The Bank of Cyprus (BOC) announced on Monday the sale of €916 million in non-performing loans to funds belonging to the Pacific Investment Management Company (PIMCO), one of the world’s largest investment managers with $1.78 trillion assets under management.
Analysts hailed the move, noting that it gave the BOC balance sheet a considerable boost, and noting that the move has no effect on the bank’s capital reserves. The bank’s reserves will see some small impact, but nothing worth the notice of regulators.
“Group Chief Executive Officer Panicos Nicolau commented: “We remain committed to further de-risking of the balance sheet and we will continue to seek solutions, both organic and inorganic to achieve this. We will continue to assess the potential to accelerate the decrease in NPEs on our balance sheet through additional sales of NPEs in the future.”
Analysts noted that the accounting impact on capital reserves will be offset when the payment process is completed by PIMCO – which means an eventual increase in the bank’s capital. PIMCO is also to pay compensation to BOC if managing the NPLs generates profit.
According to MarketScreener, the Portfolio has a contractual balance of €1.46 billion and it comprises 22,224 loans, mainly to retail and SME clients, secured over 5,616 real estate collaterals. The net book value of the assets being sold amounts to €440 million. The consideration amounts to 46 per cent of the gross book value and 29 per cent of the contractual balance payable in cash, of which 35 per cent is payable at completion and the remaining 65 per cent is deferred without any conditions attached. The deferred component is payable in three broadly equal instalments over 48 months from completion.
With the sale, the bank cuts the value of NPLs by 83 per cent compared with 2014.
In total, the reduction of NPLs during the first six months of 2020 reaches a value of €1. 3 billion, with an organic reduction of €278 million.
As BOC forecast losses of €75 million in the results announced for the fourth quarter of 2019, an additional loss of €21 million is not expected to change the outlook as it was announced.
Analysts said the sale significantly reduces current risk levels at the largest bank in Cyprus, at a time when financial institutions are facing elevated risk levels around the world.
“This move is good for the BOC balance sheet, as it reduces the non-performing loans (and the non-performing loans ratio), in a capital neutral way. Nevertheless, the situation still demands caution for all banks as we don’t know how the COVID-19 outbreak will change the banks’ asset quality in the coming quarters.”
The move is part of what the bank is now calling Helix-2. Project Helix, launched some years ago, represented a significant milestone in the delivery of the bank’s strategy of improving asset quality through the reduction of NPEs.
The bank promises an acceleration of Helix-2 in the future. There is a clear attitude to continue this improvement, the bank said in a statement. The timing-related effort reflects the clearing attitude, with the aim to run the restart project more effectively in the future.
Analysts give full credit to Bank of Cyprus for its commitment to continuous reductions in non-performing loans. “The recovery of global and European economic conditions by early 2022 will allow the Cypriot economy to be back on course and in full swing in 2022,” comments Athanasia Kokkinogeni, Europe Senior Analyst, EMEA at DuckerFrontier. She expects the bank to take full advantage of the upswing.
On the London Stock Exchange, Bank of Cyprus Holdings (BOCH) was holding steady at €0.50 per share at this writing.