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CYPRUS: H1 losses double at Hellenic Bank, Rothschild to advise on capital

31 August, 2014

Hellenic Bank, the island’s second biggest lender that avoided a public bailout after private investors stepped in and pumped about €100 mln earlier this year, announced that after-tax losses doubled year-on-year to €95.5 mln, due to a deterioration of the bank’s loan portfolio and further increase in provisions.


The bank’s new chairwoman, Irena Georgiadou, in her first report to shareholders, warned that the Cyprus economy and society continued to face “an unprecedented crisis”, but that the obstacles faced by the crisis will be overcome bringing better days for all.
Georgiadou said that during the second quarter, the bank strengthened its balance sheet further with comfortable liquidity and improved coverage of non-performing loans (NPLs). Deposits increased by 6% since the end of 2013, and the net loans to deposits ratio improved even further to a best in class ratio of 57%.
“In terms of capital, we comply with the regulatory requirements. In anticipation of the results of the Comprehensive Assessment and the ensuing Stress Tests by the ECB, we are considering our capital plans and in this respect we have engaged the firm Rothschild who advise us on capital matters. Our capital base and our access to capital enables us to grow and support our clients,” she added.
Indicating the new era for the bank ever since the likes of New York-based Third Point, the Belarus-controlled Wargaming.net and local fund Demetra boosted its capital, Georgiadou said that “we are excited to play a key role in the recovery of the Cyprus economy. We are currently in the process of reviewing our strategy in that direction and for that purpose we are working with the consulting firm Roland Berger.”
Hellenic Bank’s profit from ordinary operations before provisions for the first half amounts to €87.1 mln, increased by 46%, compared to €59.6 mln for the corresponding period ended June 30, 2013, mainly due to the increase in net income, a bank statement said.
The net interest income (NII) amounts to €105.6 mln compared to €84.2 mln for H1 2013, up 25%, due to the significant decrease in interest expense by 47%, despite the decrease in interest income by 9%. Staff costs have decreased by 21% (€9.7 mln) compared to the corresponding prior year period, with total operating expenses showing a decrease of 9%.
The loss after taxation amounts to €95.5 mln, compared to a loss of €46.1 mln for the corresponding prior year period.
The negative economic environment and the continuous increase of NPLs continue to affect the quality of the Group’s loan portfolio. As a result, provisions for impairment of loans and advances amounted to €194 mln, up by €99.4 mln from the same period last year.
The bank statement added that as a result of the Common Equity Tier 1 ratio dropping below 8%, convertible common shares worth €15 mln are to be converted into shares on a pro rata basis. Thus, the bank’s capital adequacy ratio as of June 30 stands at 12,3%, the Tier 1 Ratio at 11,2% and the Common Equity Tier 1 Ratio at 8,0%, in line with the ECB stress tests to be conducted next month.
Gross customer loans and advances in Cyprus showed a marginal increase compared to December 2013, reaching €4.4 bln, with customer deposits up 6% to €5.9 bln, while the ratio of net loans to deposits was 57,2% with zero funding from the European Central Bank, zero raised liquidity from the Emergency Liquidity Assistance and the non dependence on the interbank market.
The bank said that this has “effectively shielded its assets and with a comfortable liquidity and a strong balance sheet, is able to play a key role to the recovery of the Cyprus economy and expresses its readiness further strengthen its capital base if needed after the completion of the stress tests.”
In July, Fitch upgraded the ratings of the Bank of Cyprus and Hellenic Bank, after the government lifted its final local capital controls imposed by last year’s bailout and economic adjustment programme, but warned that the island’s biggest lender still faces a high risk of capital erosion because of weakening asset quality and profitability.
The agency had said the upgrade came as a result of the lifting of the domestic capital controls on May 20, which have been imposed since the agreement on a €10 bln bailout by the Troika of international lenders including the ECB, EU and IMF in March 2013.
“Although restrictions remain on cross-border outward capital flows, these banks are now substantively able to service all their obligations,” Fitch pointed out, adding however, that the remaining capital controls, especially outward “is unlikely to be fully implemented before the end of 2014.”
The agency considers asset quality as one of the main concerns for Cypriot banks. In 1Q14 both banks’ non-performing loans (NPLs) continued to increase, albeit at a lower rate than past quarters, reaching 55% at BOCY and 49% at HB of gross loans and Fitch expects loan quality to weaken further in the near future, although more moderately.
“The two banks’ most important challenge will be to improve NPL recoveries, for which banks have internally strengthened their recovery units. NPL coverage remained low in Fitch’s view in a stress scenario at 35% for BOCY and 43% for HB at end-1Q14,” it added.