* Market share at 30-40% says CEO Marios Clerides; insurance business to get a boost with Allianz products *
“Is this the weekend that we will have a haircut, or the next?”
This was the talk that drove thousands of depositors at the Cooperative credit societies (SPI) last year to fear a new bail-in on savings, similar to the fate of the island’s two biggest lenders in 2013, a rumour that pushed many to withdraw their money, even from the safety of their local Coop.
But the ECB stress tests, which the state-bailed out Cooperative Central Bank passed with flying colours last October, acted in a catalytic way to put an end to the rumours and lay depositors’ fears to rest. The CCB had shown to have a surplus of 331 mln euros in the ‘worst case’ scenario, meaning it had enough capital to start lending again and try to revive the economy.
Gradually, deposits started to trickle back and with the bank’s biggest challenge being its responsibility towards small savers and agrarian communities, it had to juggle between its radical restructuring plan on the one hand and on the other, projecting an image that it was still the “peoples’ bank”.
When the Troika of international lenders insisted that the once-rural behemoth – that used to operate like a piggy bank for anyone who was turned down by commercial lenders – had to undergo a drastic change in culture and banking practices, it lay the foundations for the creation of a giant that is on track with profitability and can now afford to lower its rates below those of its rivals.
But it was not an easy accomplishment.
The bank, that is the owner of the formerly sprawling network of sister ‘housing and loan’ Coops that have been merged into 18, is now returning to its roots, literally, by refocusing its efforts on its biggest customer base, rural societies, and building new businesses, such as financing of renewable energy ventures and reviving its association with the global insurer Allianz.
Marios Clerides, the veteran banker who took the reigns of the Cooperative Central Bank just eight months after the economic meltdown in 20013, recalls trying to deal with the rumours of a rumoured bail-in, spreading every Friday and dissipating by Monday.
“It was a terrible environment for the public to work under conditions like this. The stress tests acted in a catalytic way,” to put an end to the rumours, he told the Financial Mirror in an interview.
And so, the new era for the Cooperatives started at the end of October.
“October were the results (of the stress test) and in November, a relief that that part was concluded. We saw a positive inflow of deposits, that is deposits which we had lost to competitors, coming back, and the (environment) calmed a lot.”
So, is the CCB free of stress tests for another year?
“We must understand, first of all, that the stress tests are now part of the way of life of the banks. It is like when the doctor tell you that every two or three years you need check-up. It is a preventive part to see, for example, if the building has any cracks, to give you time to bring in the right engineers to fix them.
“Unfortunately, for us in Cyprus, the stress tests, became associated with (asset valuers) PIMCO and the closure of Laiki and this is why the public has the wrong impression of what a stress test is all about,” Clerides said, adding that a bank does not change drastically from one year to the other. Unless of course if something fundamental happens, such as Greece returning to the drachma.
GREEK EXIT WAS GOOD
“An unintended consequence of the MoU (when Cyprus banks were forced to sell their Greece operations), was that as a decision at the time it may have been wrong because the Cyprus banking system lost its diaspora it had in other markets. At the end, though, it seems to have benefitted us, because if we had any exposure to Greece today, we would see a similar deposit flight we are witnessing in Greek banks.”
Simple folk, who used to be the depositors, and subsequently ‘members’ of the local Cooperatives, now want to know if they will ever ‘own’ their old savings banks, again, with the government, that pumped in 1.5 bln euros to prop up the CCB, ever selling its shares back to the public.
“The government has given first option to the old Cooperative members, who were the owners of the local Cooperative credit societies, to buy back their SPI five years after the MoU. After those five years, there is no obligation to leave for another 10 to 15 years. Thus, the government may leave, but it is not obliged to do so,” Clerides said.
Does this mean that the present management has five years to restructure the Cooperative bank and turn it around?
