By Stelios Orphanides
Bank of Cyprus, the island’s largest lender, is on Tuesday holding its annual general meeting after undergoing an unprecedented transformation over the three-and-a-half years, probably the most turbulent in its 117-year history.
After the bank was forced to bail in its depositors and merge with its failed competitor Cyprus Popular Bank, widely known as Laiki in March 2013, it completed 18 months later a €1bn capital increase, the largest so far foreign direct investment in Cyprus. Economists and bankers interviewed by the Cyprus Business Mail said that while the bank completed Herculean tasks since March 2013, it is still not out of the woods and its long-term viability, which is a mirror of the Cypriot economy’s health, is far from secured.
“Bank of Cyprus completed three achievements since its recapitalisation,” Yiannis Telonis, a former Hellenic Bank executive said in an interview. “It found new investors in 2014 which was a major achievement, sold its subsidiaries abroad including Uniastrum and repaid most of its outstanding emergency liquidity assistance which means that confidence has been restored”.
In addition, the bank managed to merge several corporate cultures; first, its traditional Bank of Cyprus culture distinguished by its “paternalistic relation to the customer” with that of Laiki which “was good with good clients and bad with bad ones,” he continued. The synthesis was completed with the appointment of its current chief executive officer John Hourican three years ago, Telonis said. “The situation improved dramatically”.
Under the new management, the lender saw extensive internal changes, which included the creation or further strengthening of units tasked with monitoring of loans in arrears, and restructuring and recovering non-performing loans. Still, much of its internal effort appears less fruitful than intended. Shortcomings in Cyprus’s structural reform effort may be to blame.
Cyprus, half-heartedly at best, modernised its economy in the direction prescribed by its cash-for-reforms programme which expired in March, economist Marios Clerides, a former Hellenic Bank and Cooperative Central Bank banker said. “We are at a point which will show whether institutional reforms will indeed work or they will prove merely changes we merely made on paper”.
“We will go through a phase in which courts need to decide (on new laws) and depending (on the ruling) we need to see whether the foreclosure and insolvency framework require more changes,” he added.
Cyprus’s bailout terms included changes in its foreclosure and insolvency framework aiming at addressing non-performing loans and strategic default. The programme also provided for the creation of a legislative framework to allow the sale of loans to third parties.
Clerides who declined to comment specifically on Bank of Cyprus for the purposes of this report, said that a September Larnaca district court decision barring Bank of Cyprus from applying the new law to auction a property, because its foreclosure order was issued before the law’s amendment two years ago, highlights the gaps in the current legislative framework.
In the absence of loan sales and following the limited success of property foreclosures since June, banks resort increasingly to debt-to-asset swaps to reduce their non-performing loan stock, Clerides who also chairs the Cyprus Economic Society, said. This in turn forces them to operate two different subsidiaries: a traditional banking unit and real estate company.
The main implication of the stalled reform process effectively since December 2015 is that banks, including Bank of Cyprus, may have switched to “short-term vision,” rather than operating based on longer-term plans, University of Cyprus economist Marios Zachariadis said.
“There is a real issue with real property and the trend is that banks accumulate real estate and this will be consequential effect on their obligatory effort to reduce non-performing loans,” he said. “They could sell loans but instead of doing this, which would result in booking losses today, they swap them with assets and accumulate real property. This is not a problem now but in the long-term, it is”.
Bank of Cyprus accumulated real estate worth €689m alone in the first half of the year, in which the bank sold properties worth €92m. At the end of June, the bank managed assets worth €1.1bn, a figure which included immovable assets worth €201m abroad.
This practice may reflect a shorter-term time approach to the bank’s challenges, instead of a longer-term, both at the bank’s major shareholders and its CEO Zachariadis, who is also member of the Fiscal Council, a body tasked with monitoring fiscal developments, said.
A year ago, Hourican signed a new contract with bank of Cyprus after he surprisingly filed his resignation in April 2015 citing personal reasons. He repeatedly angered Cypriot political party leaders until a year ago. Hourican criticised them for delaying key reforms that would allow the bank collect loans.
“They may not want to show (now) the losses which would incur from the sale of loans,” Zachariadis, added in a comment which one may interpret as a decision at Bank of Cyprus to flow from now on with politics. “But sooner or later, the losses will come”.
On Wednesday, the Fiscal Council urged banks and authorities to do more to help banks reduce to half future loan losses, estimated by the International Monetary Fund at up to €15bn. Resuming the reform process, and especially by making the foreclosure framework more efficient, could help contain debt writedowns, the fiscal watchdog said.
Bank of Cyprus posted a €56m after-tax profit in the first half of the year in which it slashed 350 jobs with a voluntary retirement scheme. In 2015, the bank generated a €438m loss, caused mainly by its former Russian unit Uniastrum, compared to a loss of €261m in 2014.
The Cypriot lender is currently pursuing a listing at the London Stock Exchange which is likely to allow many of its shareholders to sell their holding in a more liquid exchange at some point. It also plans to maintain the Cyprus Stock Exchange listing, to delist the share from the exchange in Athens, where it took a serious battering last year when an investor sell-off, triggered by the country’s default, bank closure and introduction of capital controls, caused all bank shares to drop, including that of Bank of Cyprus which was then and is no more exposed to Greece.
Recent events in the UK showed that the price of the bank’s share is largely influenced by events abroad. The outcome of the June 23 referendum in the UK, in which voters decided in favour of the country leaving the European Union, further affected –and continues to do so– the price of the bank’s share which since then follows roughly a parallel path to the fluctuations of the British pound.
On Monday, the price of its share close at the CSE at €0.135, up 1.5 per cent from Friday, which was one a post-February low.
Still, for the listing to be successful a lot will depend on decisions taken in Cyprus, economist and former banker Clerides said. “What investors are worried about is whether they can have confidence in the stability of institutional framework in Cyprus”.
If the parliament decides to compensate bondholders whose investment was wiped out in the bail-in, and ever since are pressing politicians to act, or strengthen the primary home protection from foreclosures, the credibility of the institutional framework will suffer, Clerides said.
The bank did not respond to a request for comment.