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Centralbanker tells Bank of Cyprus board: “Decide now!”

03 July, 2014

 * Bank needs €1bln in fresh capital – investors offer €1.9 bln *

Bank of Cyprus board members are faced with a dilemma – do they drag their feet and insist on finding their own investors to recapitalise the bank (a process that could take ages) or do they consider offers already on the table and proceed immediately with new investors well in time for the stress tests to be concluded by October?
This dilly-dallying by a number of board members has forced Central Bank Governor Chrystalla Georghadji to appeal to the bank’s board twice in a week to make up their minds fast, otherwise potential investors who are willing to inject up to 1.9 bln euros might walk away.
The conflict has disheartened staff and customers alike, who were only now seeing signs that the bank was on a slow path to recover when it announced 31 mln euros in profits for the first quarter.
HSBC and Credit Suisse have advised the board on how to proceed with future recapitalisation plans, as well as the disposal of non-core assets, with the lender’s directors agreeing after a marathon 10-hour board meeting last Thursday to adopt the recommendations. These include issuing new share capital both to new investors and present shareholders, as well as those who saw their shares evaporate into thin air after the bail-in on unsecured deposits imposed last summer.
However, some in the board are now hesitant to go the markets and find new investors, for fear of diluting the control of existing shareholders and want to find white knights of their own, a process that government sources say could take a long while and would push the bank closer or past its stress-test deadlines.
The Central Bank’s Georghadji has told the board to recall its last decision that rescinded an earlier agreement to seek new investors, while telling them to forget about changing the bank’s structure and appoint two deputy CEOs to keep the current chief executive John Hourican in check.
This last minute turnaround by the board infuriated Georghadji who has now demanded that the board make up its mind within the next two days and stick to a strict roadmap, whereby a new investor must be found by August 7 after which the board will seek shareholder approval at an EGM, secure the funds and be fully recapitalised by September.
Political parties of all shape and size have joined the debate, some even suggesting that the government should not meddle in the bank’s operations, while others have even challenged the centralbanker’s authority, not realising that her mandate is clear – she can sack an entire board if she believes they are unfit to manage the bank.
In any case, sources suggest that the bank could meet the stringent liquidity levels of the stress tests conducted by the European Central Bank, even with its current capital situation. The benchmark core tier 1 ratio is believed to be around 11%, beyond the cushion of safety needed to keep the bank afloat.
Bank of Cyprus is the only one of the 128 European systemic banks that will be subject to the stress tests that has not yet undergone additional recapitalisation. Hellenic Bank raised 100 mln euros last last year when it attracted three local and institutional investors (New York-based Third Point, Wargaming and the local Demetra Fund), while the Cooperative Central Bank received 1.5 bln in a state bailout and subsequent nationalisation and downsizing.
Only last week, the government agreed to return about 950 mln euros to Bank of Cyprus as part of the 1.8 bln euros burden it was forced to carry when it absorbed the now defunct Laiki Popular Bank, itself exposed to some 9.5 mln euros in Emergency Liquidity Assistance.
CEO Hourican, who seems to enjoy the support of both Georghadji and Finance Minister Haris Georgiades, has continued with cost cutting measures initiated by his predecessors last year and introduced some measures of his own, such as the disposal of some overseas banking and insurance operations and selling off non-essential properties, while reducing the branch network and staff size.
On Monday, the standoff between the board and Georghadji seemed to have abated, but the centralbanker wanted clear decisions, which is why she sent off a second letter on Tuesday.
“For the government the issue of capital increases by commercial banks is a matter of strategic importance to the Cypriot economy,” government spokesman Nikos Christodoulides warned on Monday. “It is being handled by the Central Bank and we are monitoring developments closely.”
The biggest problem facing the Bank of Cyprus is the difficulty in lower the level of non-performing loans, currently estimated at 45% of its total loans portfolio, while recoveries is taking time, with major debtors pulling all stops to get board members and the bank’s management to stand down from aggressive collection.