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Bank of Cyprus: There is evidence of improving stability in the banking sector

03 February, 2014

The Bank of Cyprus leadership believes there is evidence of improving stability in the Bank and generally in the banking sector. Nonetheless, it points out at the same time that it is fully committed to restoring the confidence of depositors and customers

In an interview with the Cyprus News Agency, Chairman of the Board of the Bank Christis Hassapis and CEO of the Group John Patrick Hourican talked about the recent release of the first of the three fixed term deposits and the sale of the Group’s Business in Ukraine.

After the shock of the Eurogroup decisions of last March and the consolidation process, the Bank`s new Board and the new management are actively working to stabilize the Bank and restore the trust of depositors, which has gradually begun to return to the Bank as well as the banking sector in general. However, the Bank’s leadership does not this trust for granted.

“We need to keep earning their trust and we need to keep making progress in restoring the strength of the Bank”, Hourican notes.

The Bank now puts forward a new goal, empowerment through shrinking (Shrinking to Strength) and this includes the recent sale of its subsidiary bank in the Ukraine.

For the restructuring plan, Hassapis notes that it is on track, adding that the goal is to create a bank attractive to investors.

According to Hassapis, improving the stability of the deposit base and the liquidity of the Bank is also reflected in the recent release of the six – month fixed deposits, amounting to € 950 millions, which were frozen under the consolidation decree.

However they say that problematic loans remain a source of concern, estimating that amid the ongoing economic contraction, the loan portfolio will continue to come under pressure.

The full text of the interview granted to CNA is as follows:

The Bank has just released the first of the three fixed term deposits. At the same time a large part of the Bank’s funding comes from ELA. What is the rationale which has led the Bank to release the blocked deposits?

Ch. Hassapis: The Bank’s funding comes from a variety of sources. We have customer deposits, funding from the Central Bank in the form of ELA and ECB funding and we have the equity base of the bank. The deposit base includes €2.9bn of deposits that were blocked at the date of the bank was recapitalized. The first £950m of these fixed deposits were due for release at the end of January and the bank had an option to roll the deposits for a further period of six months. Having established evidence of improving stability in the Bank’s deposit base and an increasing level of customer confidence, we determined that the most appropriate course of action was to release these deposits. This decision was taken after careful consideration of all the facts not least our expectation of available liquidity under various scenarios.

How do you expect the depositors of the Bank to react to the release?

John Hourican: We recognize that all of our depositors have choices and, as restrictive measures across the economy are lifted, this choice will increase. We have seen increasing stability in our deposit base over the past few months and this is pleasing, as confidence slowly returns to the banking sector and Bank of Cyprus in particular. We believe that our depositors will continue to support the bank but we do not take this support for granted. We need to keep earning their trust and we need to keep making progress in restoring the strength of the bank.

Have you had any disagreement with the Government or the Central Bank on releasing these deposits?

Ch. Hassapis: We made a very careful consideration of all aspects of this decision and we consulted with the appropriate stakeholders. We listened to input from various interested parties and we took into consideration their opinions in making the decision. This was a decision that the Bank Board of Directors took having carefully weighed up all the arguments. Moreover the Ministry of Finance and the Central Bank issued a joint press release on the issue. We are satisfied with customer and market reaction.

What should a holder of a blocked deposit expect and know?

J. Hourican: Although we have released the fixed deposits, they will continue to be affected by the general restrictive measures currently applicable across all banks in Cyprus. The depositors can withdraw up to 20% from the fixed deposit and place it in a current account. The rest will be placed on a one month deposit or, as we hope, the customers can opt for a deposit of a longer duration.

How is the implementation of the restructuring plan going?

Ch. Hassapis: The restructuring plan adopted by the Bank sets out a clear roadmap for the Bank over the coming few years. It is designed to make the Bank safer, smaller and relevant to Cyprus and its economy. This plan relies on our rebuilding customer trust and confidence, simplifying the business and making it attractive to investors.

We are doing well. We have completed the rationalisation of our branch network, reduced the cost base of the Bank significantly and we are on target to integrate the Bank’s IT platforms by mid-year. We are making steady progress on our business disposal agenda and you will have noted, for example, that we have recently announced an agreement to sell our Ukrainian business to Alfa Group. We have clear plans to engage with customers to help restructure their exposures and we are making progress in arresting the deterioration of asset quality across our business.

Whilst we have made a good start on restructuring the Bank, we still have much to do. We are working with our largest and our small customers to ensure loans can be serviced and repaid. We are working hard to regain the trust of depositors. We recognize that we must play our role in re-starting the Cypriot economy.

Why are you selling the Group’s business in the Ukraine?

J. Hourican: We decided, as part of our restructuring plan that our business in the Ukraine was not core to the strategy of the “go forward” Group. We are pleased with the sale of this business to Alfa Group and we are pleased that our 500 staff in Ukraine will have the prospect of a future career under a new owner.

The group is “shrinking to strength” deliberately. We have withdrawn from the Ukraine as part of a deliberate strategy to focus our scarce capital and resources primarily on our domestic operations in Cyprus.

What are you expectations for problematic loans?

Ch. Hassapis: The trends in problematic loans are of course a concern for the Bank and we need to do everything we can to arrest any worsening of the position. As the economy continues to contract, we will have pressure on the loan book and we have to counteract this with clear and deliberate actions with delinquent customers.

The way delinquent loans are reported can be confusing. The definition of Non- performing loans has changed during 2013. Most loans that have some element of restructuring are now captured for an extended period within this definition, irrespective of performance and the “NPL” classification on ours and other banks’ balance sheets will likely grow and become less meaningful.

Within the non-performing category are loans that are in arrears past 90 days and it is these loans that are the true measure of delinquency. We have seen some stabilization in the absolute level of these 90+ days overdue loans during the past few months. We would not yet characterize the trends as in reverse and, as the overall balance sheet changes shape it is of course possible that some trends and ratios will need further explanation.

One of the Bank’s main challenges is dealing with large exposures and recovering problem loans. What is the Bank’s approach on these and other exposures?

J. Hourican: The Bank’s Executive is systematically and actively engaged with our largest customers. We are working with each of our customers to ensure that we protect the bank’s interests but also that we work to ensure viable businesses are supported. We have reorganized the bank to create a centralized, specialized division responsible for restructuring and recoveries. This is an essential feature of our business at this difficult point in the economic cycle. It is essential that the bank’s customers, large and small, meet their obligations to the Bank and work to ensure that we can recycle lending into the Cyprus economy.

The Troika is in town and you have already met with them. How were the meetings?

Ch. Hassapis: We have a very good working relationship with the Troika. We had a number of meetings where we presented on our business, the progress we are making and issues we are facing. We were, as always, very open with them and our meetings have been very productive. We look forward to continuing this cooperation and engagement throughout 2014.

How would you describe the cooperation between the two of you, given that both of you have assumed your posts in the Bank only recently?

J. Hourican We have an excellent and harmonious cooperation on a daily basis. We have created the necessary internal structures and conditions that strengthen this cooperation. Our ultimate goal is the operation and governance with the aim to serve the Group’s best interests.

Hassapis expressed his agreement with a nod of approval.