By Angelos Anastasiou
The European Commission on Friday announced the approval of additional state aid of €175 million in favour of the Cooperative Central Bank (CCB) in Cyprus and its subsidiaries.
The Commission concluded in particular that the additional restructuring measures that the bank committed to implement will ensure that it becomes viable in the long-term, whilst distortions of competition will be minimised.
“Repeated state aid for a bank, while its competitors compete on their own merits by finding capital on the market, can create serious distortions of competition,” EU Competition Commissioner Margrethe Vestager said.
“It is therefore crucial that Cooperative Central Bank restructures so that it in the future it can cover potential capital needs by raising money from private investors. It will then be in a position to contribute to the recovery of the Cypriot economy on a sustainable basis.”
In a press release on Friday, the Commission recalled that, as a result of the deep recession in Cyprus in recent years, a high proportion of the Cooperative group’s loan book became non-performing. The group needed capital injections of €1.5 billion from the state to cover the losses, which the Commission approved in February 2014 on the basis of a restructuring plan.
The funds were provided to Cyprus by the European Stability Mechanism (ESM) in the context of the country’s economic adjustment programme.
As a result of the recapitalisation, the Cypriot State has become the 99% shareholder of the Cooperative Central Bank, which in turn obtained control over the previously independent cooperative credit institutions.
In line with the centralisation and rationalisation foreseen under the original restructuring plan, the number of independent cooperative credit institutions was reduced from over 90 to 18 through mergers. The group has also set up an internal non-performing loan management division and started to develop more robust risk-management and IT functions.
However, the assessments carried out in 2015 by the European Central Bank (ECB) in its capacity as supervisor, identified that the bank did not make sufficient provisions compared to the size of its defaulted loans portfolio, revealing a so-called “provisioning shortfall”.
The bank made the requested additional provisioning in its 3rd quarter 2015 account but, as a consequence, needs additional capital of € 175 million.
Mainly due to its current complex structure and the resulting lengthy process to list its shares on the stock exchange, the Cooperative group is not in a position to raise the required additional amount from private investors within the short deadline set by the regulator.
Cyprus’ newly created Recapitalisation Fund – which is financed by levies from the banking sector – plans to provide the necessary recapitalisation in exchange for ordinary shares in the Cooperative Central Bank.
The Commission ruled that additional state aid needs to be accompanied by supplementary restructuring measures, in order to ensure that the bank becomes viable without continued state support in the future and that the distortions of competition created by the state aid are mitigated.
In particular, Cyprus’ commitment to either list the Cooperative group’s shares on the stock exchange or sell a significant part of the capital to solid investors by 2018 will restore the bank’s access to capital markets and enable it to finance the recovery of the Cypriot economy on a sustainable basis, the announcement noted.
Moreover, the group will deepen the rationalisation of its structure and will accelerate the development of central divisions (non-performing loan management, risk management, IT department), which are key for prudent and efficient management of the bank and will enhance its viability.
On the basis of these commitments, and subject to their full implementation as set out in the bank’s amended restructuring plan, the Commission concluded that the additional recapitalisation was in line with EU state aid rules.
The Commission will continue to closely monitor the correct and timely implementation of the plan.