After seven quarters of losses and a severe restructuring plan imposed as part of a national bailout, the island’s biggest lender Bank of Cyprus has turned a profit of 31 mln euros after tax for the first quarter.
This was on 71 mln euros of pre-tax operational profits, a far cry from the record 1.8 bln losses it showed for the first half of 2013 prior to its restructuring, cost-cutting and writing off of billions in toxic Greek government bonds.
But the bank’s chief executive was cautious and said this turnaround “should not be seen as a trend”, at least not until the bank fully returns to operational normalcy.
This is a major leap from the last quarter of 2013 when it showed a loss of 103 mln euros just as it embarked on its survival plan and “moving on” programme of its new board and management that came out of a massive recapitalisation in the summer by unsecured savings from depositors.
The bail-in programme, an experiment by the Eurogroup of Eurozone finance ministers who are now having second thoughts about their methods, injected some 3.8 bln euros of fresh funds to prop up the bank that had already absorbed the now-defunct Laiki Popular Bank, and with a combined Eurosystem funding of 11.4 bln euros.
CEO John Hourican, recruited by the new shareholders late last year to help the bank turn around, said that “we have made significant progress in the implementation of our restructuring plan and we continue to deliver against our strategic objectives. The performance of the Cypriot operations, our core business, was significantly stronger than the Group’s overall performance, supporting our efforts in shrinking to strength through the disposal of non-core operations.”
Three primary disposals included the sale of the Ukrainian banking subsidiary to the Russian-owned Alfa Bank, the sale of a high-risk insurance portfolio in Serbia and its remaining stake in Romania’s Banca Transilvania. This helped repay the ELA funding, reduced to 9.23 bln in May, with an additional 1.4 bln from the ECB still pending.
Hourican added that the bank’s balance sheet was thus deleveraged by 1 bln euros and the new benchmark Common Equity Tier 1 capital (CET1) ratio increased from 10.2 to 10.6%. He added that loans in arrears from more than 90 days declined for the first time in 16 consecutive quarterly increases, with the rate of non-performing loans stabilised at 48.6% of its loanbook, the same level as at the end of December 2013.
Of the 247 mln in NPL reductions, the majority is from corporate clients, a senior manager explained, debunking the myth that “business majors” were not repaying their outstanding loans and that the bank was pressing harder on retail clients, many of whom are unemployed or have seen their savings wiped out and can no longer service their debts. But the impression remains and the bank must work harder to convince public opinion.
At the same time, the bank has reduced staff size through a voluntary redundancy scheme and shut down nearly half its branch network to about 130 locations. It is also continuing with the offer of non-core assets, such as redundant properties from their own real estate portfolio or from repossessions, while concentrating operations in their own facilities has also benefited the group by about 5 mln euros in rents saved.
The bank also said that its own deposit rate had stabilised, just as the rate of banking system deposit outflows had significantly abated in 2014, with the holders of 3-, 6- and 12-month deposits, frozen and broken up by the Central Bank of Cyprus, gradually returning their moneys back to the Bank of Cyprus.
Just as the bank’s operational earnings came from a combination of local business, cost-cutting and asset sales, confidence outside of Cyprus is still not recovered, with deposits in the U.K. and the Russian 80%-owned subsidiary Uniastrum continuing to recede.
The justification given by senior managers that the drop in Russian deposits from 1.15 bln euros a year earlier to 767 mln at the end of March was due mainly to the crisis in Ukraine was not convincing, with the excuse of tougher controls on smaller banks in Russia sounding more believable.
Whereas as deposits in the U.K. seemed steady at 1.295 bln euros in June 2013, they were marginally down to 1.249 bln at the end of the first quarter, with Group deposits sliding from 16.97 bln in June 2013 to 14.06 bln in March 2014.