By Dr George Mountis
The physical transfer of the banks’ assets (mainly owned and repossessed collaterised assets) to an Asset Management Company (AMC) has been the case of extensive debate and discussion in Cyprus (and the EU). Taking into account the solutions provided in Germany, Ireland, Spain and Portugal, it seems that there are two key forms of structures that our banks could potentially adopt in Cyprus:
The German structure
The first one relates to the asset division which takes place at the banking entity. In this structure, the shareholders of the ‘good’ bank (with the ‘good’/performing loans) are also the owners of the ‘bad’ bank (non-performing/repossessed assets) and potentially assume unlimited future losses from these problematic loans (this solution was partly implemented in Germany).
The Irish/Spanish structure
The second structure of a real estate-management (REM) bank or an AMC is similar to the Spanish-Irish solution. The banks’ assets are ‘sold’/transferred to a joint government company that then conducts the wind-down (disposal) comprehensively. In Ireland, after transferring the assets to this wind-down company (called ‘NAMA’), the ‘good’ part of the banks (and their shareholders) were entirely relieved from any future losses from problematic loans and the repossessed.
One could argue that the set-up of a REM bank or AMC in Cyprus will mainly depend on the scale and nature of the expected losses resulting from disposal and effective management of the repossessed assets or the assets under management. Troika will require the strict application of the Memorandum of Understanding (MoU) measures. In the original settings of the Memorandum, the option of an Asset Management Company was indeed discussed where assets will be transferred at their long-term economic value.
To this end, it is important to note that the difference of ‘real estate-management bank’ and ‘asset management company’ has to do mainly with the handling of the emergency liquidity (ELA). The real estate-management bank could take over part of the emergency liquidity that has accumulated in the books of Bank of Cyprus (BOC), potentially improving its balance sheet. On the other hand, the asset management company will not be a bank and will not be able to absorb the emergency liquidity that has real estate as collateral. Depending on the solution to be decided, all collateral for the problematic loans that have been granted in recent years will be transferred to the new entity, and the new entity – bank or company – will undertake the asset sale or rent in order to repay the loan.
The key aim of an AMC or a REM bank is to pro-actively manage and wind-down these problematic assets with a view to maximise recovery value (note that there are also social/economic implications that the policyholders need to address with mass liquidations and disposal of properties). The asset transfer at long-term economic value would require a meticulous quality review. Pricing these assets will most likely to lead to a significant discount compared to current book values (in Ireland assets have been discounted as much as 70% from their book value when transferred to NAMA).
The AMC authority (or shareholders) need to have tight control and ownership (working closely with external advisors), while Cypriot banks should only have negligible control (even if they are the ones who have the initial customer relationship). The AMC will require the setup of asset managers with local knowledge of the property and banking sector, exclusively pro-actively managing these assets. The setup and execution of such a model requires thorough preparation, both from the Cypriot authorities but also from the participating banks to ensure that all economic, legal and accounting issues are addressed properly.
The new Bank of Cyprus needs to start fresh and isolate itself from the ‘bad’ or ELA assets. Cleaning the portfolios is the only way the Cypriot banking system can revive itself and start to breathe again. But until then, we have a long way to go…
Dr George Mountis is Partner | Banking, Strategy & Financial Services advisory