Carnage wipes out EUR 8 bln from Cyprus bourse

CSE declines 42% in 1Q’08

 

The massive decline in equity prices in the first quarter has wiped out EUR 8 bln in wealth from the Cyprus Stock Exchange.

After starting the year with a total market capitalization of EUR 20.5 bln, the first quarter carnage saw the CSE Index losing 41.6% and in the process wiped out EUR 8 bln, with the market cap as at March 20 declining to EUR 12.5 bln.

The CSE Index has now dropped to levels last seen in mid-2006, wiping out all the positive movement in 2007 as well as some of that in 2006.

After gaining an unprecedented 129% in 2006 to 3900 points with a total market cap of EUR 12.5 bln, the CSE Index gained another 24% in 2007 to 4820 points, lifting the total market cap to EUR 20.5 bln by the end of the year. In November 2007, the CSE hit its all-time high of 5518.50 points.

Since then, stocks have been sliding lower, with the sell-off accelerating in February and March when the CSE lost 25% in value, on top of the 17% lost in January.

 

— Not only funds to blame

 

Heavy selling by foreign funds reducing exposure in all markets has been one of the principle reasons why Cyprus equities are falling, but local investors have also been active sellers as the fundamentals of the blue-chips has deteriorated.

Unconfirmed reports suggest that a number of foreign funds that lost heavily in other markets and are exposed to sub-prime loan investments and in need to raise capital have been selling Greek and Cypriot banking stocks.

Moreover, many investors have chosen to simply stay away and neglected the market, afraid that the current sell-off may be a repeat of the 1999/2000 boom and bust, when equity prices crashed and declined by more than 90% from their November 1999 peak of 900 points to 75 on the index by 2004.

 

— Hot growth ended?

 

News that most of the blue chips are forecasting a reduction in their profit growth while some are actually forecasting a decline in their 2008 profits has taken the shine off Cyprus stocks, leading to the bloodbath witnessed in the first quarter of 2008.

Bank of Cyprus, the most widely owned stock of Cyprus and the darling of the foreign funds, which started the year at EUR 12.50 per share with a market cap of EUR 7 bln, has lost 40.45% in the first quarter closing at EUR 7.42 on March 20.

In the process, its market cap has declined to EUR 4.2 bln, lower than the EUR 5.7 bln market cap that the bank boasted end of 2006 when it closed the year at EUR 10.3 per share.

An avalanche of downgrades by foreign analysts of the price target of the bank after the management promised only 11% profit growth in 2008 has added to the wave of selling originated by foreign funds rushing to reduce their exposure.

Marfin Popular Bank and Hellenic Bank have fared even worse.

Marfin Popular, which at the end of 2007 closed at EUR 9.10 per share and had a market cap of EUR 7.2 bln, has taken a nose-dive of 45% in the first quarter and by March 20 ended at EUR 5.00 per share with its market cap having contracted to EUR 3.9 bln.

Intense selling by foreign funds and lack of buying by Dubai, which has announced plans to lift its stake to 20% in the bank but is still waiting for regulatory approval, have all been blamed for the freefall in the share price of Marfin Popular Bank.

Hellenic Bank, which ended 2007 at EUR 4.60 per share with a market cap of EUR 1.3 bln saw its share price tumble by 44% by March 20 to EUR 2.58 with the market cap declining to EUR 750 mln.

Other Cyprus blue-chips have declined on average by 35% during the first quarter as the lack of confidence on the three major banks has spread to nearly all stocks.

 

— Lack of confidence

 

While Cyprus banks have practically no exposure to sub-prime loans and promise a healthy growth by 2010, the losses sustained in Cyprus are far greater than other developed markets with direct exposure to the sub-prime loans and investments.

As the CSE tumbled by 41.6% by March 20, the losses in Greece were only 28%, while elsewhere in Europe the losses are on average about 20%.

In the Far East, the losses in the first quarter average around 25%, while in the US the Dow Jones is down by 6.8%, the S&P 500 is down 9.5% and the NASDAQ by 15%.

Lack of confidence in the stock market and limited available funds by local investors largely explains why prices are declining at such an alarming pace in Cyprus while in other markets, the decline is less severe.

One would expect that the state-owned Social Insurance Fund that is plagued by low returns would seize the opportunity to buy into weakness and titles that have a steady dividend paying policy, but alas, even the appointment of a stock market-friendly Finance Minister cannot change the way the state machine operates.

And the reason why in the US the losses are contained even-though the problem is limited to America, is because there the authorities (government and central bank) are taking action, while in Cyprus, they simply don’t care or are just following developments by taking no action.

 

— Rebound possible

 

Cypriot investors are justified to give up hope on their own government, but the current bloodbath may not be a repeat of 1999/2000 boom-bust when the decline went for four years until the end of 2004. If a long-anticipated rebound in foreign stocks emerges in April, then this is likely to rub on Cyprus stocks too.

With more than 25% of Bank of Cyprus shares in the hands of foreign funds and the bank promising a healthy growth in profits in 2009 and 2010 (on average 25% each year), there is a good possibility that investors will rush back to buying Bank of Cyprus shares on the first sign of reemergence of confidence.

Otherwise, at current depressed levels and with such a hot growth story for 2009 and 2010 to tell, the bank may easily become the subject of a takeover bid, now that its 2008E price to earnings (p/e) ratio has declined to 7.7x while its price to book value (P/BV) is down at 2.1x.

Marfin Popular Bank may also stage a strong rebound from the current depressed levels if foreign funds warm up to its projected 2008 profits or if its major investor, the Dubai Fund, wins regulatory approval to raise its stake to 20% by purchasing shares directly from the market.

Both BOC and MPB, as well as Hellenic, are also likely to attract institutional buying because of their satisfactory dividend payouts.

Based on the total dividend per share of 43.8 cents announced by Bank of Cyprus, the dividend yield at EUR 7.42 per share comes to 5.9%, according to Financial Mirror calculations.

The dividend yield of Marfin Popular Bank based on EUR 5/share and 35-cent payout amounts to 7%, while the dividend yield of HB based on EUR 2.58/share and 19.50-cent payout comes to 7.5%.