generation that can support generous capital management (50-70% payout => 10% cap mgt yield). The key pillars for this include a strong deposit franchise (50% loan to deposit ratio) and a lower risk loan portfolio (NPL <2%, 30- 40 bps cost of risk charges). Beneath this sits a solid non-interest income base (insurance and other financial services), which covers half of their operating expenses. Loan growth is the last key lever for value compounding, having returned to growth mode in 2024 and is now expected to expand at a level comparable to GDP growth in the coming years. BOCH will become the largest life insurer in Cyprus when its recent acquisition of Ethinki Insurance Cy closes in 2H25.

There are a few ways to directly invest in the Cypriot economy, which has attractive attributes on an absolute and relative basis to the Eurozone. This includes better GDP growth prospects, a corporate tax haven advantage, a better debt/GDP position, and a positive fiscal surplus. Bank of Cyprus is the most geared investment play on the Cypriot economy via their dominant market share (~40%) in both loans and deposits.

Loan growth grinds higher + outperforms the Euro bank sector

Began growing loans again in 2024 and expects 2025 and beyond to grow in line with nominal GDP growth levels (~4-5%). New lending in early 2025 is +25%, as retail lending and international credit expansion are delivering growth as projected.

Still delivering strong ROE's in a more normalised interest rate environment

BOCH is well positioned to deliver >15% ROE in the face of levelling off reference interest rates in Europe (lower ECB repo and EURIBOR rates). This is thanks to an attractive cost-income (40%) and a manageable cost of risk charge (40-50bps). While also further reducing its exposure to asset quality risk (both in NPL and REMU stock terms), and maintaining its surplus capital position.

On track to be a consistent >10% yielding capital management stock

Leveraging an excess capital starting point (>19.5% CET1 ratio, ~8% MDA buffer) and high annual capital generation, BOCH is set via its 50-70% capital payout policy to be one of the best-yielding financials in Europe for the foreseeable future. Until its valuation is materially re-rated, the capital management yield (dividend + buyback) will likely remain attractively above 10%.

Although Cyprus's country fundamentals are currently in solid shape, BOCH, as the banking market leader and most liquid equity play, would be vulnerable to any top-down country risk that emerges. Risks could stem from politics (election in 2026), taxation (15% corporate tax haven), anything that hits the Cypriot tourism industry (10-15% of GDP), or externally from any Greek bank sector-led troubles, given they have key subsidiaries in Cyprus. >50% of their loan book is to private individuals and hotels & catering clients.

BOCH saw its net interest income double from 2021 to 2024, helped by the ECB rate hiking cycle, to 50bps in July 2022 to a 4% peak in September 2023 and back down to 2.25% in April 2025. In their forward guidance, they have been very transparent about the impacts of ECB/EURIBOR rates reversing back lower, so investors are expecting NII to drop back to 1H23 levels. BOCH have made efforts to reduce its gearing to interest rate movements via hedging, but the forecasted drop off in net interest margins is still pretty meaningful.

Cyprus's de facto two-state country brings a very unique geopolitical risk exposure to the table. Cyprus is divided between the south of the island (a member of the EU and Greek Cypriot-controlled) and the northern part, which is only officially recognised by Turkey. Their separation dates back to 1974 when Turkey invaded the North of Cyprus to help stop a Greek-backed coup attempt to unite Cyprus with Greece. There exists a UN-monitored buffer zone separating the two states, and reunification talks over the years have all proven unsuccessful. Internationally, Cyprus is in the interesting position of being a non-NATO EU country.