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BoC ‘richer’ with €1.6bn cash buffer

By Staff Reporter

DESPITE the near-meltdown of the island’s biggest lender, Bank of Cyprus now seems to be far better capitalised than many of its peers that will be subjected to excruciating stress tests in October.

A senior BoC official on Friday said that the recent capital increase, the money it was owed by the state and potential new bond issues will give the bank a capital buffer of about €1.6bn, pushing its liquidity levels several points above the minimum requirements set by the European Central Bank.

The recent exercise to increase the bank’s capital by about €1.1bn in three stages has attracted major venture capitalists who seem to have faith in the bank’s future and are pumping their own money to prop up the bank’s funds.

This move, that will now include the likes of American billionaire Wilbur Ross and the European Bank of Reconstruction and Development among the bank’s new shareholders, won the praise of Moody’s rating agency, that said that the latest news will boost liquidity levels and strengthen depositor confidence.

And in a sign of old shareholders lowering their rhetoric and opposition to foreign investors grabbing the bank they once cherished as their own, Archbishop Chrysostomos said that “the capital increase has taken its course” and that the shareholders’ meeting at the end of August would probably be uneventful.

BoC now has a capital buffer of €1.6bn after the increase of its share capital, Group Finance director Christakis Patsalides told the Cyprus News Agency in an interview, adding that money raised from any placement of covered bonds in the future will be used to pay down the emergency liquidity assistance (ELA) burden the bank inherited when it took over now-defunct Laiki Popular.

“With (our) common equity tier 1 ratio amounting to 15.1 per cent, significantly above the minimum required (by the European Banking Authority) which is 8 per cent, we have created a capital buffer amounting at €1.6bn,” he said.

Patsalides said that given the bank’s current risk profile, the quality of the loan portfolio and the bank’s reduced overseas exposure, there is a significant capital buffer to absorb unexpected losses or shocks.

The senior official said that after the completion of the first phase of the capital increase, the existing shareholders hold 53 per cent of the bank, while new shareholders have the remaining 47 per cent. The “legacy Laiki” holding will fall to 10 per cent from 18 per cent, while international investors introduced by billionaire Wilbur Ross will hold 19 per cent. These percentages are expected to change after the second phase of the share capital increase, where up to 20 per cent of the shares of Phase 1 will be allocated to existing shareholders in the “clawback” process, but at the same price of €0.24 offered to existing and institutional investors.

“It is not a coincidence that the international rating agencies have seen positively this increase and is expected to gradually upgrade the credit rating of the bank, something that reduces (our) cost of borrowing from the markets,” Patsalides said.

The investment in the capital increase represents about 6 per cent of the island’s gross domestic product (GDP) making it the largest foreign investment to date, he said.

However, he said that the capital increase would not change the bank’s policy dealing with bad loans, as the new legal framework on foreclosures will give the bank the right tools to effective deal with non-performing loans, especially the recovery from those who can afford to but refuse to pay back their loans.

The stronger capital and liquidity is expected to improve the bank’s ability to grant loans, but this will be done in a prudent manner, taking into account the bank’s new credit criteria and the creditworthiness of customers, Patsalides said.

Already, the bank announced a reduction in key interest rates by 0.25 per cent this week to help reduce borrowing costs for households and businesses and to strengthen the domestic economy.

Endorsing the bank’s capital increase, Moody’s described it as credit positive because it improved the lender’s liquidity and funding position.

The agency warned, however, that BoC still faced challenges, especially due to its high levels of non-performing loans (NPLs).

In an issuer comment, Moody’s said the bank’s successful completion of the first phase of its €1bn capital increase “is credit positive because it will improve the bank’s liquidity and funding position, strengthen depositor confidence and potentially open other funding options.”

Moody’s said the additional capital would help BoC pass the EBA stress tests and withstand losses stemming from the high level of NPLs, which hovered around 55 per cent

The agency said it expected the bank to make a loss this year, despite the modest profit in the first quarter.

Government spokesman Nicos Christodoulides welcomed the statement, which he described as “particularly important.”

BoC said it is proceeding to phase two — the “Open Offer” — of the share capital increase.

It invited existing shareholders to subscribe for up to 20 per cent in aggregate of the total number of shares offered to qualified investors in the first phase (833,333,333 shares) over a period of 15 business days starting July 31 at the same price as the private placement price of €0.24 offered to existing and institutional investors.

The capital raising is subject to approval by the shareholders who will convene an extraordinary general meeting (EGM) at BoC’s headquarters at 10am on August 28, where Archbishop Chrysostomos said he does not expect surprises.

He told the Stockwatch news site that he sees the new capital increase as “a positive development” and that all shareholders, old and new alike, “want to see the bank recover and return to the point of some day paying a dividend again.”

However, the head of the Church of Cyprus, formerly one of the biggest shareholders in the bank that saw its holding diluted drastically, said he was still unhappy that the bank mistreated its traditional shareholders who had supported it for decades. He said that he will continue to defend the rights of the old shareholders by getting the bank to recognise about €1.9bn in profits realised from the merger with Laiki should be given to them, together with BoC’s portfolio of property in the occupied north.

Finally, the Archbishop said that the Church was in no state to subscribe to the new capital increase, “even if the issue price is very attractive,” he said.

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