Bank of Cyprus Holdings Public Limited Company (OTCPK:BKCYF) Q4 2023 Earnings Call Transcript February 19, 2024 5:30 AM ET
Company Participants
Panicos Nicolaou – CEO
Eliza Livadiotou – Executive Director, Finance
Conference Call Participants
Eleni Ismailou – Axia Ventures Group
Alexandros Boulougouris – Euroxx Securities
James Hamilton – Numis Securities
Hugo Cruz – KBW
Operator
Ladies and gentlemen, thank you for standing by. I am Yota, your Chorus Call operator. Welcome, and thank you for joining the Bank of Cyprus Conference Call to present and discuss the Preliminary Full Year 2023 Financial Results Conference Call. All participants will be in a listen-only mode, and the conference is being recorded. The presentation will be followed by a question-and-answer session. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Panicos Nicolaou, Chief Executive Officer. Mr. Nicolaou, you may now proceed.
Panicos Nicolaou
Good morning, everyone. Thank you for joining our financial results conference call for the year ended 31st of December, 2023. I am joined by Eliza Livadiotou, Executive Director, Finance, and Annita Pavlou, Manager, IR and ESG. After my introductory remarks, Eliza will go into more detail on our financial performance and then we’ll be happy to take your questions both during this conference call and afterwards.
I would like to start by briefly reminding you of our powerful [indiscernible] and our core strengths on Slide number 4. We are the international group across banking and other financial services in Cyprus, which is a highly liquid and concentrated banking sector. And we operate in a supportive macroeconomic environment. The Cypriot economy remains strong, delivering good growth, proving once again its flexible and resilient characteristics. We are one of the most liquid banks in Europe and hence enjoy the benefits of fast and steep interest rate rises in 2023. At the same time, we have been undertaking proactive actions to position ourselves against a more normalized rate environment in the years to come. We have strong levers under our control. Our diversified business model, our ongoing focus on cost control, our robust asset quality, and our strong capital position, all support us for continuing to deliver shareholder value. We remain confident that under a more normalized interest rate environment of around 2% to 2.5%, we can produce sustainable mid-teens ROTE over the medium term.
Let’s now turn to Slide number 5, which shows an overview of the macroeconomic environment. In an environment of weak European growth and geopolitical turbulences, the macroeconomic outlook of Cyprus continues to stand out. The economy expanded by 2.3% in the fourth quarter and for 2023 overall, delivered growth of 2.5%, outpacing the Eurozone average. Based on the latest projection of the Ministry of Finance, economic growth is expected to be around 2.9% for 2024. Tourist activity continued to improve with arrivals for 2023 now back to their pre-COVID levels. Tourist receipts for January to November 2023 were 11% higher than their corresponding 2019 levels, indicating high spending levels by tourists. The unemployment rate decreased to 6% in the third quarter and is expected to grow further to 5.8% for 2024. As in many other countries, consumer inflation continues to be impacted by energy prices, but has now come under control. In Cyprus, inflation stood at 2% in January 2024 and is expected to average around 2.5% for the full year of 2024.
Slide 6 highlights the Group’s strong financial performance for the year, supported by the high interest rate environment. Net interest income for 2023 has more than doubled compared to the prior year, benefiting from the steep rise in interest rates and our high liquidity. But I want to also draw your attention to other metrics. We have diversified sources of income and non-NII is an important revenue driver, covering around 90% of expenses in 2023. Cost to income at 31% reflects both strong revenues and disciplined cost management. Asset quality remains strong with our NPE ratio at 3.6%, in line with our 2023 target, and our cost of risk at 62 basis points was in the middle range of our guidance range of 50 basis points to 80 basis points.
Let’s now turn to Slide number 7. The strong performance has led to accelerated shareholder value creation. Our CET ratio increased by 350 basis points to 18.7% pre-distributions, or 16.5% when accruing at the top of our dividend distribution policy of 30% to 50% payout ratio in accordance with Commission Delegated Regulation. This reflects strong organic capital generation of around 480 basis points in the year. Earnings per share was at EUR1.09 and tangible book value increased by 24% before distributions. We reconfirmed our dividend distribution policy. We’re calculating a payout ratio between 30% to 50% of adjusted recurring profitability, building progressively through the years. We have begun our engagement to deliver with regards to shareholder returns for 2023 and any returns will be in line with that dividend policy. We look to update our shareholders in due course when we receive the final ECB approval.