“To return to profitability, yes, but for us the target is not necessarily to prepare for an exit. Actually, some of the targets we have are determined by the restructuring plan we signed for the Cooperative to gain state support. We have given some commitments to the European competition commission that we will close branches, and lower our cost to income ratio. Thus, it is not only to prepare for an exit, but also to comply with all these commitments. Parallel to all this, we are now under the supervision of the SSM (single supervisory mechanism of the European Commission), that demands that we must all have governance and a risk policy, and these are also included in the big picture of things to do.
“In March, this time last year, we were still merging. The Cooperative always existed, but the present form as we see it today did not, with the Cooperative Central Bank at the top and 18 subsidiaries.”
Clerides also believes it is important to clarify the bank’s current status, as a major publicly owned bank with subsidiaries.
“Publicly owned, yes, but allow me to make a differentiation, because there still seems to be some confusion in public opinion, MPs, politicians and others. We are a ‘state-aided’ bank and not necessarily government-owned. It is a different concept. There is a 40-page document which determines our relationship with the owner. It is not like we are a state bank and we are obliged, thus, to lower rates. We are not obliged, unlike like semi-government organisations, to follow state policy.
“And this stems from an effort of the competition commission to regulate any potential conflicts of interest. Now, any transactions we have with the state are controlled by third parties. For example, the suspicion was that if the government wanted to borrow it would resort to the Cooperative. It no longer works this way. There are controls all around.”
NO INFLUENCE
Which is why the government has no influence over the CCB, either.
“It cannot force us, but because we are the Cooperative that has never had the ultimate goal of profitability, we also have some development aspects. It is part of our mission to see some actions to restart the economy. Some parts that will help the local communities, which was always part of our DNA. Local communities used to go the Coop to get financing for a public project, not worried if anyone could repay that loan. Now we must continue to do this but in a more structured way.”
Clerides said that the CCB’s traditional market is still the small to medium-sized enterprise (SME).
“This is community-based banking, also the traditional ‘green banking’ for the agriculture sector. When no one wanted to touch the farmers, we were always there for them and we were always more fair to our clients. Our rates were better, with no hidden charges. But we don’t want to be a lender without control.
“Now we must do all these within an environment of proper banking. At some stage, we misunderstood our social responsibility and we became a lender of last resort. Whoever had a problem with commercial banks used to go to the Coops. That is not our role. We need to be more responsible. For example, if you want a new car and you are also preparing to send a child to study, with two more to follow, we will ask you, ‘can you carry the burden?’ ”
The CEO of the CCB said that the size of non-performing loans (NPLs) is smaller than others.
“This has its advantages as well as disadvantages. The advantage is that our diaspora is much wider, and much more difficult to manage. The other banks may recover a major NPL from a leading property developer and could, say, resolve in one go the 10% of their problem loans. For us to do that we need to resolve thousands of cases. So our solutions are geared to other directions.”
The CCB, however, is often accused, like all commercial banks, that its is not providing sufficient lending from the pool of EIB financing to kick-start the backbone of the island’s economy.
“Our SME clients are much smaller than at other banks,” Clerides said, explaining that the problem with these funds is that the public feeling is that “they took the funds and lost them.”
“The reality, however, is that we have taken those funds, and if we do not give out loans, we are losing because we are paying interest on them. At the moment, we have taken those funds, we are paying interest, we are trying to lend, and we cannot find the demand.
“The demand, unfortunately, is either someone who is distressed at other banks and comes to us, or one who has a good project but does not have equity. So, bank financing should in actual fact have been equity financing. The classic example is all those who want to do start-ups or solar parks. They expect the government to put up the land and the bank to give the money. I’m afraid the system does not work this way. The borrower must also take part of the risk and put up some equity,” Clerides said.
He explained that what is needed is low-interest lending. “The state should also find a way to enter with equity, but we cannot wait for this to come from the banks, just as we suffered in the property market. Everybody put up real estate, the system collapsed and we were stuck with the equity.”
However, Clerides said now is the time regenerate businesses and restructure their finances to get them up and running again, with part of the solution being to allow investors to enter, as is the case with property developers and what happened with the banks.
