Popular Bank sees interest for Cyprus rights issue, no ring-fencing

The Popular Bank, the island’s second biggest lender that is struggling to recover from a massive exposure to Greek sovereign debt, is hopeful that an upcoming rights issue will be picked up by existing and new shareholders.
The 1.8 bln euro issue to be underwritten by the state will effectively part-nationalise the recapitalized bank with the government appointing up to eight board members and taking control of the bank.
The bank’s chairman and former Finance Minister Michalis Sarris told a new briefing Thursday that although the 10c price of the rights is at par with the current stock market value of the shares, major shareholders from Cyprus “have not yet indicated if they will participate fully or partly with their allocated rights.”
“The private sector, too, has been affected by the current economic crisis and many of them have liquidity issues,” said Sarris, but was quickly reassured by the bank’s CEO Christos Stylianides that Cypriot shareholders “have expressed a desire to participate in the issue.”
Sarris admitted that “mistakes were made in the past”, especially as regarding the enormous exposure to about 3 mln euros of Greek government bonds (GGBs) in 2008 and 2009, that have since suffered a 76% writedown, pushing the bank into the red to the tune of 2.8 bln euros last year.
CEO Stylianides revealed that the bank’s board was unaware of a warning letter sent by former centralbanker Athanassios Orphanides urging Marfin Popular Bank, as it was called at the time, to reduce its exposure to GGBs.
The communist government in Cyprus had sided with major shareholder Andreas Vgenopoulos in efforts to oust Orphanides blaming the latter for the demise of the Cyprus banking system.
As regards large loans held by board members or groups controlled by board members in Greece, Stylianides said that these people should resign in order to release the bank from the strict requirement of all board members’ loan exposure not exceeding 2% of the capital.
“We have disposed of two subsidiaries, but our presence in Greece represented nearly 50% of our Group operations up to March 2011 where we also maintain a market share of about 5% in all areas of activity,” Sarris said.
The loan and asset portfolio of some 11 bln euros in Greece represents a mix of operations, from retail banking to shipping, Sarris said, but excluded the prospect of splitting the group into a “good bank” in Cyprus and a “bad bank” in Greece. However, he was also optimistic that the central bank of Greece may consider some assistance to Popular due to its significant presence there.
Four Greek banks – National Bank, Alpha, EFG Eurobank and Piraeus – are to share a recapitalization boost of some 18 bln euros this week, but Popular and the Societe Generale subsidiary Emporiki have been excluded, for now.
Cyprus parliament has approved the appointment of five officials representing the state on the board of Popular Bank, with a further three expected to be appointed as the government takes full control.
The rights issue, the conversion of bonds, as well as other cost-cutting measures that include, redundancies, pay cuts of 12.5% and the reduction of operational costs by at least 7% should help the bank replenish its core tier 1 capital by June 30, in accordance with European Banking Authority demands.
Similar to the part nationalisation of Lloyd’s and the Royal Bank of Scotland, the government will take up the balance of unsold rights through a bond-for-equity swap, but will seek an early exit, probably within five years. The rights issue will first be offered to existing shareholders, then through a private placement to potential institutional investors, according to the prospectus submitted to the Securities and Exchange Commission.
The amount, equivalent to about 10% of Cyprus GDP, forms the bulk of a 1.97 bln euro capital shortfall identified by the EBA.