Bank of Cyprus, the island’s former finance giant that has been brought to its knees by a painful bailout plan following years of bad management, edged closer to returning to normalcy when it was announced it would get a state cash injection of €950mln next week.
But the lender, that announced €31 mln in first quarter profits, is still in need of fresh funds and is still contemplating plans of a capital increase of up to €1 bln and further assets sales, as proposed by advisors HSBC and Credit Suisse.
The government, acting through the Public Debt Management Office that has been handling the recent successful return to markets after a three year absence, has decided to pay back some €950 mln owed to the bank after it was forced to absorb the now-defunct Laiki Popular Bank, itself the victim of crooked bosses and state incompetence. The amount matches the €944 mln in outflow in customer deposits during the first quarter, with Bank of Cyprus depositors still jittery over the future of their savings.
The refund is part of the €1.8 bln rescue package the government threw at Laiki Popular in 2012 and subsequently nationalised the island’s second biggest and oldest lender, a lifeline that came too late to close the black hole created by unsecured lending and excessive investments in toxic Greek government bonds.
When BOCY absorbed Laiki, it also undertook the burden of the €1.8 bln, as well as €9.5 bln in Emergency Liquidity Assistance that had accumulated there and which the Bank of Cyprus has been repaying in recent months.
“Bank of Cyprus Public Company Ltd announces that it is examining certain funding and capital options in line with the proposals of its advisors [HSBC and Credit Suisse]. The proposals aim to expedite the implementation of the Group’s Restructuring Plan in tandem with the further strengthening of the Group,” it said on Friday, after a marathon 10-hour board meeting on Thursday.
“The Group is proceeding with the assessment of potential investor interest regarding these options and will issue further announcements when and if there is further tangible progress, subject to the approval of the Board of Directors in a future Board meeting,” calming some concerns that any capital raising plans would further dilute the current shareholders’ stakes, including the former Laiki shareholders and the former BOCY stock holders, reduced to less than 1% last October.
Any new funding will also help prop up or at least a healthy capital adequacy ratio in time for the crucial stress tests of 128 Eurozone banks in October.
News reports have suggested that the bank may seek funding of about €600-850 mln euros, with some even suggesting closer to €1 bln, which would also alter the current shareholder structure and introduce new institutionals.
The bank was recapitalised last year to the tune of about €3.4 bln when it converted unsecured deposits of more than €100,000 to equity and created new shareholders from among mega-depositors, mostly from Russia, annihilating the old shareholders who now represent about 0.5%.
A further dilution of the present shareholding, however, would not be to the liking of the present board, who, nonetheless have no other choice.
This follows statements this week by Finance Minister Haris Georgiades and Central Bank Governor Chrystalla Georghadji who urged commercial banks to turn to foreign investors to strengthen their capital base.
Georgiades, giving the example of the government’s successful €750 mln bond issue last week, said that the four Cypriots banks that will undergo stress tests – BOCY, Hellenic Bank, Russian Commercial Bank and Co-operative Bank – “should seek to recapitalise even before the stress tests, now that foreign investors are confident in the prospects of our economy.”
Hedge Funds and managers interested to take part in the capital injection reportedly include Fairfax, Capital Research, Wilbur Ross, Fidelity, Mackenzie and Brookfield, who had been active in Greece with the recent capital injection at Eurobank and are keen to look at Cyprus too.
Though there are signs that things are slowly stabilising at BOCY and hence chances of survival have increased, “it is obvious that the bank is still in intensive care and on life support. Without the emergency funding from the ECB the bank would literally be illiquid with potentially severe consequences,” said Ben Rosenberger of Exito Capital.
“The outlook is challenging and linked to a lot of uncertainties. The recovery – if successful - will certainly take several years.”
Get all the latest news and videos in your inbox. Register FREE