* Announced H1 loss of EUR 554 mln after higher provisions *
Bank of Cyprus Holdings, the island’s biggest lender, announced a first-half loss of EUR 554 mln, following an earlier decision to allocate EUR 500 mln of the bank’s capital, through increased provisioning, to further accelerate risk reduction. As a result, the bank’s executives said that non-performing loans have been reduced by EUR 1.2 bln, or 12% of its high-risk portfolio, a policy they plan to continue till the end of the year.
However, the decision to de-risk its balance sheet with a EUR 500 mln increase in provisions and reduction in capital was deemed by Moody’s rating agency last week as ‘credit negative.’
“We expect an additional negative effect as a result of the implementation of International Financial Reporting Standard 9 (IFRS9), although Bank of Cyprus expects the phased-in fully loaded effect to be manageable relative to its capital plans,” Moody’s Investors Service said last week.
“The bank’s improved loan-loss reserve buffers will allow it to absorb credit losses and provide a greater ability to take write-offs, which is part of the bank’s strategy to reduce its high stock of non-performing loans,” seen at 52% of its loan portfolio in the first quarter, Moody’s continued.
The rating company said that it expects that following the increase in provisions, the coverage ratio of its NPLs will increase to 48% in the second quarter from 42% in the first quarter.
“We expect reserves relative to non-performing loans to increase to 60% in June 2017 from 54% in March 2017, in line with the average for Moody’s-rated euro area banks,” it said. “However, the higher charges will make Bank of Cyprus loss-making in 2017, the sixth year out of the past seven that the bank has reported losses,” Moody’s said. “Given Bank of Cyprus’s size and the extent of the losses, we expect
Announcing the first-half results, the bank said in an announcement on Tuesday that its achievements included ‘good progress’ in reducing its non-performing exposures (NPEs), a sufficient capital ratio, a strong funding position, a robust operating performance and a ‘more normal’ 2018.
CEO John Hourican said in a statement at the shareholders’ annual general meeting that the bank “is continuing to make steady progress in its journey back to full strength. The first half results reflect the bank’s previous policy of absorbing all its operating profitability in further de-risking the balance sheet.
“The board also made a deliberate decision to allocate a further EUR 500 mln of the bank’s capital, through increased provisioning, to further accelerate risk reduction. NPEs now have provisions at 48%, above the EU average, and we expect to exceed the medium term target of 50% by the year end. This substantially concludes our discussions with the ECB on this matter.”
Hourican explained that the de-risking decision “resulted in a loss of EUR 554 mln for the first six months of the year. We expect to continue to utilise the operating profit of the bank in the remainder of 2017 for further balance sheet de-risking and, post the introduction of IFRS 9 on 1 January 2018, to be in a position to present a more normal credit cycle charge.
“Capital levels remain adequate, despite the incremental provisions. As at 30 June 2017 the bank’s CET1 ratio (transitional) was at 12.3% and the total capital ratio was 13.8%, in excess of regulatory requirements.
“Momentum in risk reduction continued in the second quarter. We have recorded material NPE reductions for nine consecutive quarters and we expect the organic reduction of NPEs to continue in the coming quarters. Overall NPEs were reduced by 12% or EUR 1.3 bn during the first half of 2017,” the CEO said.
Hourican added that deposits remained broadly stable in the first half of the year and now fully fund the loan book.
“The focus has now shifted from deposit gathering to ensuring the deposit base has an appropriate shape to meet both LCR and NSFR liquidity requirements.
“We are pleased to see that the Cypriot economy continues to grow, recording a 3.5% growth rate for the second quarter of 2017, currently the second fastest growing economy in
In his address to the shareholders, board Chairman Dr Josef Ackermann said that the bank’s operations during 2016 and so far in 2017, “took place under an improving economic setting both domestically and abroad,” while, looking ahead, “the growth outlook for
“The welcomed gains in output have improved the financial position of the corporate sector, but are yet to be significantly felt by the household sector. Both sectors are still highly indebted and undergoing a deleveraging process. This is reflected in the trends in bank non-performing loans, where major progress has been made in reducing the non-performing exposures (NPEs) of the corporate sector, with more modest progress for the retail sector and SMEs.
“There has also been a significant, and much awaited, increase in the demand for bank credit from the corporate sector and to a lesser extent from the household sector,” Ackermann said.
“The financial health of the bank continued to improve substantially during 2016 and in the first half of 2017 … but, understandably, challenges remain.”
Ackermann said that the bank has lowered further its loans-to-deposits ratio to 90% and has become compliant since March 2017 with the ECB’s Liquidity Coverage Ratio requirement.
“Equally important, the bank has made enormous strides in stepping up debt restructurings and achieving a cumulative steep reduction in NPEs of EUR 5.2 bln or 35% since end-2014. Overall, the bank has continued to record sizable operating profits before provisions in excess of EUR 500 mln on an annual basis during 2015, 2016 and the first quarter of 2017. The bank recorded modest positive profits after tax and after provisions in 2016 and the first quarter of 2017. 2016 was the first profitable year for the bank since 2010.”
“The board has decided to accelerate further the reduction of NPEs and the de-risking of its balance sheet by adopting a more conservative provisioning methodology and thus increasing provisions by an additional EUR 500 mln relative to what was originally envisaged for the second quarter of 2017. As a result, the NPE coverage ratio rose to 48% by June 2017, and by implication the bank recorded an accounting loss of around EUR 560 mln during the latest quarter. … The bank is expected to resume normal provisioning and return to profitability in 2018.”