Looking now in more detail of the quarterly evolution on Slide number 8. We delivered a ROTE of 25.6% in the fourth quarter, the fourth consecutive quarter of returns over 20%, supported by strong net interest income, which grew by 3% in the fourth quarter to EUR220 million. We believe that this now will [indiscernible].
Slide 9 shows how our performance is tracking against the 2023 targets. We provided guidance for 2023 and the medium term at our 2023 Investor Update Event in June, and are pleased to share with you that 2023 actual financial performance exceeded all of our targets. Our guidance was for NII to exceed EUR650 million and deliver NII of EUR792 million off the back of high ECB depo rate averaging 3.3% and well-managed deposit pass-through and mix. The cost to income ratio of 31% came ahead of our third quarter’s guidance, mainly due to better revenues. As already mentioned, NPE ratio at 3.6% was in line with our target and our cost of risk at 62 basis points was in the middle range of our guidance of 50 basis points to 80 basis points. And our ROTE of almost 25% clearly met our over 17% guidance.
Moving now to the outlook for 2024 on Slide number 10. We are reiterating our ROTE targets for 2024 and 2025 of over 17% and over 16% based on a 15% CET1 ratio. And most importantly, we do so while we are incorporating conservative assumptions for rates, normalizing around 2% to 2.5% in 2025. Lastly, with ECB rate environment, we expect a higher average ECB rate in 2024 of 3.4%, but now expect a faster normalization with ECB depo rate at 2.7% and 2% by fourth — by the fourth quarter of 2024 and the fourth quarter of 2025, respectively. Our guidance for 2024 is as follows. We are updating our net interest income expectations from above EUR625 million to above EUR670 million. Eliza will discuss in more detail the drivers on the next slide. We maintain our cost to income ratio at around 40% and we reconfirm our ROTE guidance of over 17% on a 15% CET1 ratio. On asset quality, we expect to continue improve NPE ratio to around 3% at year-end and cost of risk trending towards the normalized level of 40 basis points to 50 basis points. On capital, we expect significant CET1 generation in the range of 200 basis points to 250 basis points pre-distributions of 2024.
Our aim to provide sustainable shareholder returns is reiterated. Dividends are expected to build prudently and progressively over time towards a payout ratio in the range of 30% to 50% of the Group’s adjusted recurring profitability. And importantly, we reiterate our 2025 guidance for ROTE of above 16%, based on a normalized rate environment of 2.2%. The path of rate normalization seems very volatile currently, but we want to reiterate our commitment that Bank of Cyprus has sustainably delivered mid-teens ROTE in a normalized rate environment of 2% to 2.5%.
I will now hand over to Eliza to take you through our NII and guidance for 2024 in more detail.
Eliza Livadiotou
Thank you, Panicos, and good morning from me, too. So, starting on Slide 11, we have seen a rapid increase in interest rates in 2023 and recent market expectations have been extremely volatile in respect of the path of rate cuts. 2024 is expected to be a transition year, a year marked by a declining interest rate environment. Currently, market expectation is for rates to normalize by 2025. Euribor rates have already started to move in anticipation of these moves, with six-month Euribor expected to average at 3.2% in 2024.
As you can see on the chart on this page, the current rate outlook is more conservative compared to market expectations in November ’23 at the time of our third quarter results. You can also see how it compares to our rate assumptions at the time of our investor update event in June last year. We think this is an appropriately conservative scenario, which is how we run the bank. As a result, we would expect NII to decline in 2024 to a level above EUR670 million, higher than our previous guidance of above EUR625 million. We expect quarterly NII to decline during ’24 and start stabilizing towards the year-end.
