By Angelos Anastasiou
THE cash-strapped Bank of Cyprus (BoC) appears to be forced to address some of the most important issues facing it imminently, relating to a speculated capital increase, the bank’s rising non-performing loan portfolio, and decisions that are bound to dramatically shape its future.
The BoC board has reportedly been struggling to come to a decision on a €500 million capital increase at the suggestion of HSBC, which was commissioned to propose optimal restructuring strategies for the lender to address its woes. But the decision has been met unfavourably by some board members – former depositors who found themselves with board seats following a conversion of their uninsured deposits into bank stock – who voiced concern at the dilution their ownership stake in the bank would suffer.
Dissenting shareholders also question the wisdom of increasing capital through a non-public offering – or private placement – whereby new share capital is offered to a few selected investors. The proposal was tabled by HSBC, but some board members disagreed as they felt this would be unnecessarily restrictive.
Responding to the media commentary on the subject, BoC put out a statement late last night denying a capital increase is currently on the table though not ruling it out entirely either.
In it, the bank said its board of directors “has not yet assessed any specific proposal regarding a capital issuance.
“The bank together with its external advisors is considering and assessing a number of strategic options regarding its corporate structure,” it added.
Last month a proposal to create a ‘development’ bank to absorb the lender’s troubled assets – non-performing loans – was also reported to have caused significant friction at board level, with no decision yet to have emerged since. The dysfunctionality of the board has not gone unnoticed by the authorities and is thought to have already discouraged potential investors.
Following a meeting with Governor of the Central Bank of Cyprus Chrystalla Georghadji on Wednesday evening, DISY leader Averof Neophytou said that a World Bank subsidiary – rumoured to be the International Finance Corporation – has expressed its interest in investing in the BoC.
A government appeal to the European Bank for Reconstruction and Development (EBRD) – of which Cyprus is a founding shareholder – for financial aid in February 2014 was approved yesterday.
Shortly after the announcement, ruling DISY welcomed the EBRD’s decision and sought to clarify its terms.
“It is clarified that the EBRD’s interest focuses on activities that will strengthen the financial sector and improve its governance, as well as the privatisation schedule,” the statement said.
The ruling party also addressed the issue of the 18 per cent stake in the BoC which was created by the conversion of failed Laiki bank’s uninsured deposits into BoC stock.
“At the same time, we note the ongoing deliberations aiming at the EBRD’s taking over the management of the significant stake in the Bank of Cyprus’ share capital, which corresponds to the interests of Laiki bank’s creditors. We hope this effort is successful, noting that it will contribute in itself to the restoration of confidence in the banking system.”
BoC boss John-Patrick Hourican spoke favourably of the prospect of the EBRD taking control of 18 per cent of his bank. Speaking at a convention organised by the Institute of Certified Accountants and Gold magazine, Hourican said this would be a positive development both for the bank and Cyprus.
“It would bring a reputable institution to the island, and employing their expertise will be good for the bank and Cyprus,” he said.
Meanwhile, the effort to effectively address the issue of the BoC’s mounting non-performing loan portfolio continues, with the latest proposal tabled calling for the creation of a subsidiary to manage the lender’s troubled assets. The proposal resembles the earlier ‘development’ bank idea but stumbles upon the issue of financing, as it would require capital to purchase the distressed assets. A model similar to Ireland’s, where a state company was created to carry out the task, has reportedly been rejected by the Troika as it would drive public debt up.
But a source from inside the Central Bank of Cyprus denied that the subsidiary bad bank scenario was ever tabled at any meeting with the Troika.
“As far as the Central Bank is concerned, such an issue has never been tabled, nor was it discussed by the Troika,” the source told the Cyprus News Agency.