Cyprus Mail

Recapitalise or resign, CBC governor tells BoC board

Divided, BoC chairman Christis Hassapis and CEO John Hourican

By George Psyllides

CENTRAL BANK (CBC) Governor Chrystalla Georghadji has sent the Bank of Cyprus (BoC) board an ultimatum threatening members that if they don’t stop delaying tactics and push ahead with a capital issue, she will demand resignations, it emerged on Saturday.

The disclosure came a day after the lender, which was forced to use depositors’ savings to recapitalise itself last year, said it was assessing potential investor interest and would make a further announcement “when and if there is further tangible progress”.

The announcement was issued after Thursday’s marathon meeting of the bank’s 16 board members, some of whom, including chairman Christis Hassapis, do not favour the issue of capital and have been accused of engaging in delaying tactics.

The board is split between those supporting Hassapis and those backing CEO John Hourican who wants to issue new capital.
A government source asked by the Sunday Mail confirmed on Saturday that Georghadji had sent a letter on Friday, warning the board that she would ask for four or five resignations if procedures to raise new capital were not completed by early August.

The unsettling dispute is taking place even though foreign investors have shown “serious interest”, according to the source.

The bank is said to be seeking some €1 billion but it appears that there is interest for double that amount. However, new shares would mean that old shares would be diluted and would necessitate a new board of directors.

In light of this, some members of the board, including the chairman, have sought to delay if not scupper the process.
Some have promised to bring Russian capital to the bank, a move the government and the Central Bank do not believe to be in the best interests of BoC or the country.

The source suggested that in the end some members of the board may have to leave anyway to secure the success of the capital issue.

Politis reported on Saturday that the board was now expected to reconvene on Monday or Tuesday to take a clear decision concerning the capital issue.

The paper said Finance Minister Harris Georgiades met with Hourican on Friday morning. He warned the minister that the situation did not look good and appeared ready to resign if he was not allowed to do his job, Politis said.
Georgiades then met Georghadji.

BoC was forced to convert a large portion of client deposits to equity last year when international lenders refused to provide assistance.

The process, known as a “bail-in”, marked the first time in the history of the eurozone debt crisis that distressed banks used client funds to recapitalise, instead of EU tax payers.

Based on its first-quarter results, BoC had a core tier 1 capital, a ratio of financial strength, of 10.4 per cent, increasing slightly to 10.6 per cent from the disposal of Serbian assets in May.

Under stress test baseline scenarios it should exceed 8 per cent, and in an adverse scenario 5.5 per cent.
The bank is one of more than 100 across the eurozone which will be assessed by regulators this autumn under simulated conditions of financial stress.

The dispute over the capital issue is another example of the reported friction between Hourican and Hassapis, particularly over how to deal with the bank’s extremely high rate of non-performing loans which now constitute more than 50 per cent of the bank’s loan portfolio. Though this friction has been denied, it is now clear that the two cannot see eye to eye.

The latest run-in is not helping the bank’s efforts to regain confidence and foster stability in its operation.
Hourican appears to be fighting with deeply entrenched interests represented by board members put there by the new shareholders that came about after the bail-in.

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