* BOCY, Laiki, HB need to ringfence their “good loans” from the “bad loans” in Greece and then replicate the same model in Cyprus *
“Consolidation” used to be a taboo word, especially when it came to banks. Yet, with public rescue funds coming in once the PIMCO and BlackRock reviews are completed, now may be the best time to talk about mergers in the island’s banking system.
Already, four of the biggest in Greece – National Bank, Eurobank, Alpha and Piraeus – have received some 27 bln euros in bailout money which will help them recapitalize their operations and resume lending, with a trickle-down effect expected to partly help the three Cypriot banks that remain grossly exposed to the Greek market.
Part of the plan being floated around includes ringfencing the “bad”, non-performing loans of the Cypriot banks in Greece and handing them over to an asset management company in exchange for government bond guarantees. This would allow the banks to focus on their “good” loans and perhaps consolidate their operations in Greece into one in order to benefit from economies of scale.
The same model could eventually be replicated in Cyprus, even though industry analysts say that the small size of the local economy, and their disproportionate overseas expansion, would require at least two “large banks” to continue to operate.
Both Bank of Cyprus and Popular Laiki Bank issued profit warnings last week, with the former saying that after-tax results for 2012 and before the impairment of Greek government bonds (GGBs) will be worse than the full results for 2011, while the Core Tier 1 ratios may even be below 5% announced last month. This is below the 6% target set by its Greek peers.
On the other hand, Laiki said it expects its 2012 results to show a reduced after-tax loss compared with its record loss in 2011. The bank reported a 2.5 bln euro net loss in 2011 that forced it to seek a state bailout of 1.79 bln euros. As a result, the government now controls 84% of the bank.
Both are expected to tap into the lion’s share of 10 bln euros that all Cypriot banks may need to recapitalise, as part of a 17.5 bln euro bailout package that Cyprus needs to roll over its public debt and pay down its runaway public sector deficit. But the final bill will not be known until Black Rock audits the due diligence report of PIMCO, the world’s biggest bond manager.
Laiki has already closed 64 branches in Greece and Cyprus and offered redundancy packages mainly to its staff in Greece.
“It is now up to the Central Bank of Cyprus and the government to decide what they will do next and, hopefully, they will learn from the Greek experience,” said a senior banking source.
“In Cyprus, too, the “bad bank” operations would probably be transferred to a state-controlled asset management company. With economies of scale being less in Cyprus, the current banks would probably continue as they are, focusing on their “good bank” operations, and they may even continue with their present staff.”
“It would be better if at least two big banks continued in Cyprus,” the source told the Financial Mirror, adding that although it has projected an image of having avoided the crisis, Hellenic Bank too is exposed heavily to NPLs and other bad loans in Greece.
Central Bank Governor Paniccos Demetriades seemed confident when he met Eurozone ambassadors on Monday, saying that a consolidation in the banking sector is possible, under the present circumstances.
Acknowledging the harsh criticism from the international media, Demetriades also plaid down the issue of sustainability of the Cyprus public debt, telling the diplomats that Cyprus would not seek the contribution of private depositors, especially after the failure to secure a 5 bln euro loan from Russia.
“The postponement of the maturity of the Russian loan would be acceptable to Eurozone governments, as well as the privatisation of public companies, while [the Governor] also seemed in agreement that Cyprus should not have been imposed a bond haircut,” a diplomat told the Financial Mirror.
A Central Bank source was quoted by the Cyprus News Agency as saying that “there is no issue of the Cypriot banks pulling out of Greece,” but that they would need to revise their strategic plans and decide what kind of operations they would maintain there.
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