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Co-op official slams ECB over vetoing CSE listing

By Stelios Orphanides

Former Co-op board member Kypros Ellinas told investigators on Thursday that bank’s plan for a listing of its share that would have otherwise allowed it to tap private capital was unfairly blocked by supervisors, the Cyprus News Agency (CNA) reported.

Ellinas, the first witness to testify on Thursday at the committee appointed by Attorney-General Costas Clerides tasked with probing the reasons that led to the demise of the state-owned bank recapitalised by the taxpayers with €1.7bn, said that the bank had already prepared itself for a listing on the Cyprus Stock Exchange (CSE) in 2016, which would have allowed it to seek fresh private equity whenever deemed necessary.

“We started early (and) had two years (ahead) to tap capital,” said Ellinas who served as board member from July 2016 until June 2018, when he stepped down.

The disappointing outcome of the Co-op’s attempt to get its stock listed was one of the events that gave the bank the impression that it was treated unfairly, and prompted his resignation, he said.

After supervisors told the Co-op in September that it wouldn’t require additional capital, the onsite inspection that took place early this year produced an unprecedented result both at home and abroad, as it concluded that provisions for loan impairments had to be increased by €800m, the former board member said. This led to supervisory pressure to find a strategic investor for the bank with procedures which were not very transparent.

While supervisors, i.e. the Central Bank of Cyprus and the European Central Bank’s (ECB) Single Supervisory Mechanism, did insist on shorter procedure that would have taken 30 days, this deadline was extended to 40 days which proved insufficient to attract investors, he said.

The SSM was pressuring towards the sale of the Co-op’s operations, especially in 2018, Ellinas said.

He added that the sale of the bank could have not been completed before a merger with the 18 independent cooperatives it administered had been completed which ultimately happened in early 2017.

In March, two months after the disappointing results of the SSM’s onsite inspection, he travelled to Frankfurt together with chief executive officer Nicholas Hadjiyiannis and chairman Giorgos Hadjinicholas, to convince the supervisor of the merits of the bank’s privatisation plan via capital increase.

The message they got there was that the supervisor was favouring a break-up of the bank into a bad bank and a good bank that could be acquired by another Cypriot lender, as this would benefit the Co-op, the banking system and the economy, he said.

He added that the supervisors already objected to the listing already in 2017, Ellinas said.

While the Co-op was making progress in reducing its non-performing loans, its supervisors did not give more time to reduce them, he said. A target ratio of 20 per cent for its delinquent loan portfolio was impossible to achieve given that the lender’s portfolio comprised mainly of mortgages. Still, the lender managed to reduce them by €800m at the end of last year compared to August.

The sale of loans, he continued, was not possible with the legislation in place at the time. Ellinas questioned the timing of the amendment in the law on the sale of loans early July, part of a reform package aiming at facilitating the management of non-performing loans requested by the European Commission in exchange to the approval of the sale of the Co-ops assets to Hellenic Bank.

The majority in the bank’s board was in favour of assigning a prominent external loan manager to allow the sale of immovable property.

Ellinas said that rumours about a possible bail-in in the Co-op led to an increase in supervisory pressure to the bank amid an increase in deposits outflow, while the issue of the €2.4bn government bond in early April in favour of the bank and the subsequent deposit of €2.5bn was considered state aid.

While supervisors were mainly concerned about governance and to a lesser degree, about weaknesses they spotted at the bank’s officials, they failed to have those they considered incompetent replaced he said.

The lender, he said, did have a skills gap, as it lacked the proper human resource management systems.

Ellinas said that the bank’s plan to offset the reduction in net income from the management of non-performing loans, via its insurance business, a reduction of its deposit rates and a voluntary exit scheme plus a reduction of its branch network, could have worked.

He also said that other banks were eying the Co-op for years amid rumours about a possible bail-in which intensified ahead of the presidential elections. Indicatively, Bank of Cyprus, the island’s largest, expressed interest in acquiring the cooperative bank of government employees, while a consultancy company advised Hellenic Bank to buy the Co-op early on.

With respect to Altamira, the Spanish non-performing loans management specialist, Ellinas said that Citi, the US bank hired to assist the Co-op find investors, opined that it the agreement was fair for the bank and that related expenditure would have a neutral impact on the bank.

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