I will explain the main drivers of this. Higher deposit costs. Term deposit pass-through increased slowly during 2023 to 18% in the fourth quarter, but we expect it continues to increase to an average of 40% as deposit balances reprice to high — to the higher fund book rates. We expect rate cuts to be passed on gradually to new deposits. Hence we expect a slow and gradual repricing of the deposit back-book in 2025. We continue to allow for a change in deposit mix, with time and notice deposits increasing from 32% in December ’23 to around 45% of the total by December ’24.
On the lending side, we expect single-digit loan growth in ’24 and ’25, supported by economic growth. Almost half of our loan book is Euribor-linked and these will be priced to lower rates. Wholesale funding costs will increase to reflect the full year impact of the planned December issuance and further planned issuance in order to meet the 2024 MREL requirement.
Finally, we will continue the structural hedging activities to reduce the NII sensitivity. This will come at a cost in 2024, but will support future revenues, while continuing to successfully grow our fixed income portfolio to around 16% of total assets, with NII benefiting also from the rollover of the portfolio to higher rates.
Let me now touch on the bank’s NII sensitivity on Slide 12. As you know, we are structurally rate sensitive on the asset side. But over the last year, we have reduced this rate sensitivity and we plan to continue to do so in ’24 by converting some of our assets from variable to fixed. The NII sensitivity per100 basis point rate drop has reduced by EUR16 million during the year from 34% to 14% and reflects the following actions. About one-fifth of the Group’s loan portfolio is linked with the bank’s base rate, which provides a natural hedge against the cost of deposit. We added more fixed rate loans by granting around EUR245 million of such loans. We increased the investment in fixed rate bonds by 54% to EUR3.1 billion. We entered in reverse repos of EUR400 million. And finally, we entered in receive fixed interest rate swaps totaling EUR950 million.
We expect to continue careful further hedging of the balance sheet in ’24 to reduce the NII sensitivity by a further EUR30 million to EUR40 million. Specifically, we intend to add another EUR4 billion to EUR5 billion structural hedging positions with expected average duration of three years to four years, depending on market conditions. These actions will have a cost on the ’24 NII, but will support future revenues and, most importantly, will result in lower rate sensitivity.
Slide 15 shows the detailed income statement of the group. I will not go through every line here as I will be discussing the drivers of our profitability in the following slide, but I would like to highlight a profit after tax of EUR487 million for the year, corresponding to strong earnings per share of EUR1.09.
Slide 16 shows the main drivers of the — for the strong NII, which more than doubled in ’23. 4Q NII of — at EUR220 million is we believe the peak. As already discussed, we expect continued increase in deposit costs while the repricing of loans will start reflecting lower Euribor rates.
On Slide 19, you can see that deposits remained roughly flat on the prior quarter, but increased by 2% year-on-year to EUR19.3 billion. We’re encouraged that the shift in deposit mix towards time and notice deposits is progressing more slowly than we expected. In Q4, it was around 32% of the total. And if you look at the breakdown of our EUR19.3 billion deposit base, you can see on the bottom left chart that almost 80% of our deposits are from Cypriot residents. Additionally, deposit pass-through levels were well managed, facilitated by the very liquid Cypriot banking sector. This is evidenced by the evolution of our cost of deposits which remained low at 24 basis points, corresponding to a pass-through of 18% on time and notice deposits in Q4, up from 15% in Q3. We expect the cost of term deposits to continue to increase from 74 basis points in the fourth quarter as deposit balances reprice to their higher fund book prices. We expect rate cuts to be passed on gradually to new deposits. Hence, we expect slow recycling of the deposit back book in 2025. Overall, we assume an average term deposit pass-through of 40% in 2024.
Now let’s move to new lending on Slide 20. During 2023, we granted EUR2 billion worth of loans driven mainly by corporate demand. The gross performing loan book remained roughly flat at EUR9.8 billion both Q-on-Q and year-on-year as repayments had offset new lending. Going forward, we expect some recovery on the loan book as repayments stabilized with low single digit loan growth assumed for ’24 and ’25 supported by GDP growth. Towards that goal, in December ’23, we agreed to acquire a small portfolio of performing and restructured loans with gross book value of EUR58 million. Completion is expected in the first half of ’24.
