By Angelos Anastasiou
A DAY-LONG marathon session of the Bank of Cyprus board of directors was convened in order to look at splitting the bank into two separate entities – a commercial and a development arm. Picking up from Thursday’s session, the meeting was set to debate consultants HSBC’s proposal to create a ‘bad bank’ that would relieve the flailing lender of its troubled assets.
But despite Thursday’s reported consensus on the concept of a bad bank, drilling down on the details proved challenging. Sources cited by financial news website Stockwatch noted that the financing of a new entity will be the basic driver of any developments.
The bank’s consultants, HSBC, focus on locating new private investors to participate in capitalising the new entity, either through a capital issue or otherwise. However, this prospect has been met with some resistance from existing shareholders – and some board members – who might be after a stake in the new unit without necessarily putting up more capital.
The alternative – government-backed financing – is an option that is not expected to gain much traction as finance minister Harris Georgiades has repeatedly alluded to the government’s unwillingness to engage in what would amount to yet another bail-out of a distressed bank.
Georgiades’ mantra – “the decision to split the bank or not is for the bank’s management to make” – seems to suggest that the government would not object to such a manoeuvre, as long as it is not asked to pay for it.
The bank’s management is eager to move forward with the issue as it needs to address the challenging environment it operates in and agree on a viable implementation roadmap with the Troika.
Bank of Cyprus’ non-performing loans (NPLs) are closing in on 50 per cent and the upcoming ‘stress tests’ by the European Central Bank (ECB) call for alternative planning in case the bank is found in need of fresh capital.
One of the key drivers that will determine the viability of the project is the valuation of the assets that will be transferred to the new entity. Management is tasked with striking a balance between the assets’ discounted transfer price – giving the new entity greater profit potential and thus making it an attractive prospect to private investors – and sustaining as few losses as possible.
Another issue on the table relates to the prospect of transferring part of the emergency liquidity assistance (ELA) that burdens the bank’s balance sheet – in the form of short-term debt to the Central Bank of Cyprus – to the bad bank with a view to turning it into mid-term or long-term debt.
The issue had been tabled months ago, with the ECB hinting its consent, but the prospect was never explored conclusively due to political resistance.
It is hoped that an arrangement similar to the 2013 liquidation of Ireland’s IBRC – whose balance sheet was also burdened by extraordinary amounts of ELA – can be put together, where ELA repayments were replaced by long-term bonds that will start to be repaid 27 years after they were issued – at the earliest.