“The issue of Cyprus is equity and I don’t see this problem being addressed in a systematic manner. And because in the past we had confused the banks with equity finance (you put up your home and started the company, which I financed), now you put up the home, the business flops and the mortgaged asset is stuck in the system.”
Recalling that at some time in the past banks had venture capital divisions, Clerides said that “we all closed (those divisions) because we have all learned. We had some bad experiences. To have a VC is good, but it needs a lot of control, and we did not have that. Part of the problem in our banking system is expertise.”
SHARED RESPONSIBILITY
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But even the borrower must now have a greater share of the responsibility. “The average Cypriot company owner does know how to do cash flow analysis. They only realise they are in trouble when the overdraft gets out of control.”
However, there are also some positive aspects, as long as some easier and some simple rules are followed, even by the banks. When lending, the repayment must not exceed 35% of the borrower’s annual household earnings. In Cyprus, we have to decide what a household means. In the UK, you have to consider the different purses of a couple, here it includes the entire family.”
Clerides admitted that, for now, there are no plans to create a dedicated SME unit, or even a semi-partnership to provide advice.
“Not right now. The advice is given when we are discussing with the client. Unfortunately due to our restructuring plan, we cannot create new units, with new risks and additional staff.”
The CCB’s biggest advantage remains that some staff know the farming sector very well.
“We know the cycle of the farmer and we understand their needs. At the same time, we are trying to set up through third parties the infrastructure for alterative energy which we do want to do on our own. For example, we did now know that the biggest risk to solar panels were frustrated hunters who would shoot at the panels and destroy them.
“The financing side is relatively easy. But the operational risks you learn the hard way. This is where the banks get lost.”
Looking ahead, Clerides said that the banking scene will change.
“I believe we will have more specialisation. You can see some specialisation with one team, say, working exclusively with developers. We thought we know about this stuff, but discovered many problem along the way. These are experiences you build and change your policies. There needs to be a thorough inspection of costal projects and follow where the money went,” he said.
Fortunately, the CCB has a very low exposure to property developers, with the portfolio no more than about 20-30 mln euros.
The Coops had always been inbound market. Not much trade financing and mostly consumer loans to SMEs, restaurants, shops and micro businesses.
For the other banks, the boom will come from the international business units (IBUs), Clerides said, but as the CCB does not have such a division, they hope to benefit from the spillover effects in the economy.
“The Cooperative will stay focused on its own strengths, in traditional markets, and expand only where we can find a niche and do this very carefully. The biggest mistake of all banks is when you believe you can do everything,” he added.
As regards new technologies, “online banking is one of the things we have to look at seriously. Others may have surpassed us, but we have to work on the morphology of our clients, if they can or want to use it, because they want the personal contact, they don’t want the faceless contacts.”
There is also a new dynamic, he said, from a lot of young customers. “If we don’t have this infrastructure, we will stay with the old clients and we will die with them.”
As regards other activities, Clerides said that the CCB plans to dispose of non-core assets, such as the fertilisers divisions, petrol stations, stores and that there is a deadline for the disposal of these commercial activities, including those where the CCB has shares, say, in the Cooperative gas distributor Synergas. “We must sell them and there are timeframes for deleveraging.”
One of the biggest unutilised strengths is the insurance sector.
“We are brokers of Allianz. This is a very strong brand and actually undeveloped within the Coop network. It is unheard of that the Cooperatives with a 30-40% retail market share in banking to have a very small share of the insurance sector. We can provide home, fire, car insurance. Allianz has life policies as well, and some of our members also have group policies, such as specialised groups, say the police, with different risks involved.”
Staff cutbacks at the CCB has stopped.
The priority now is some projects, such as disposals. “We have issues to resolve after we merged the 18 local Coops, as they are working as separate legal entities, and you have different working hours and labour issues.”
Clerides conclude that the aim to maintain the sense of local involvement. “For example, some Coops are open on Saturdays, but in rural areas Saturday banking is essential, there we will insist on keeping them all open.”
