Cyprus Mail
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BoC out of administration

Sophocles Michaelides (l) and Panicos Demetriades(r)

By Poly Pantelides

CENTRAL Bank (CBC) governor Panicos Demetriades yesterday signed over the Bank of Cyprus’ (BoC) to its interim board, officially announcing the bank’s exit from administration status.

“The Bank of Cyprus’ exit from administration status constitutes a landmark in the banking sector’s restructuring and puts us on the right path towards economic stability,” Demetriades said in a modest ceremony at the Central Bank.

“[This] development puts an end to a prolonged period of uncertainty,” a joint announcement from the CBC and the finance ministry said earlier in the day. The BoC – the island’s biggest lender – was placed under the administration of the CBC in March, as part of the terms of a €10 billion international bailout.

A haircut of some 47.5 per cent haircut on BoC deposits exceeding €100,000 will bring the bank’s capital adequacy ratio (core tier 1 capital) to about 12.0 per cent, the announcement said. This is beyond the [compulsory] 9.0 per cent. But is expected to guarantee a 9.0 per cent adequacy by the time Cyprus exits the bailout programme in December 2015, when Cyprus will have received the full amount of its €10 billion international bailout.

“The Bank of Cyprus’ recapitalisation process is completed,” the CBC and finance ministry said.

But what does it mean for the average depositor? Take a BoC depositor who had €200,000 in the bank. Half of that, €100,000 was insured and has been untouched.

From the remaining €100,000, the depositor had access – subject to existing capital controls – to 10 per cent of that amount, or €10,000. This left him with a blocked amount of €90,000 of which more than half, or €47,500, has been given up in a compulsory equity swap, with the depositor accepting a 47.5 per cent haircut on all his uninsured deposits, in return for shares.

This left a remaining €42,500, of which 12 per cent – €5,100 of the uninsured amount – will now be also available to him, subject to the island-wide capital controls on sight/current accounts.

The remaining amount of that money, some €37,400 or 88 per cent of the total amount that was previously blocked and not subjected to a haircut, will now be carved up in equal amounts into three fixed term deposits, each with a maturity period of six, nine and twelve months.

The BoC may extend each account for another term of the same duration when the time comes. These deposits will fetch a higher interest rate compared to the average interest paid by the BoC, expected to lie at 2.95 per cent for the deposits with a six month maturity rate; 3.125 per cent for nine months; and 3.40 per cent for 12 months.

The BoC is due to confirm the figures this week. Depositors will be able to draw funds from their fixed term deposits on a one-off basis, and use them to repay loans and other obligations previously agreed with the BoC, a finance ministry decree has said.

So in real numbers, a depositor who had €200,000 with the BoC, will now have available €115,100 in a current account, and €37,400 in fixed term deposits that cannot be immediately touched.

The rest, €47,500 will now be shares of a nominal value of €1.0 each but practically worthless. “But if the bank is correctly managed in the future and becomes profitable, then those shares will acquire value. And if the bank starts giving out equity, those shares might come to be worth more than €1.0 each,” said the BoC’s the interim chairman, Sophocles Michaelides.

Michaelides suggested it would take some two years for the totality of the BoC capital to be freed up. But pending approval from the European Central Bank, the BoC should soon be able to participate in markets, he said.

The BoC’s transitional board will now need to inform the BoC’s shareholders of the changes in writing. Michaelides said this amounted to approximately 120,000 natural or legal entities. Old shareholders, who were originally to have different class shares will participate in the new Bank of Cyprus with a tiny share capital of less than 1.0 per cent.

This is to comply with capital requirements regulation, the Central Bank said. Insured Laiki depositors will now be part of the new BoC. Laiki bank itself, now under resolution, will try to recover as many of its bad assets as possible, but will also have about 18 per cent share capital in the new BoC. In due time, those shares will be sold and the amounts will be returned to the uninsured depositors of the former Laiki bank, the Central bank and finance ministry have said.

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