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Business Cyprus

BoC split could come later, minister says

Finance Minister Harris Georgiades

By Elias Hazou

A PROPOSED split-up of Bank of Cyprus (BoC) into two entities would have to take place, if at all, only after the troubled lender comes out of administration, the government said yesterday, careful not to dismiss the idea outright.

Speaking to the state broadcaster, finance minister Harris Georgiades said the break-up should be studied “on the basis of a comprehensive plan” once the bank is able to run its own affairs.

Georgiades confirmed also that the troika of international lenders – currently here to review Cyprus’ compliance to the loan agreement – has been appraised of the proposal.

The government believes such decisions should not be taken in haste, he added.

Earlier in the day, government spokesman Christos Stylianides said the administration’s top priority was to see the island’s largest lender exit its status of administration under the Central Bank.

Stylianides likewise pointed out that it would be up to the bank’s new owners – set to elect a new board shortly – to make decisions governing the lender’s future.

But neither he nor the finance minister rejected the notion of splitting BoC into a retail business and an asset management operation, in what effectively amounts to creating a good bank-bad bank.

Meanwhile AKEL leader Andros Kyprianou appeared to be advocating a non-dogmatic approach.

Speaking to reporters after meeting with the Central Bank chief yesterday, Kyprianou said the matter should be discussed thoroughly before any decisions are made either way.
The proposal has seen the light of day through leaks to the media, and its particulars are not clear.

Essentially the real estate arm of the bank would amass all the non-performing loans linked to real estate property, with a view to auctioning off the properties to raise cash and alleviate the bank’s liquidity problems.

The aim is to break up the bank’s Emergency Liquidity Assistance (ELA), transferring some or most of these liabilities on the balance sheet to the mooted real estate arm.

Aside from its own ELA liabilities of some €3bn, BoC was saddled with Laiki Bank’s €9 billion when the two lenders merged as a condition for an international bailout of Cyprus back in March.

Banks do not have an unlimited line of credit to draw emergency liquidity funds from the European Central Bank, so the BoC’s ability to get ELA has been de facto restricted.
Despite not knowing the full details, almost all parties displayed a knee-jerk reaction by slamming it as a bad idea; and the Archbishop weighed in by calling it “an abomination.”

The bank’s interim leadership has defended the plan, arguing that ‘average’ property owners have nothing to fear. Rather, they say, it’s targeted at big land developers who are not making good on their loan payments.

Moreover, the parties – especially ruling DISY – warned that if the bank starts seizing properties and auctioning them off, real estate prices in general would depreciate.

The politicians say also it’s not up to the bank’s interim board to take such momentous decisions that could impact the company’s future.

This despite the bank pointing out that, in any case, the plan would not be drafted anytime before September – by which time the current board would be replaced by the new owners.

Still, as sources tell the Mail, influential land developers are moving to quash the idea before it gains traction – hence the politicians’ reaction.

Reports say that over the weekend a group of the biggest land developers in Cyprus visited the Presidential Palace to lobby against the idea. The President, however, is said to be keeping his options open.

According to one financial expert, the premise behind the good bank-bad bank is sound, though its execution may prove tricky.

There are clear advantages to divesting the bank’s retail operation from property-related bad debts and toxic assets, said George Mountis, a partner at Leaf Research, a banking and financial services consultancy.

For one, he says, should one of the entities fail, it would not necessarily drag the other down with it.

Also, spreading the bank’s ELA liabilities means the retail business would be left with a smaller ELA tab and thus a bigger pool from which to draw emergency liquidity in the future.

Moreover, interest paid on ELA depends on the risk of the asset used as collateral for the loan. For toxic assets, ELA interest rates range from 2.85 per cent to around 3 per cent, whereas the basic ECB lending rate is 0.75 per cent.

In short, the retail arm of BoC, not having toxic assets on its balance sheet, ends up paying less for its ELA borrowing.

“The asset management bank would probably take in the 35 to 40 most exposed customers, the big cats among the developers with problematic loans. I doubt they’ll be going after the average Joe,” said Mountis.

Nevertheless, Mountis foresees certain practical problems in implementing the idea. A financial institution needs to list both assets and liabilities on its balance sheet in order to get a banking licence.

“Which means the real estate operation will necessarily have to take with it some of the deposits in Bank of Cyprus. Here’s where it gets complicated.

“Which deposits do you move to the ‘new’ bank? Say a single developer has taken out two loans – one good, the other bad – do you also split these up? But that’s against banking regulations and practices. So you’d have to take both the good and the bad to the real estate bank.”

Lakis Tofarides, honorary chairman of the Land and Building Developers Association (LBDA), said the association is not officially opposed to the establishment of a real estate bank.

“Whatever you call it, an asset management company, an investment bank, it doesn’t matter. To us, the key is not to grab properties and sell them at a huge discount overnight. That would devastate the real estate sector. If on the other hand they want to set up a company that will renegotiate developers’ loans, that’s perfectly fine.”

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