Now, turning to the fixed income portfolio on Slide 21. As of 31st December, the portfolio amounted to EUR3.5 billion, up by 42% on the prior year, representing 14% of total assets net of TLTRO. The majority of the portfolio is measured at amortized cost and is held to maturity. Hence no fair value gains or losses are recognized to Group’s income statement or equity. The mark-to-market positive impact of the amortized cost portfolio amounted EUR3 million as of December 31, reflecting a reduction in bond yields. We expect to continue to carefully expand our income portfolio in ’24 so that it represents around 16% of our total assets.
Moving now to non-interest income on Slide 22. On this slide, we would like to highlight that non-interest income is an important driver to the Group’s profitability, covering almost 90% of OpEx for ’23. Going forward, we expect it to continue contributing significantly in the coming years at around 70% to 80% of total OpEx. Net fee and commission income continued to grow by 6% year-on-year, driven by higher credit card commissions and transactional fees. We expect net fee and commission income to grow broadly in line with economic growth in both 2024 and ’25. The net insurance result was also ahead compared to the prior year due to improved experience variances and the reduction in the loss component of the insurance recognized upfront in the life insurance business. I would also like to remind you that FX gains are volatile profit contributors.
Now, moving to Slide 28, which provides an overview of operating expenses. Our cost to income ratio of 31% in 2023 was supported by strong revenues and disciplined cost management. Total OpEx rose by 5% year-on-year, driven by the termination costs of EUR7.5 million, variable pay of EUR11 million, and the cost of the customer reward program of EUR2.5 million. Excluding these items, costs were slightly down by 1% year-on-year. On a quarterly basis, our cost to income ratio increased to 32%, driven by seasonally higher expenses.
Now, let’s move to Slide 30 and capital. The bank’s capital position remains robust. During 2023, we saw a rapid capital buildup, unlocking around 480 basis points of organic capital generation, driving our total capital ratio and CET1 ratio to 23.7% and 18.7%, respectively, pre-distribution. Accruing for a dividend at the top end of our dividend policy of 50%, in line with the regulatory framework, our total capital ratio stood at 21.5% and our CET1 at 16.5%. Let me remind you that this level of dividend accrual does not constitute an approval by the regulators for a dividend nor a decision by the bank with respect to the 2023 dividend payment. Further details on capital requirements are set out on Slide 56.
Moving now to Slide 32 and asset quality. The NPE ratio stood at 3.6% at year-end, or 1% on a net basis, in line with our 2023 target, and our NPE coverage improved to 73%. When including tangible collateral, NPEs are fully covered. During Q4, we recognized EUR53 million as unlikely to pay exposure with the completion of our assets. Most of these UTPs are not macro-related and continue to present no arrears. We expect to reduce our NPE ratio to around 3% by year-end ’24, and our NPE ratio target of below 3% by end 2025 is reaffirmed.
Now, turning to Slide 33 and cost of risk. Q4 cost of risk was broadly flat on the prior quarter at 73 basis points, averaging 62 basis points for the year. This cost of risk includes 19 basis points relating to the classification of specific customers with idiosyncratic characteristics as UTPs, even though they adhere to their payment schedule and present no arrears. Going forward, cost of risk is expected to trend towards the normalized levels of 40 basis points to 50 basis points in ’24 and ’25. Additionally, we incurred impairments and other provisions of EUR15 million in Q4, relating mostly to REMU stock properties on specific, large, illiquid assets.
Moving on to real estate on Slide 34. REMU, as you know, is our engine to manage the stock of properties acquired from defaulted borrowers. As you can see, REMU stock properties reduced by EUR217 million on the prior year to EUR862 million as of December. With balance sheet derisking completed, the inflows are expected to remain at extremely low levels, and our focus will be on delivering sales. We remain on track to achieve our 2025 target of reducing the REMU stock to around EUR0.5 billion, and we continue to sell on average close to 90% of independently assessed open market value, or 106% of book value. The prospect for real estate market in Cyprus remains strong. Based on data by the Central Bank of Cyprus published in October, property prices rose by 7.6% year-on-year in the third quarter. It’s important to note that these prices remain below their 2010 peak level.
