By Makis Keravnos, CEO, Hellenic Bank Group
The Cypriot economy and financial services industry are going through a crucial period, culminating with the arrival of Troika in the island for the first evaluation of the bail-out agreement implementation. There have already been developments regarding the consolidation, restructuring and recapitalisation of the financial sector, notably in the case of the Bank of Cyprus, but also with regards to the recapitalisation of Hellenic Bank and the Cooperative Credit Institutions.
The situation in the country has been significantly affected by the Eurogroup decisions and the ruthless decision it took against Cyprus on the 25th March 2013; a decision that was based on inadequate economic data, obscure intentions and wrong forecasts and estimations.
The Eurogroup decisions included amongst others a “haircut” on deposits, the closing down of one of the two biggest banks, a critical situation for the other, and a severe impact on the whole of the financial system. At the same time, the banking sector is gravely affected by the restrictions which are still in effect, on transactions and the movement of capital which concern not only the financial institutions that have been directly affected but also for all other institutions, like Hellenic Bank, which have been affected to a lesser extent.
Unfortunately, the Cypriot financial system has been entirely devastated and therefore many additional, concerted, efforts and measures should be taken so as to regain trust, confidence and security, not only in the financial sector but in the whole of the economy.
Despite, though, the progress that has been achieved as regards to the restructuring of the financial sector and the steps taken towards reducing the fiscal deficit, important ambiguities and crucial questions still remain.
Firstly, fiscal targets do take into consideration the expected contraction of the economy. However, will the targets set within the Programme framework be successfully implemented or will the Programme, in the medium-term, go off track? Undoubtedly, the achievement of the Programme’s targets will accelerate the process of restoring trust and confidence in the financial sector and the island’s economy.
Secondly, the continuous imposition of temporary restrictions and exchange control measures on banking institutions greatly damage both the economy and the country as a whole. Delays in the restructuring of the financial sector in combination with the restrictive measures do not seem to alleviate the current situation, but on the contrary, risks and problems are exacerbated. It is very important to send positive messages both internally and abroad, of our decisiveness to return back to normal, by fixing, once and for all, the flaws of the system as they have been widely expressed and analysed.
Thirdly, the economy is already in a vicious circle of contraction with the increase of non-performing loans and the fall of real estate prices and other collaterals, threatening the viability of the system. Such developments further undermine the banking sector and fuel worries for a prolonged recession.
The economic environment is expected to be tough, especially throughout both 2013 and 2014. On the other hand, by taking the right steps and initiatives, the economy can readjust relatively quickly and return to positive growth rates following 2014. This will depend on the recession’s duration and how intense the negative implications of the readjustment process will be.
It is evident that the financial system has been entirely devastated whilst the efforts to restore trust, confidence and security have been hardly noticeable.
We believe that the regaining of trust and confidence constitutes an essential prerequisite for the situation to stabilise and the economy to recover. The cure and complete revamping of the banking sector’s operations through recapitalisation, provision of ample liquidity coupled with the gradual lifting of the exchange control measures, will constitute the most important step towards recovery and return to normality.
As far as Hellenic Bank is concerned, the Board and Executive Management of the Group – foreseeing earlier on that the global financial crisis initially, and the Greek crisis thereafter, wouldn’t leave intact the Cyprus economy – have taken precautionary measures, early enough, acting with prudence and responsibility.
However, in view of the developments that followed the March Eurogroup meeting, with the closing down of one bank, the consolidation of the biggest bank, the PIMCO reports and the terms for the recapitalisation of the financial sector, the Bank has taken important but necessary decisions in order to further secure the Group’s capital adequacy.
Being aware of the responsibilities and crucial role the Group and more specifically the role the Bank has to play in the future recovery of the Cyprus economy, and aiming to protect shareholders and clients, the Bank has taken decisions towards strengthening the Core Tier 1 capital ratio up to at least 9% and adjusting its capital to the levels and structure set by the Central Bank of Cyprus. Such measures were based on the adverse scenario of PIMCO’s diagnostic check, in order to ensure the proper and independent running of the Bank’s operations. Taking the opportunity, it is worth noting that we, as a Bank, expressed clearly, several times the last few months, our concerns regarding the results of PIMCO’s checks, which were in essence the outcome of a process that lacked transparency and sufficient reasoning.
The Board of Directors of Hellenic Bank has determined the main terms and details of the Restructuring Plan and Increase of its Capital Base, which include:
• The issue and sale or distribution of new common shares of up to €168 million.
• The voluntary exchange of current Capital Securities and Bonds of the Bank into Convertible Capital Securities of total value up to €306 million.
• The issue of CCS 2 to interested investors in order to raise more capital.
In this way, the Group aims to proceed to the restructuring and strengthening of its capital base, so as to respond to the new economic and supervisory environment whilst ensuring, in parallel, both its balance sheet strength and its strong liquidity position.
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