1 Annual Financial Report 2016 . This Annual Financial Report relates to the Bank of Cyprus Public Company Ltd (the Company' and together with its subsidiaries the Group') as at 31 December 2016 . The Financial information referred to and/or presented in this Report is not the statutory Financial statements of Bank of Cyprus Holdings Public Limited Company for the purposes of Chapter 4 of Part 6 of the Companies Act 2014 of Ireland. Bank of Cyprus Holdings Public Limited Company's statutory Financial statements for the purposes of Chapter 4 of Part 6 of the Companies Act 2014 of Ireland for the period 11 July 2016 to 31 December 2016 are expected to be published by 30 April 2017 and delivered to the Registrar of Companies of Ireland within 28 days of 30 September 2017. (as at the date of this Report , such statutory Financial statements have not been prepared nor have they been reported on by the independent auditors of Bank of Cyprus Holdings Public Limited Company).
2 BANK OF Cyprus GROUP Annual Financial Report 2016 . Annual Financial Report For the year ended 31 December 2016 . Contents Page Board of Directors and Executives 1. Statement by the Members of the Board of Directors and the Company Officials Responsible for the Drafting of the Consolidated Financial Statements 2. Management Report of Bank of Cyprus Public Company Ltd 3. Consolidated Financial Statements of Bank of Cyprus Group 16. Independent Auditor's Report to the Members of Bank of Cyprus Public Company Ltd on the Consolidated Financial Statements 185. Statement by the Members of the Board of Directors and the Company Officials Responsible for the Drafting of the Financial Statements 193. Financial Statements of Bank of Cyprus Public Company Ltd 194. Independent Auditor's Report to the Members of Bank of Cyprus Public Company Ltd on the Financial Statements 319. Annual Corporate Governance Report 327. Additional Risk and Capital Management Disclosures 362.
3 BANK OF Cyprus GROUP Annual Financial Report 2016 . Board of Directors and Executives as at 27 March 2017. Board of Directors of Prof. Dr. Josef Ackermann Bank of Cyprus CHAIRMAN. Public Company Ltd Maksim Goldman VICE CHAIRMAN. Arne Berggren Lyn Grobler Dr. Michael Heger John Patrick Hourican Marios Kalochoritis Dr. Christodoulos Patsalides Michalis Spanos Ioannis Zographakis Executive Committee John Patrick Hourican CHIEF EXECUTIVE OFFICER. Dr. Christodoulos Patsalides DEPUTY CHIEF EXECUTIVE OFFICER AND CHIEF OPERATING OFFICER. Michalis Athanasiou CHIEF RISK OFFICER. Nick Fahy CHIEF EXECUTIVE OFFICER, BANK OF Cyprus UK. Eliza Livadiotou FINANCE DIRECTOR. Panicos Nicolaou DIRECTOR CORPORATE BANKING. Louis Pochanis DIRECTOR INTERNATIONAL BANKING SERVICES AND WEALTH, BROKERAGE. AND ASSET MANAGEMENT. Dr. Charis Pouangare DIRECTOR CONSUMER AND SME BANKING. Nicolas Scott Smith DIRECTOR RESTRUCTURING AND RECOVERIES DIVISION. Anna Sofroniou DIRECTOR REAL ESTATE MANAGEMENT UNIT.
4 Aristos Stylianou EXECUTIVE CHAIRMAN, INSURANCE BUSINESSES. Internal Auditor George Zornas Director Group Compliance Marios Skandalis Company Secretary Katia Santis Legal Advisers Chryssafinis & Polyviou Independent Auditors Ernst & Young Cyprus Ltd Registered Office 51 Stassinos Street Ayia Paraskevi, Strovolos CY-2002 Nicosia, Cyprus Telephone: +357 22122100, Telefax: +357 22336258. 1. BANK OF Cyprus PUBLIC COMPANY LTD Annual Financial Report 2016 . Statement by the Members of the Board of Directors and the Company Officials Responsible for the Drafting of the Consolidated Financial Statements We, the members of the Board of Directors and the Company officials responsible for the drafting of the consolidated Financial statements of Bank of Cyprus Public Company Ltd (the Company') for the year ended 31. December 2016 , the names of which are listed below, confirm that, to the best of our knowledge: (a) the consolidated Financial statements on pages 16 to 184: (i) have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and the requirements of the Cyprus Companies Law, (ii) give a true and fair view of the assets, liabilities, Financial position and profit or loss of the Company and the undertakings included in the consolidated Financial statements taken as a whole, and (b) the Management Report provides a fair review of the developments and performance of the business and the position of the Company and the undertakings included in the consolidated Financial statements taken as a whole, together with a description of the principal risks and uncertainties that they face.