I’ll now hand back to Panicos for our closing remarks.
Panicos Nicolaou
Thank you, Eliza. Moving now to Slides 35 and 36. 2023 was a milestone year for the bank, achieving strong financial and operational performance. We generated profit after tax of EUR487 million, equivalent to a ROTE of almost 25%. This facilitated rapid capital buildup, reflecting accelerating shareholders value creation. Going forward, we are entering 2024, a year of potentially declining interest rate environment on a position of strength. We will continue to execute on those levers under our control and we remain confident that we can deliver a ROTE of over 17% on a 15% CET1 ratio for 2024. Under a more normalized interest rate environment of around 2% to 2.5%, we reiterate our 2025 ROTE target of over 16% on a 15% CET1 ratio.
This concludes our presentation. We will now open the floor for your questions.
Question-and-Answer Session
Operator
Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] One moment for the first question, please. The first question comes from the line of Ismailou Eleni with Axia Ventures Group. Please go ahead.
Eleni Ismailou
Hello, good morning and congratulations for this strong set of results. I have three questions from my side. First one is on the structural hedges. Out of the EUR4 billion to EUR5 billion guidance, what percentage would be allocated to the interest rate swaps? And the second question is, as attention shifts to the net fee and commission income, if you could give us some more color on how you’re planning to keep growing that part of your income statement and what are the moving parts? And the third question would be on your CET1 target, like the guidance you provided. Could you talk a little bit more about the underlying assumptions here, especially the RWA trajectory? Thank you.
Panicos Nicolaou
Okay. Let me start with the net fee and commission income. Okay. And I will again reiterate that this income is strong contributor in diversification initiative and resilience for our business model. So, 2023 increased by 6%, excluding nonrecurring items. We expect this to grow in line with the equity growth. We also presented in the presentation the contribution from our insurance sector which is a growing factor and contributes around 30% of our non-NII in 2023. So insurance subsidiaries are — and growing and contribute to this growth. We are also for the first time presented Jinius with a new initiative and we’re launching actually today our marketplace. And Jinius is another source — new source of non-NII in the years to come. At the same time, again, in the first quarter, we are launching our affluent banking initiative, which is a kind of more general offering to the wealth clients of the bank, which is an — also an additional initiative for non-NII contribution. Going back to the CET1 target and your question on the RWAs, I think RWAs are relatively flat through the year. So, organic growth will not consume much capital for the bank. And at the same time, REMU reduction will actually release capital from the bank. So, I think there is a question about structural hedging, Eliza?
Eliza Livadiotou
Structural hedging. Around three quarters of our hedging strategy is through IRFS and the rest is covered through reverse repo and the natural balance sheet items — fixed loans and fixed income investment form.
Operator
Ms. Ismailou, are you done with your questions?
Eleni Ismailou
Yes. Thank you very much. And again, congratulations for the strong set of results.
Operator
The next question comes from the line of Boulougouris, Alexandros with Euroxx Securities. Please go ahead.
Alexandros Boulougouris
Yes, good morning. Congratulations on the numbers as well from me. Quick question on the deposit mix. You have in your target that it will reach 45%. Even that a bit too conservative, given the reducing — the declining rate environment. So, are you being a bit too conservative, or is there some data that you see that you think this indeed seems to be going up to this level? That’s my first question. A second question regarding the fixed income portfolio. You mentioned that you target to go to 16% of assets by end of 2024 and the fixed income book has increased in 2023 as well. Should we see this trend continuing, or is this 60% where more or less you want to be? And one other final question regarding loan growth, and this is something that we are gradually seeing in the Greek market. Regarding reperforming loans from old NPLs, is it something that you would consider as well buying reperforming loans later on in two years’, three years’ time as a potential growth in organic, let’s say? Thank you.
