FM projections at CYP 80 mln
Emphasis back on organic growth
Bank of Cyprus Pcl (BOC) is seen lifting first half profits by a staggering 155% year-on-year to well above CYP 80 mln, much higher than the CYP 72.4 mln reported for the whole of 2005 and on track to surpass analyst estimates of CYP 140 mln profit for the whole of 2006.
BOC is reporting its results on Thursday, July 27, after the close of business on the ASE. A poll carried out by the Financial Mirror among the island’s top analysts shows a median average forecast profit of CYP 75 mln, but Financial Mirror projections, based on exceptional profits associated with the booming stock market, point to the net profitability of BOC rising above CYP 80 mln for the first half.
All analysts polled by the Financial Mirror expect BOC to record a significant improvement in revenue, which coupled with BOC’s ability to control costs and the fact that provisions for bad debts are seen lower, will combine to boost profits higher. The major unknown is the level of exceptional gains that BOC will book from gains in trading in securities and other financial instruments.
CLR Securities and Financial Services forecast BOC net profit for the first half to reach CYP 73 mln compared to CYP 31.3 mln a year ago in the same period. CLR says the exceptional non-recurring items included in its forecast may reach CYP 10 mln.
SFS Securities and Financial Services expects BOC profits to range between CYP 73 to 75 mln, while Egnatia Financial Services forecasts net profit of CYP 78.3 mln.
Financial Mirror projections hover between CYP 78-85 mln in net profits for the first half on the back of the exceptional gains.
BOC had reported net profit of CYP 72.4 mln for the whole of 2005, which were 88% better than the CYP 38.5 mln reported for the whole of 2004. In the first quarter, BOC lifted its net profit by 132% to CYP 37.2 mln.
Higher market share
BOC’s ability to boost its market share in loans, both in Cyprus and Greece, is seen by all analysts as being the principle reason driving revenue growth higher. Other factors seen boosting the net interest income are more effective and competitive pricing compared to the Cooperative Credit Societies, especially on housing loans and transfer of loans from the Coops to the banks, easier and simplified methods for consumer loans and better promotion campaigns.
The fact that during the first half, both the Fed and the ECB hiked interest rates is also seen as a positive factor, since each time the central banks hike rates, banks like BOC benefit as they immediately hike borrowing rates, but continue to pay the same lower rates on deposits until they mature and are renewed on the higher rates.
The Group’s insurance operations, Eurolife and General Insurance are also expected to continue to lift their share of profit.
Costs under control
Total overheads are seen staying low with Egnatia forecasting that first half costs will reach CYP 119.3 mln, up by a modest 2.5% year-on-year and the cost to income ratio for 1H06 to improve to 50.3% from 59.0% in 1H05 (vs. 52.6% in 1Q06) amid the Group’s continued strive for cost containment, as expressed in the form of a staff ”hire freeze”, an early retirement plan set for its Cyprus operations, as well as the centralisation of the Group’s operations and the rationalisation of costs at all levels.
Organic growth
Following the unanimous decision by BOC’s board and management to withdraw from the race for control of Emporiki Bank of Greece, attention is now expected to shift to accelerated organic growth in Greece, as well as a speedier implementation of the planned expansion drive in Romania and Russia.
BOC insiders have shrugged at criticism for pulling out of the Emporiki race, justifying their action because of uncertainties with the level of the EMP staff pension fund liabilities, as well as the fact that if the takeover of EMP was successful, its capital adequacy ratio would decline below the Central Bank minimum requirement of 8%.
Informed sources told the Financial Mirror that the head offices for the start of operations in Romania and Russia have been secured, and very soon, BOC Leasing will commence operations in Romania.
In Greece, the Group plans to accelerate the expansion of its branch network from the current 115 to beyond 200.
Day after Emporiki
BOC sources brushed aside press reports suggesting that the Central Bank is asking for heads to roll at board level insisting that it is natural for major corporations to seek or abandon takeover bids.
“It happens every day in major countries, yet some people here are making a major issue out of nothing,” said an informed source who insists that it’s better to walk away from an uncertain situation such as the EMP pension fund liability now, rather than proceed with a takeover offer and then find out about the extent of the problem after the deal is closed.
They point to staff action by EMP staff because of uncertainty associated with the pension fund issue, which further justifies the action taken by the BOC Board and Management.
The same source also dismissed press reports that the Emporiki bid cost BOC close to EUR 5 mln, stating that the fees paid to Credit Suisse, the issue advisors amounted to EUR 3 mln, but the other costs such as promotion and others did not amount to much.
BOC is now likely to wait for the Emporiki privatisation to be completed, after which it may decide to inform its shareholders on the various issues, its prospects and expansion strategy.
The important issue for BOC shareholders is that the bank’s share price continues to trade higher, and major analysts like UBS have maintained their price targets on the bank’s share price.
The only uncertainty is the role that Piraeus Bank, holding 8.2% of BOC capital will play in future. The big question is whether Piraeus decides to enter into a strategic cooperation deal with BOC to safeguard its investment in the bank, ups its stake to 9.99% and more or on the other hand decides to trim its position.
