By Loucas Charalambous
ONE OF the most serious issues that will need immediate attention by the new board of the Bank of Cyprus will be what to do with the very big non-performing loans (NPL) on its books.
In July there was a big public row after the then chairman of board Sophoclis Michaelides spoke about the possibility of splitting the bank into two separate entities, the first dealing with commercial business and the other with asset management.
The leaders of both AKEL and DISY expressed strong objections to this idea, though their comments were marked by a large dose of populism. They cited the danger of re-possessions of the homes of those on low incomes.
“I would not like to wake up one morning and see people’s properties being auctioned off at 20 or 30 per cent of their value,” said DISY chief Averof Neophytou at the time.
He ignored that Michaelides had said that if the bank was split into two the properties of small businesses and low income bank customers would not be at risk. The plan would deal with the NPLs of developers he explained.
It is therefore clear and rational that any decision to separate the operations of the bank would not have as its objective the re-possession of small properties (apartments and houses) bought with loans and used as the home of the borrower.
The split would be designed to deal with the massive, unserviced loans of the big sharks who led the BoC to the brink of bankruptcy. It would be the NPLs of big developers and big businessmen which would be taken over by the asset management company.
In last week’s column I referred to two cases that had been revealed by Kathimerini regarding Leptos Estates and Aristo Developers, which belonged to a former chairman of BoC, and were truly astonishing.
In 2012, while the country was deep in recession and the bank unable to meet its capital needs, the BoC management, quite scandalously, gave new loans to these companies – €222 million to the first and €140 million to the second. Incredibly, in the previous three years, these companies had not even been paying the interest on their existing loans.
What purpose would be served by keeping these and similar NPLs at BoC? So the bank can include in its accounts income from interest that will never be collected, adding this to its provisions and thus increasing its losses?
It is very clear that the transfer of loans that will never be repaid and of properties used as their collateral, to an asset management bank would be the best solution. Admittedly, an attempt to sell these properties now, so the bank could recover its loans, would not be wisest decision as it would not secure reasonable prices for them.
There are however, among these assets, unfinished buildings, the completion of which could be done in two ways: by the asset bank making capital (assuming it has it) available or by their sale to foreign investors who would pay for their completion with funds from abroad.
This solution, apart from creating jobs, would have two benefits – first, it would allow the delivery of apartments or houses to the buyers and second, there would be revenue for the state, from the transfers of the unfinished buildings and transfers of the properties to the buyers, who will be dealing with a reliable seller.
In the case of tourist developments, once it takes ownership, the bank could reach a deal with investors or tour companies regarding their sale; these companies could agree to pay for the completion of the projects in exchange for having use of them for a pre-agreed period.
There is no doubt that once an assets bank takes control of mortgaged properties it will find ways to make money from them, even if this takes some time. It would be better than leaving the properties under the ownership of the bankrupt customers resulting in more losses for the bank.
Under the circumstances, the new board needs to be courageous and determined in taking these decisions, without taking into account the objections of Averof and Andros Kyprianou, who should stop interfering in the affairs of the BoC. They have no authority to get involved in how a privately owned bank is managed.