Panicos Nicolaou
Okay. I will start with generally on depos, it’s not just the mix, but also on deposit pass-through. And a general comment that the Cypriot backing sector is very liquid and concentrated, so this will not change. And this was also the main driver of us having depos — total deposit cost of just 24 basis points, and over a pass-through rate of 6%, 18% on [tenor return] (ph). So we expect to continue some gradual repricing of the back book, which means that there will be a balance sheet mix as well. I remind you that those — the pass-through of 40% or whatever pass-through we end up in the end does not necessarily mean that the deposit cost will go up because the deposit — because the Euribor rates actually expected to drop. What is important is total cost — total deposit cost anyway and we provided a number there and guidance which says that every 10 basis points increase has an effect of around EUR19 million to the NII. So we focus mostly on deposit cost rather than that on pass-through and mix. Of course, we’ll have to navigate 2024 reduction until most stabilization comes in 2025 in the rate. And until we start gradually seeing the rate cuts to pass back to rent depositors. But all in all, pass-through mix having — have been all taken into account in our updated guidance for 2024 and 2025 in another conservative rate assumption scenario. So going to the loan growth and the performing loans are actually what Eliza mentioned before about the acquisition from this EUR58 million coming from KEDIPES, this was kind of small acquisition for overly performing loans in Cyprus. But I will say that we need to be careful on doing this because the definition of stage one, stage two and stage three, based on the ACP guidelines, it’s much different of what the services of [Technical Difficulty] are actually in mind. So we’ll be very, very careful and this will take some time. I don’t expect this to materialize within the next one year to two years, three years. And this is not part of our Plan A for loan growth. We don’t assume in our loan growth assumptions of any acquisition of reperforming loans. All these are fairly in line with growth of the economy, planned international initiatives. I think there’s a question also on the fixed income, Eliza?
Eliza Livadiotou
So, on the bond portfolio, this is a dynamic exercise, as you know. Our 16% guidance is based on our current risk/return characteristics of the portfolio versus other alternatives, be it the ECB or other options on the — on liquidity management. It’s not a ceiling, but it’s also not something we can guide to more specifically at this point, i.e., a higher or a different level. Our current strategy goes to the 16% level on the basis or on the back of current rate expectations and current risk/return dynamics of the bond portfolio.
Alexandros Boulougouris
Thank you.
Operator
The next question comes from the line of Hamilton, James with Numis Securities. Please go ahead.
James Hamilton
Thank you. And thanks for the presentation. I just wanted to touch on the Jinius business. You’ve mentioned it in your presentation. It’s the first time it’s appeared in the slides. I was just sort of wondering if you could give us a flavor of where you feel this could land in, say, sort of two years’ or three years’ time. What are your aspirations for it? Obviously, you mentioned non-interest income, but I’m more sort of thinking about the sort of strategy, the data and analytics you might get from it, from the sector of the bank.
Panicos Nicolaou
Okay. Thank you, James. As I already mentioned, Jinius is a new subsidiary, aiming to drive digital economy in Cyprus and create an ecosystem-driven platform to create opportunities for all. What we have — what we initiate for Jinius is to connect business together, B2B, which is already live, to connect customers with business, B2C, which the — just the first step is already live with the marketplace we launched in February and of course, to combine all this and support them with banking and financial products. So, this is part of us investing in the digital bank value chain, diversify our income and, as I already explained earlier, this will be an additional contributor of our — of non-NII, which you know that we aim to cover most of our expenses through non-NII. So in the near future, let’s say, in three years, we expect naturally more contribution, tangible contribution in our non-NII from Jinius. But we also expect no progress in the business-to-consumer part of Jinius owards a more lifestyle platform service in Cyprus, we probably expect to have loyalty schemes. We will have personal analytics, offers promotions, financial and insurance products offered to the client, service bookings, consumer communities, different ecosystems, including [Technical Difficulty] ecosystems, green ecosystems, car ecosystems. So all these have to do with us developing the business-to-consumer concept of Jinius. And we are very enthusiastic about doing this and this stuff you will see coming in 2024 onwards.
James Hamilton
Thank you. I had one other regarding loan book growth. Could you sort of chat a little bit about how you see the dynamics of the — sort of the growth that you’re talking about given the tough environment that we saw in 2023? Is this just as we see lower rates, you’ll see fewer sort of prepayments? Or is this sort of a more active process of expanding growth or is it just purely the macro?
