BANK OF CYPRUS STRENGTHS
– High liquidity
– Proper risk management
– Low cost/high productivity
Bank of Cyprus, the island’s largest lender, is sure to withstand the global credit crisis and come out relatively unscathed due to its prudent policy of maintaining high levels of liquidity combined with proper risk management techniques and a relatively low cost base, according to its chief executive.
“A year-and-half ago we started taking preemptive measures to reduce risk, lower leverage and boost our liquidity to very high levels so that if and when a crisis would pop up, we would be prepared,” said Bank of Cyprus CEO Andreas Eliades. He admitted, nevertheless, that he could never imagine the level and magnitude of the current crisis, which he described as “deep, brutal and one that will be taking many casualties.”
The three main pillars on which Bank of Cyprus has built its success story – high liquidity, proper risk management and low cost base leading to efficiency and high productivity – have contributed to rapid growth in profits and will continue to fuel future profits, Eliades told financial journalists at an informal briefing on Monday.
He dismissed the arguments by experts that the crisis surfaced because of the sub-prime mortgage loans. “That’s the pretext, the real problem is credit, and how non-financials were allowed to insure credit at high leverage, a process that is now being reversed.”
Pre-emptive action
Bank of Cyprus officials are certainly worried about the situation in credit markets and are following developments closely.
Eliades said the management’s insistence with board backing to introduce proper risk management techniques, its policy of not investing in assets that it does not understand and sticking to traditional banking such as deposits and lending, has paid off handsomely as the bank is not exposed to any sub-prime related loans or investments linked to risky assets.
The fact that all Treasury operations are centralised is also seen as a major plus, helping to reduce risk exposure.
Uniastrum
Referring to the Group’s foray into the Russian market through the takeover of 80% of the capital of Uniastrum Bank in Russia for EUR 371 mln, Eliades said that Russia will weather the crisis much faster than other countries and in turn will help boost the fortunes of Bank of Cyprus.
“It took us one-and-half years to enter Russia on our own and more than six months to proceed with the Uniastrum takeover after careful due-diligence, which is a perfect fit with our culture. Similar to BOC, Uniastrum is a traditional retail bank with no exposure to investment banking operations,” Eliades explained, dismissing rumours that Uniastrum will become a financial burden on the Group.
The deposits and the size of Uniastrum in relation to Bank of Cyprus is very low and the Group liquidity of EUR 1 bln can easily withstand any shift in customer preference.
Yiannis Kypri, Group Chief General Manager, said some of the Uniastrum loans that did not fit the Bank of Cyprus risk profile have been placed in escrow and will be taken over by the two principle owners of Uniastrum if any problems surface.
Christis Hadjimitsis, responsible for Russia and the international expansion drive, revealed that Uniastrum’s exposure to Russian stocks is only USD 1 mln, adding that similar to the overall BOC profile, Uniastrum has a balanced and well diversified deposit and loan book.
Russia strong reserves
While Russia’s GDP is USD 1 trln, its banking sector size is only USD 300 bln and total deposits placed with banks is USD 200 bln. On the other hand, Russia’s foreign exchange reserves amount to a staggering USD 600 bln, which in Eliades’ opinion is more than enough to meet any contingency.
“No other country has double the reserves than bank deposits,” said Eliades, explaining that this is because the banking sector has not yet developed in Russia with most of the public using banks for transfers.
Once the final permits are secured in October, Bank of Cyprus will introduce retail banking products such as credit cards, mortgage loans and other products ideal for the Russian consumer, areas where BOC has built up tremendous strengths, experience and know-how in Cyprus and Greece.
Funds selling
Asked to comment on the recent price pressure on BOC shares, mostly because of intense selling by foreign funds liquidating positions across the globe, Kypri said the level of foreign fund ownership is still at 33-34%.
“Some funds are selling, others are buying, that is the way markets operate.”
Kypri said he will be flying to London on Thursday to explain to institutional funds the relative strengths of Bank of Cyprus and how it is not exposed to credit risk and is operating in a low-risk environment of taking deposits and spreading its loans.
“Our job is to inform them (fund managers) why they should not be afraid of investing in BOC shares. I’m sure when things calm down, the funds will decide that BOC is a safe place to put their money,” said Kypri.
Cyprus is safe
Eliades said the low level of risk and leverage at home and strong financials will allow Cyprus to overcome the credit crisis pushing many countries into recession.
“Cyprus will definitely be affected, but it will be mild.”
Regarding concerns that with property prices now heading lower, banks will be exposed because of high lending to the sector, Kypri said Bank of Cyprus has worked out different levels of decline in equity prices and is confident that its margins are safe to withstand some kind of short-term decline in property prices.
“Our policy of lending to individuals home buyers remains in place to make sure the borrower has the ability to repay the loan and that the guarantees are sufficient enough to withstand a down-pressure in prices,” Eliades said, adding that this assumption is based on there being no major increase in unemployment or business closures.