5 Prof. Dr. Josef Ackermann Chairman Maksim Goldman Vice Chairman Arne Berggren Non-executive Director Lyn Grobler Non-executive Director Dr. Michael Heger Non-executive Director Marios Kalochoritis Non-executive Director Michalis Spanos Non-executive Director Ioannis Zographakis Non-executive Director John Patrick Hourican Executive Director Dr. Christodoulos Patsalides Executive Director Eliza Livadiotou Finance Director 27 March 2017. 2. BANK OF Cyprus PUBLIC COMPANY LTD Annual Financial Report 2016 . Management Report The Board of Directors submits to the shareholders of the Company their Report together with the audited consolidated Financial statements for the year ended 31 December 2016 . The Annual Financial Report relates to the Bank of Cyprus Public Company Ltd (the Company') and together with its subsidiaries (the Group') which was listed on the Cyprus Stock Exchange (CSE) and the Athens Exchange as at 31 December 2016 . On 18 January 2017, Bank of Cyprus Holdings Public Limited Company was introduced in the Group structure as the new holding company of the Group.
6 On 19 January 2017, Bank of Cyprus Holdings Public Limited Company was admitted to listing and trading on the London Stock Exchange and the CSE. The Company was the holding company of the Group as at the balance sheet date. Bank of Cyprus Holdings Public Limited Company was incorporated on 11 July 2016 and is the new holding company of the Group as from 18 January 2017. Further information is disclosed in Note of the consolidated Financial statements. Activities The principal activities of the Company and its subsidiary companies during the year continued to be the provision of banking, Financial , insurance services and management and disposal of property generally acquired in debt satisfaction. All Group companies and branches are set out in Note 49 of the consolidated Financial statements. Acquisitions and disposals made during the year 2016 are detailed in Note 50 of the consolidated Financial statements. Operating environment in Cyprus Cyprus exited its economic adjustment programme at the end of March 2016 after a successful return to markets and having utilised only about 70% of the 10 billion funding resources made available by the European Union (EU) and the International Monetary Fund (IMF).
7 Based on the Ministry of Finance Stability Programme 2016 -2019 (May 2016 ), in the area of public finances, the government carried out a strong fiscal adjustment and the budget returned to near balance, public spending was reduced and tax collection was made more efficient. Unemployment dropped to 13,3% during 2016 compared to an average unemployment rate of 14,9% for 2015. and a peak of 16,5% in the fourth quarter of 2014 as per the Cyprus Statistical Service. Real GDP rose by 2,8% in 2016 according to the Cyprus Statistical Service, compared to an increase of 1,7%. during 2015. Consumer prices continued to decline for the fourth consecutive year, down by 1,4% in 2016 , as per the Cyprus Statistical Service. Tourist arrivals increased by 19,8% during 2016 . The index of industrial production increased by 8,7% in 2016 . In real gross value added terms, industrial output in 2016 increased by 5,9% in the first three quarters of 2016 . after an increase of 2,9% in 2015 as per data by the Cyprus Statistical Service.
8 In the property market, the Central Bank's residential property price index continued to decline year-on-year but at a slowing pace. On a yearly basis the index dropped by 1,3% in the third quarter of 2016 after dropping by 1,7% and 1,6% in the second and first quarter respectively. Downside risks to the growth projections are associated with high levels of non-performing loans, loss of momentum in structural reforms with associated risks for public finances, and a return of inflation. Downside risks may also be associated with a deterioration of the external environment for Cyprus . These would involve slower growth in the UK with a weakening of the pound following the Brexit referendum. Political uncertainty in Europe triggered by a British exit or by the refugee crisis could also lead to increased economic uncertainty and undermine economic confidence. Upside risks to the outlook relate to a possible better growth performance in the EU and stronger investment spending as property prices are stabilising and various projects especially in tourism are implemented.
9 3. BANK OF Cyprus PUBLIC COMPANY LTD Annual Financial Report 2016 . Management Report Operating environment in Cyprus (continued). The international credit rating agencies have upgraded the rating of the country. Fitch Ratings upgraded the rating of the Republic of Cyprus one notch to BB- with a positive outlook in October 2016 , S&P Global Rating by one notch to BB with a positive outlook in September 2016 and by one notch to BB+ with a stable outlook in March 2017 and Moody's Investors Service by two notches to B1 with a stable outlook in November 2015. In November 2016 Moody's Investors Service improved the outlook on the Republic of Cyprus from stable to positive. In July 2016 the Cyprus government accessed international capital markets for the third time since the start of the economic adjustment programme to date, issuing a seven year Eurobond of 1 billion at a yield of 3,8%. Financial results1. The main Financial highlights for 2016 are set out below: Consolidated Income Statement million 2016 2015.
10 Net interest income 686 842. Net fee and commission income 167 154. Net foreign exchange gains and net gains on other Financial 48 31. instruments Insurance income net of insurance claims 44 48. Gains/(losses) from revaluation and disposal of investment properties 6 (53). and on disposal of stock of properties Other income 12 18. Total income 963 Staff costs (224) (234). Other operating expenses (173) (174). Total expenses (397) (408). Profit before provisions and impairments, gains on derecognition of loans and changes in expected cash flows, 566 632. restructuring costs and discontinued operations Provisions for impairment of customer loans, net of gains on loans (370) (959). derecognition and changes in expected cash flows Impairments of other Financial and non- Financial assets (47) (62). Provisions for litigation, claims and regulatory matters (18) (8). Share of profit from associates and joint ventures 8 6. Profit/(loss) before tax, restructuring costs and discontinued 139 (391).