Tier 1 capital to improve
Bank of Cyprus shareholders are expected to consider the many advantages offered by the convertible capital securities when they meet on April 2 to approve the issue, according to Yiannis Kypri, Group Chief General Manager.
In an exclusive interview with the Financial Mirror ahead of the EGM, Kypri said the issue of up to EUR 645 mln convertible capital securities to be offered via a priority right to existing shareholders “will help boost the bank’s capital and if converted, will increase the book value”. This will also give the opportunity to holders of the previous convertible issue to swap them for the new issue.
The bank’s board wants shareholder approval to issue the convertible capital securities (CCS) in the ratio of 11 CCS for every 10 shares with a conversion price of EUR 5.50/share. The new bonds will earn 5.50% interest until June 30, 2014 and thereafter Euribor 6-month plus 3%.
Kypri said that it is likely that many of the holders of the previous convertible bond issue for EUR 573 mln with a conversion price of EUR 10.50/share and interest rate of Euribor 6 months plus 1% from June 1, 2009 will decide to swap and take part in the new offering.
“Naturally, bond holders will consult their financial advisors before making a decision, but it has to be pointed out that with the new issue, the conversion price is significantly lower – EUR 5.50 vs. EUR 10.5 – while the interest rate is also much higher.”
The interest on the existing bonds is set to shift to variable at Euribor 6-months plus 1%, which at present would mean 2.8%-3%, whereas by swapping and participating in the new issue, bond holders will lock in the 5.50% rate until June 2014. On the other hand, the Capital Securities issue is perpetual, although the bank has the option to redeem it at the end of Year 5 as was the case with the existing convertible bond.
Limited dilution
Shareholders will also consider the level of dilution in their stake because of the CCS issue. The possible addition of new shares on top of the existing 586.66 mln issued shares gives an earning per share (EPS) dilution factor of 12.5%, based on the mid-average of the profit projection made by the bank for 2009 of EUR 300-400 mln.
However, Kypri counters that the increase in the book value will be close to 15%.
“The EUR 5.50/share conversion price was determined in such a way so that the net difference would be positive for shareholders.”
Capital boost
While the existing bonds are currently included in Tier 2 capital, the new CCS issue will be included in the calculation of Tier 1 and will boost existing levels from 7.2% to close to 10%.
Commenting on what is the optimum capital level for banks and whether the Bank of Cyprus capital levels are adequate, Kypri said that “Taking into consideration our (BOCY) risk profile, the fact that there is no exposure to toxic assets and the fact that the Group is regulated by the Central Bank of Cyprus, practicing one of the toughest monitoring and reporting systems in the eurozone, then its obvious that our capital ratios are more than adequate.”
Kypri said that now is the time to “put our capital to use and consume it” and not raise money from shareholders during the current difficult environment, as some global banks are doing.
Depressed share price
The tough environment coupled by high negative sentiment has seen foreign institutional fund managers reducing their stake in the bank from close to 28% to below 18% by end of February, which may have declined to 16-17% judging from the selling pressure seen in March.
The exodus has forced the share price to historic lows and while there is some buying by mainly Cypriots and Greek nationals, their buying power has not been enough to overturn the negative tide.
“Investor sentiment has been negative, leading to depressed prices which in the process has forced the price to book and price to earnings ratios to historic record lows,” said Kypri, pointing out that the audited financial statements for 2008 give a true picture of the situation at the bank.
“All investments have been marked-to-market, although we could have taken advantage of the relaxed accounting and reporting rules adopted by the EU.”
Liquidity, low risk
The Bank of Cyprus management has placed particular emphasis on maintaining high liquidity and at the same time controlling its risks and placing a tight lid on costs as the best strategy to survive and emerge out of the global credit crisis.
The EUR 9 bln in liquid assets are more than adequate to meet and cover the total of EUR 6.8 bln of foreign deposits which, according to Kypri, in any event are rising as overseas investors shift their money to the relative safety of Bank of Cyprus.
Profit decline
The negative global environment coupled by an expected decline in loan growth has been one of the key factors leading the bank to issue a reduced profit indication of EUR 300-400 mln for 2009, which Kypri said factors in single digit loan growth compared to 25%+ growth rates witnessed in recent years.
With Cyprus and Greece contributing most of the Group operating profits, the state of the economy, unemployment and growth in the two countries will determine to a large extent future profitability.
“Naturally, if there is prolonged slowdown/recession in Cyprus/Greece leading to unemployment and no investment, then it will affect the level of non-performing loans and loan growth and have a negative impact on profitability,” Kypri said.
Nevertheless, he remains optimistic hoping that the stimulus packages and draconian measures implemented by governments all over the world will lead to a rebound in the not too distant future.
