* Wants to dispose of Russia, Ukraine assets; To surprise with Q1 2014 results
* New bank will be smaller; Focus on core business; Russia experiment failed
ANALYSIS
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It was a briefing like no other: media spread out along a U-shaped panel with the new CEO and chairman in the middle, taking questions of all types, trying to give a simple answer – Bank of Cyprus will survive the storm.
Less than three weeks at the helm, the bank’s new chief executive Christos Sorotos already has his hands full. Fortunately for him, he comes with a track record of restructuring companies and that is what shareholders, stakeholders and depositors expect of him.
An international banker and expert in corporate restructuring, Sorotos was hired by the bank’s month-old board to oversee the takeover of the second-largest Popular Laiki Bank that was rescued by the state but failed to avoid bankruptcy due to its huge exposure to Greek debt and spiralling losses.
Besides, he has been tasked with producing results by the next AGM in October, where the bank’s new shareholders will decide whether to keep him on board and continue with efforts to turn the bank around, or vote no confidence in the interim management and send the bank back into a whirlwind of disaster, taking the economy down with it.
So, what are the plans? How can the Bank of Cyprus recover? What are the next steps?
To begin with, Sorotos is the central piece of a new team, unlike past administrations. He is flanked by board committees on the one hand, and an executive team of senior managers on the other, basically, the group of people that have kept the bank alive ever since it was forced into a limbo state, with the Central Bank and the Ministry of Finance squabbling over who has the final say in the bank’s future. To be frank, neither have proved their ability to resolve this mess, so, perhaps, they should leave the bank alone.
One thing’s for sure – the Bank of Cyprus Group as we knew it in the past decade, will no longer be. Already, it has been amputated and deprived of its assets in Greece, while it’s Russian and Ukrainian arms will probably be put up for sale, while not pulling out of these markets altogether. It will become smaller, leaner and better focused on its core activities – banking and insurance.
To this end, a deal has been struck with the trade unions reducing all wages by “up to 30%” and all benefits scrapped or reduced to half. This will pave the way for some 1,200 to 1,500 of its 5,760 staff to opt for voluntary redundancies, taking the sweetener of a five month wage bonus.
The franchise network in Cyprus is already being reduced by a total of 70 from the joint BOCY and Popular Laiki, with 20 branch closures already underway and absorbing staff in larger properties.
DOSVIDANIA TO UNIASTRUM?
The bank may dispose of its subsidiaries in Russia and Ukraine to reduce costs and return the bank to growth and profitability, with the bank’s management promising a turnaround as early as the first quarter of 2014.
A senior official said that the Uniastrum subsidiary, one of Russia’s 25 biggest banks, “is a big part of our group and we shouldn’t keep it” under the current economic conditions.
The bank has shrunk in size after the three Cypriot banks’ sizeable operations in Greece were handed over to Piraeus Bank as part of the bailout plan.
Bank of Cyprus bought a controlling 80% stake in Uniastrum in October 2008 for 371 mln euros ($567 mln) but its return on investment has been disappointing with after-tax profits of around 10 mln euros a year. In 2008 it also took full control of AvtoZazbank in Ukraine, renamed Bank Kiprou, with a 44 branch network.
However, the deal at the time has come under scrutiny and President Nicos Anastasiades has ordered an investigation after a Central Bank-commissioned report by Alvarez and Marsal found the bank went ahead with the purchase despite misgivings in due diligence reports. There were also reports of large kick-backs involved in the deals.
Laiki's Ukrainian subsidiary, PJSC Marfin Bank, had 59 branches. Bank of Cyprus took over some of Laiki's international businesses in Romania and the UK, but the Ukrainian operations remain part of Laiki, which is being wound down for the benefit of its creditors.
As regards the disposal of other assets in order to reduce overheads, the Bank of Cyprus operations in the U.K. will remain as part of the Group.
“We have no plans to sell and we need to be there. The international business unit there is doing very well,” a senior banker said.
Q1 2014 WILL BE A SURPRISE
The official said that although the bank will not return to profitability any time soon, the first quarter results for 2014 “will be surprising to all”, expecting positive results from the implementation of the restructuring plans.
A new "Holding" division or asset fund will be created to handle some of the bank’s disposable assets and any other non-banking business that have commercial value, such as 250 properties in Greece that have a market value of about 100 mln euros.
“This may attract property funds to invest in the portfolio held by the new division, but in any case we do not plan to become a real-estate company,” the banker said.
He added that once the bank’s restructuring gets underway, it will be easier to secure more liquidity assistance from the European Central Bank to compensate for the withdrawal of deposits by customers after strict bank controls were imposed as part of the bail-in plan that affected all unsecured deposits above 100,000 euros.
However, those depositors, currently represented by an army of lawyers, will also become the bank’s new shareholders after the equity for deposits programme recapitalised the bank and will want to have a say at the next shareholders’ meeting scheduled for some time in October.
The bank’s executive team will also have to adapt to better and more transparent methods of management by introducing best international practices, good risk management and good corporate governance, with the latter two not applied properly in the past.
The new CEO is active, he is determined to restructure the bank, and the board seems determined to support him in this endeavour.
The new direction of the bank should be in accordance to how the new government envisions the economy in the next five years. Since it will be the largest bank in Cyprus by far, and will be the main source of funding for the new direction of the economy, then there should be a close cooperation with the government. Government sources told the Financial Mirror that closer cooperation is already underway and that meetings have been scheduled with the new National Economic Council, the president’s advisory committee headed by Economics Nobel laureate Christopher Pissarides.
However, both CEO Sorotos and the bank’s management teams realise that of utmost importance is reinstating trust within the public. If depositors start showing more trust in the banking system, it will face less liquidity issues, banks will be able to fund their customers, they will eventually start generating some business, service their loans, and slowly we will get out of this vicious cycle, hampered by the strangling controls imposed by the Central Bank in order to prevent capital fleeing the country.
The bank is expected to exit the central bank’s direct control by the end of July, while the interim administrator will be stepping out of the building as early as this Friday, having handed over full management control to the new team.
The only outstanding issue is that of the ECB’s Emergency Liquidity Assistance (ELA) to the tune of 11.2 bln euros (9.2 bln for Laiki and 2 bln for Bank of Cyprus). This debt has been transferred to the consolidated Bank of Cyprus, but at a “favourable” rate 2.5%, far lower than other lending at 6% or higher.
