By Michele Kambas
Cyprus’ bailed-out Co-Op Bank plans to tackle more than €1bln in problem loans a year to help to reduce a mountain of bad debt hobbling the island’s banking system and holding back lending to households and businesses.
Cyprus has the highest percentage of non-performing loans in Europe, the legacy of an economic crisis which started in the euro zone country in 2011 and culminated in a €10bln international bailout in 2013.
The Co-Op Bank is one of Cyprus big three banks with 38 per cent of the deposits of the country’s residents. I
It was bailed out with €1.5bln in taxpayers’ money and has a loan book where about half of the loans are non-performing, mirroring a trend throughout the Cypriot banking system.
Nicholas Hadjiyiannis, incoming CEO of the Co-Op and chairman of its board of directors, told Reuters the bank had a 12-month plan to use the latest technology for managing non-performing loans.
It will use a so-called ‘open architecture’ approach to restructure up to €4bln in outstanding non-performing loans, with a sizeable chunk of them being mortgages.
“The general target is to turn around our portfolio for restructurings in three to four years. That means we need to do at least €1.2, €1.3bln in viable restructuring every year,” Hadjiyiannis said.
“It’s a big problem and we have to handle it, but we cannot destroy households,” the chairman said. “Our aim is to pursue viable restructurings (of loans) because we know we have to work with these households, these people, for the next 20, 30 or 40 years.”
Hadjiyiannis said the bank had hired an international advisory firm to work alongside specialist IT companies and they would use a combination of existing and new strategies to deal with the problem loans.
Aggregate data from the Cypriot Central Bank shows that throughout the Cypriot banking system 47 per cent of outstanding loans were non-performing for July.
“It places us in a pretty unique position worldwide,” said Hadjiyiannis, who worked in London, Geneva and Greece before returning to his native Cyprus. He was appointed chairman of a completely revamped board team in late 2013.
“Half of the people in Cyprus right now are not eligible for normal banking business because of the NPL situation,” he said.
In the Co-Op’s case, he said, it concerned 120,000 clients, a big number in a country with a population of less than a million.
Earlier this year, authorities introduced a foreclosures law, and an insolvency framework, a move international lenders hope will draw a line under a problem widely blamed for holding back new credit and economic growth.
PROBLEM LOAN GROWTH EASES
By the broadest measure, the non-performing loan ratio has remained in the upper 40-per cent bracket this year, but Hadjiyiannis said cases of 90-days past due, a three-month lag on debt repayments, were showing signs of easing.
That mirrors signs of a pick up in Cyprus’ economy, which returned to growth in the first quarter of 2015, the first time since mid-2011. It was expected to show growth of about 1.5 per cent for the whole of 2015, compared to a contraction of about 2.0 per cent in 2014.
But the fact that the country is living in a ‘deleveraged environment’ focused on repaying debts, meant a decrease in assets would make a stable non-performing loan amount appear higher as a percentage, he said.
Under terms of the Co-Op’s revamp, some 100 small cooperatives were merged to create an 18-subsidiary co-operative credit sector operating under the umbrella of the Co-Operative Credit Bank. It has a €15bln balance sheet, roughly equivalent to 80 per cent of Cyprus’ gross domestic product.
The state has a 99 per cent stake in the bank, though the Co-Op says it is not run by the state. “There is a close relationship, but it is not a state owned bank because we have to operate competitively in the banking industry,” Hadjiyiannis said.
Under terms of Cyprus bailout, the state could start disposing of its Co-Op shareholding in 2019.
“Our mission is to implement the restructuring plan and create value for the shareholder,” he said.