By George Mountis
With Greek banks heading down the route of yet another re-capitalisation, the horizon for Cypriot banks could be improving. Hellenic Bank and Bank of Cyprus, while still navigating a fine line in terms of provisions and non-performing loans (NPL) management, may have spotted a light at the end of the tunnel. We have seen some positive interest in the two Cypriot banks, with Bank of Cyprus riding international investor interest on the wave of Cypriot banking stability, while Hellenic Bank just secured a new strategic investor from the EBRD.
However, the banking sector in Cyprus is still far from ideal. Cypriot banks urgently need to sort-out their NPL portfolios (which are still rising) by using new loan workout methodologies employed in other countries with great success. In their attempt to deal with the huge number of NPLs which cannot be repaid, the Cypriot banks need to adopt new and innovative practices which will include foreclosures, debt-for-asset swaps, debt-for-equity, write-offs, etc. As such, they must find a way to manage considerable portfolios of real estate assets seized from the lenders in exchange for debt repayments and write-offs. They must also begin to offer competitive (by European standards) loan rates (as they did with the deposit-interest rates). As such, the Cypriot banks must navigate a fine line in reducing NPL levels, reducing their margins and attracting new business before we can be convinced of their long-term viability and sustainability. Each bank active in Cyprus is affected by a variety of uncertainties, with NPL levels a common red flag amongst the main stakeholders.
Bank of Cyprus
Bank of Cyprus is hoping to draw fresh capital from international markets, but seems to be plagued by its high NPL exposure, low coverage ratios and the need to manage and dispose of a considerable portfolio of real estate assets which will be stockpiled until debt-for-asset swaps and other “smart” workout approaches to NPL reduction become a more common method to dealing with unsustainable lending. Economic uncertainty in Europe and Russia, and particularly uncertainty arising from the never-ending Greek crisis still plagues BoC’s immediate prospects. Liquidity will be positively affected by expectations of further Quantitative Easing employed by the Central Bank to aid the Eurozone economy. The positive impact of tourism and especially retirees from the UK has had an effect but is subject to the volatility of the British pound to euro exchange rate which has seen considerable variation recently.
The Greek subsidiaries are mostly affected by the unsettled Greek climate, which also has an impact on their Cypriot operation despite their “ring-fenced” status. Their Greek parent companies have been further supported by the European Stability Mechanism (ESM) which has stabilised deposits once again. The recent elections will bring a much needed political stability, while the Troika adjustment programme should ease banking sector risks.
For Hellenic Bank, NPLs remain significantly high, which means the bank’s priority should be to identify and implement measures for NPL reduction sooner rather than later. High NPL levels erode any profits the bank wishes to enjoy, as additional provisions need to be taken while NPLs are on the rise. Despite some progress which has admittedly been observed, the property market slump, limited real estate liquidity and dated internal procedures are all elements that must be looked into in greater detail in the short-term. The new executive management team has the experience to turn the bank around.
The co-op is slowly but surely establishing more streamlined procedures and trying to stay in line with commercial banks. Restructuring and elimination of unnecessary bureaucracies must remain a priority. As with all banks, a recovery in the economy will be the single most significant factor affecting the bank’s books. NPLs remain significantly high, which means the bank’s priority should be to identify and implement measures for NPL reduction sooner rather than later.
Dr. George Mountis is the managing partner of Nicosia-based Delfi Partners and Co