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Cyprus

BoC twice told it was undercapitalised, court hears

The former country manager of Ernst & Young, external auditors for Bank of Cyprus (BoC), said on Tuesday their firm had twice reported the bank was under-capitalised.

Andreas Demetriou, former Country Managing Partner for Ernst & Young Cyprus, was testifying in court in the ongoing BoC trial, where the lender itself as a legal entity as well as five of the bank’s former senior officials are accused of deliberately misinforming investors with regard to the bank’s capital position in 2012.

Under cross-examination by defence attorney Polis Polyviou, representing the bank, Demetriou said the bank calculated the value of its Greek bond holdings – after they were written down – at 35 cents, whereas Ernst & Young assessed the value at between 20 and 30 cents.

But the divergence in the two estimates was not a substantial one, he said. After June 22, 2012, the two sides settled on a value of 21.6 cents on the bonds.

On two occasions, in reports dated November 31, 2011, and June 30, 2012, the auditors had pointed out that the bank may require additional capital.

Next on the stand was Christis Hadjimitsis, former Senior Group General Manager at BoC, who was forced out by then-Central Bank of Cyprus (CBC) governor Panicos Demetriades in 2013 while the lender was under CBC administration, following the bail-in of depositors in March of the same year.

Hadjimitsis said that part of his duties consisted of taking instructions and reporting to Andreas Eliades, former bank CEO and one of the defendants in the trial.

In his deposition to police, submitted as evidence in court, Hadjimitsis said that in June 2012, and given that it looked unlikely the bank would be able to divest its insurance companies to raise cash, the lender should have informed the public of its capital needs.

According to the witness, at the bank’s annual general meeting (AGM) of shareholders on June 19, 2012, former BoC board chairman Theodoros Aristodemou – also a defendant – had said that the capital shortfall would be plugged at a subsequent time, while Eliades claimed that the lender had already covered around 80 per cent of its capital needs.

Hadjimitsis did not recall whether any reference was made at the AGM about increased capital needs.

He cited a letter by Eliades, dated June 20, 2012 – a day after the controversial AGM – with confidential information to the effect that the lender’s capital requirements had risen from €200m to €400m.

Hadjimitsis said also that at the bank’s ‘Maxi Committee’ which convened on June 26, 2012, it was recommended that provision be made for a €118m capital shortfall for Cyprus operations (up from €53m initially) and for a €206m deficit for Greece operations (up from €150m).

The witness stated for the record that the bank officially announced increased capital needs on June 27 of that year.

Covering the capital needs was a major issue for the bank at the time, he said, responding to questions by the state prosecutor.

The department which he headed constantly kept Eliades informed of actions taken, he added.

In addition to the bank, indicted are Eliades, his successor Yiannis Kypri, Aristodemou , former vice chairman Andreas Artemi and former first deputy CEO Yiannis Pehlivanides.

They are facing charges of market manipulation and conspiracy to defraud investors in connection with “non-disclosure to the public that the bank’s capital needs had risen significantly relative to the amount of €200 million, which was announced on May 10, 2012.”

According to previous testimony heard in the trial, during meetings held in May and June 2012 between top BoC brass and the CBC, the former spoke of a €200m shortfall, not €400m.

In a letter to then-CBC governor Demetriades, dated June 20, 2012 – i.e. one day after its AGM – the bank raised its capital needs to approximately €400m.

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