Panicos Nicolaou
Okay, I’m afraid I didn’t hear very well the question, but I got the headline, which is loan book growth. So I will start by saying that 2023, the loan stock will actually flat because of higher repayments. I remind you that 2023 — 2022 had a loan book growth of 3%, which we expect as normalized repayments to come in 2024 to be the case. And it’s in line with also with the growth of the economy in Cyprus. So we do expect to return back to loan growth in line with the economy in Cyprus. And over and above to support this assumption, we accelerate our international strategy for diversification, excluding [ship integration] (ph) and some corporate loans in Greece. So we expect to start seeing more tangible results on this on the second half of this year. So, of course, in gross, we have saying that we will not change volume at asset swap portfolio quality. And this is — and it’s very important for us that actually since 2016, 99% of our new exposure are performing and have been performing through tough times in Cyprus, COVID, the war in Russia-Ukraine, the inflation, the high rates. So, all these are also important for us, because they define our future cost of risk.
James Hamilton
Thank you.
Operator
The next question comes from the line of Cruz, Hugo with KBW. Please go ahead.
Hugo Cruz
Hi, thank you for the time. I have a few questions. First of all, on the NII, you’ve talked about the fixed income portfolio, but can you talk about what’s the upper limit for the hedging as well? You flagged some additional hedging in 2024. So, can you do more in later years? And then on OpEx, if you could tell us what’s your guidance for OpEx and ideally splitting the impact of levies and other regulatory costs? And then also for provisions, if you could give us — other provisions, if you could give us the guidance there as well, it would be very helpful. Thank you.
Eliza Livadiotou
If you go on hedging, the EUR4 million to EUR5 million — EUR4 billion to EUR5 billion rather, notion of that we put in the slide or disclosed is not the upper limit. As you know, we are — we were and continue to be a relatively rate sensitive bank. And we will look through the hedging in 2024 and opportunities to reduce this rate sensitivity going forward and make returns more predictable and more — and planning more manageable. I mean, at the end of the day, our NII decisions, our hedging decisions, all link back to our ROTE target, which is above 17% for this year and above 16% for — going forward on normalized rates. So, there is no upper ceiling here for the EUR4 million to EUR5 billion, that is not the upper ceiling, but it’s what we plan to do this year.
Panicos Nicolaou
Okay. On OpEx guidance, I will take you back to the cost to income ratio of around 40%. So, this covers everything. Of course, there are some — there is some route to go. We need to invest in technology. We need to keep continue investing in technology. There is also some inflation to go. But you should not forget that our focus on cost discipline in a forward-looking perspective is there. It will continue. Probably, you have noticed that in 2023, we have concluded a small exit of our employees, around 50 people, at the cost of almost EUR8 million to EUR9 million. So — and I also remind you of the aggressive and rapid downsizing of our network and also our number of FTEs. So cost to income of 40% is a good proxy to have in mind. On the provisions, I think — okay, I think on the provisions, I don’t expect any one of provisions. We do expect, I would say, the normalized cost of risk to trend towards the 40 basis points to 50 basis points. And this is our best case scenario for the years to come.
Hugo Cruz
Okay. And sorry, I asked as well, on the levies, do you have any kind of confirmation of what the levies could be in 2024?
Eliza Livadiotou
The bank levy is at 15 basis points of deposits, too costly — formulaic in terms of cost.
Hugo Cruz
Okay. Thank you very much.
Panicos Nicolaou
We don’t assume any additional levies and we don’t assume any of the existing levies to be actually canceled. So this is the main assumptions for the financial plan.
Hugo Cruz
Thank you.
Operator
[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Nicolaou for any closing comments. Thank you.
Panicos Nicolaou
Thank you all for your participation and questions. As always, we will be very happy to arrange one-to-one calls to take you through in more detail on our actual results of 2023. But also, most importantly, in the driving factor and assumptions of our 2024 and 2025 guidance. Thank you, all.
Operator
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for calling and have a good day.