Bank of Cyprus is pondering whether to split its operations and have a ‘bad bank’ to handle the non-performing loans or to opt for an asset management company, similar to mortgage lender Northern Rock that collapsed in 2008 due to heavy borrowing and uncontrolled securitisation.
This is why HSBC has been called in to advise the island’s biggest lender which is still suffering from a Jekyll-and-Hyde syndrome of whether to recover the billions owed by property developers or to allow them to continue calling the shots and repay their NPLs at a slower pace, forcing the bank and its clients to suffer.
The bank’s entire board met with President Nicos Anastasiades on Thursday and then convened for their two-day directors’ meeting ending on Friday to consider HSBC’s proposals, with the high-profile appearance at the presidential palace giving unnecessary fodder to political parties to speak their minds… as if they had one!
In any case, the bank’s chairman, Christis Hassapis, has let it be known that the board favours the creation of a ‘development bank’ and not a ‘bad bank’, which coincides with CEO John Hourican’s initial plans to set up an asset management company when he was first recruited six months ago to rescue the bank and turn it around to profitability.
Hassapis and Hourican have also been gentleman-like in their public appearances of late, rebuffing press reports that they are at odds with each other, primarily because of pressure from mega-developers who are in turn exerting pressure on political figureheads to tell the bank’s 500-strong recovery team headed by ex-RBS exec Euan Hamilton to back off.
Such pressure would be at conflict with the bank’s viability plan, supposedly monitored by the Troika of international lenders who imposed a “bail in” of depositors’ money to recapitalise the bank to the tune of 3.8 bln euros.
Although the Bank of Cyprus said that its core tier 1 ratio of liquidity is close to 10.2-10.4% of its capital, above the European Banking Authority’s benchmark 9%, the rising rate of NPLs due to lack of repayment and inability of mortgage holders to restructure their loans, is a grave concern.
NPLs have reached nearly 50% of all loans, despite statements over the past few months that this rate had stabilised and “was under control”.
In the meantime, the bank has also recruited experts from KPMG UK to help with the restructuring of loans, while some news reports suggest that only NPLs and failed mortgages of over 100,000 euros will be transferred to the new entity, either a ‘bad bank’ or asset management fund.
The bank’s executive management team has already proceeded with the sale of some of its overseas assets, including the timely disposal of Bank Kipru in Ukraine and a stake in Romania’s Banca Transilvania, while it has yet to decide if it will turn around or dispose of the 80% stake in the Russian bank Uniastrum that it bought for 371 mln euros in 2008, but which has performed poorly ever since.
The bank is already selling other assets, such as property, and has gone through an aggressive early-retirement plan, also slashing the number of branches by nearly 100 to about 130 around the island. At the same time, the group has to dispose of its 50.1% stake in CNP Laiki Insurance, a joint venture with the CNP Assurances that it inherited from the forced merger with Laiki Popular Bank. The French partners are reportedly not interested to assume the remaining stake, while this business is becoming a drag on the Bank of Cyprusd’ own insurance divisions, EuroLife and General Insurance of Cyprus, both of which are valuable revenue earners for the group in Cyprus and abroad.
The biggest blow, apart from the colossal exposure to toxic Greek government bonds four years ago, came last year when the Bank of Cyprus was forced to absorb the failed Popular Laiki, as a result of the latter’s incompetent management, as well as its ELA funding, that combined with its own is estimated at about 9 bln euros at present.
Worse still, all three Cypriot-owned banks – Bank of Cyprus, Laiki and Hellenic Bank – surrendered their Greek operations, almost at gunpoint, to the central Bank of Greece, and lost potential revenue while remaining burdened with the losses of those operations.
Whatever the outcome, the Bank of Cyprus board has to take some bold decisions and ignore the antics of ignorant politicians who need to save face for their inability to deal with the economic crisis, especially with the European Parliament elections a month away which will act as a signal of public support or popular apathy.
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