Citigroup lifts Bank of Cyprus target to EUR 16 per share

Citigroup has increased its price target on Bank of Cyprus (CSE:BOCY) to EUR 16.00 per share from EUR 15.50 previously and is currently the highest price target issued by an investment group. The Citigroup target implies a 35.6% expected share price return, which when combined with the expected 3.5% dividend return, gives a combined 39.1% return potential.

Citigroup is reiterating its “Buy” recommendation on the Bank of Cyprus stock. Furthermore, Citigroup also increase its EPS forecasts by 5% for 2007E, 4% for 2008E, and 3% for 2009E. This is due to lower loan losses and taxes, as well as management optimism on the outlook.

“We see BoC as an attractive mix of offshore banking growth, domestic restructuring and cyclical recovery, and overseas expansion. We reiterate our Buy/ Medium Risk rating and increase our target price to EUR16 per share (from EUR15.5),” said Citigroup in a research note dated May 11, 2007.

Bank of Cyprus (BoC) reported 1Q07 net profit of CYP62 million (EUR107 million), 9% ahead of the Citi estimate, and up 70% yoy. The “beat” versus forecasts was helped by the continuing asset quality improvement story, with provisions of CYP11 million below forecast of CYP19 million, and also below the recent quarterly run rate.

“Not surprisingly, given the “Marfin threat”, management struck a very bullish tone both in their release and on the results conference call,” noted Citi analysts.

The domestic Cyprus business reported pre-provision profit of EUR57 million, in

line with forecasts. Cyprus NIM was 2.57% in 1Q07 vs 2.12% in 1Q06, and 2.54% in 4Q06. The margin was helped by increasing spreads on deposits. Lower than expected provisions pushed PBT 4% ahead of Citi forecasts.

Volume growth remains strong, with total loans up 23% yoy and total deposits up 20% yoy. Foreign currency deposits make up 58% of total Cyprus deposits, and increased 30% yoy (and 6% ytd). Management view the outlook for offshore deposits as healthy, with limited incremental competition in practice. Domestic loan growth of 23% in Cyprus was ahead of Greek loan growth, driven by very strong growth in mortgages (+67% yoy). Corporate and SME loan growth is running at +20% yoy.

In Greece, 1Q07 financials were also in line with Citi forecasts. Greek NII came

in at EUR65 million. The Greek NIM was 3.02% in 1Q07 vs 3.1% in 1Q06, but a fall from the seasonally strong 3.23% reported in 4Q06.

Total loans in Greece increased 20% yoy, which is in line with the Greek system (and BoC’s FY06 growth of 21%). Mortgages growth stood out at 26% yoy, with corporate loans up 15% yoy for medium/ large corporates and up 17% yoy for small businesses. Deposits increased by a robust 21% yoy. BoC continues it branch opening program: its immature branches (below 5 years old) amount to 50% of its network.

For 1Q07, BoC reported Greek revenue and cost growth of 15%: zero ‘jaws’. On the conference call, management stated that they expected to see healthy operating jaws for the FY07. Specifically, management see c20% revenue growth for the full year, with cost growth budgeted in the high teens. This operating leverage is expected to be driven by improving balance sheet mix (more loan growth vs deposits, which are high cost for BoC).

Bank of Cyprus reiterated their rejection of Marfin’s approach. Marfin are seeking a ‘strategic cooperation’ with Bank of Cyprus, using their 8.1% BoC stake as a mean of pressure. Marfin state that this could involve competition with BoC in the domestic Cyprus banking market, coupled with a combined, integrated expansion in Greece and ‘New Europe’.

Management reiterated that they view Marfin estimates on potential synergies as

“unrealistic” and “exaggerated”. In BoC’s opinion, the combination would also

be subject to high levels of integration and execution risk and would distract management’s focus on the development of the business.