By Stelios Orphanides
The state-owned Cooperative Central Bank (CCB) needs to reduce its stock of delinquent loans substantially, over the next months, in order to become more attractive to investors ahead of a much-needed capital increase, an economist said.
The lender, which cannot rely on more state aid after receiving €1.7bn from the taxpayer – in the form of two successive capital injections in 2014 and 2015 – might need to increase its provisions for bad loans next year when it adopts new accounting standards, said Leslie Manison, a former senior economist at the International Monetary Fund (IMF).
The Co-op, currently working on a Cyprus Stock Exchange (CSE) listing that will enable it, via successive capital increases starting next year, to reduce the state’s holding to 25 per cent, is still struggling with €7.2bn of NPLs (60 per cent) according to March 2017 figures. Two years ago. the NPL total was €7.5bn or 57 per cent.
The bank suffered another setback in March when the financial ombudsman ordered the return of €111m to overcharged borrowers, translated to a €75m decrease in capital. The Co-op posted a €7m net profit in 2016 and adjusted its 2015 results to reflect a net loss of €176.4m. It originally posted a net loss of €165.6m in 2015. In the first quarter, it posted a €2.6m net profit compared to a €25.3m profit in the respective quarter of 2016, partly on a €10m reduction in net interest income. Amid all this, unions asked their members to strike on Tuesday at the Co-op demanding more pay.
“The further decline in income earnings in the first quarter of 2017, especially from interest on good loans, is contributing importantly to the fall in profits before provisions,” said Manison who also advised the Central Bank and the finance ministry.
He added that “at the same time, there has been no effective reduction in the extremely high level of non-performing loans resulting in considerably more provisioning being required. And with the need to implement the new IFRS (International Financial Reporting Standards) 9 regulation by 2018 that requires the putting aside of more provisions against prospective loan losses even on new loans more funding from outside will be necessary.
“Consequently, while funds for provisioning from profits are falling, the need for much greater provisions, essentially fresh capital and reserves, has become elevated and urgent. It is hoped that the CCB can better manage and decrease its NPLs as well as competently carry out its loan activities in the coming months so as to inspire the public to invest in the CCB and make its forthcoming IPO (initial public offering) a success”.
Even a perceived failure to attract sufficient capital from investors at the CSE “could dent confidence in the capacity of the CCB to cover its provisioning requirements against prospective losses and thus could put the future of the bank in jeopardy in its proposed form and shareholding structure,” the Australian-born economist said.
A high-ranking executive at the Co-op, one of the four Cypriot banks jointly supervised by the Single Supervisory Mechanism and the Central Bank of Cyprus, said that the lender had already made progress in reducing its bad loans stock and intended to do even more in the future.
“We have successfully completed loan restructurings in excess of €2.5bn with a high cure ratio, within the targets set by the Central Bank of Cyprus on a quarterly basis,” said Yiannos Stavrinides, head of strategy and transformation, in an interview. He added that the Co-op has drafted “an ambitious plan in full compliance with supervisory realities,” dubbed Angenda2022 which the bank will make public once it goes through all required stages.
The situation may become more complicated as the government intended to hand over free of charge a quarter of the bank’s stock to Co-op customers.
“How would the shares donated to the customers of the CCB as well as those offered to the outside public be priced in the planned IPO” asked Manison. “Moreover, how much in outside funds would be raised by this procedure to inject fresh capital into the bank?”
On June 2, commenting on a possible fiscal impact of the stock donation, a treasury official said that it would be based on either the value of the stock at the time of the transaction or its fair value based on a valuation. The bank saw its equity drop marginally in the first quarter to over €1.2bn from December. The CCB, until recently, served as the lender of last resort of several hundred independent co-operative saving banks, accustomed to interference by -also local- politicians in their day-to-day business ranging from extending credit or loan collection to hiring.
“The market pricing of shares offered by the IPO will depend ultimately on the confidence of investors in the future profitability of the Co-op,” Manison said.
He added that the pricing would ultimately reflect how well the management of NPLs as well as “their income-earning prospects” were perceived by investors.
“However, with minimal progress currently being made in reducing NPLs, intensified efforts must be made to induce (or) force ‘strategic defaulters’ to repay through among other things getting politically-bowing managers to be much less generous with politically- connected clients in restructurings, write-offs and servicing of their debts,” the economist continued.
“In addition, debts of households and small enterprises which have been thoroughly checked as to not having the ability to repay should be fully or partly written off as the practice of extending and pretending just ties up resources of the CCB in unproductive and costly activities including lengthy legal procedures”.
Manison added that it was important to take into account that a portion of debt extended to low-income households may have to be forgiven as it lacks any prospect of ever being repaid. He cited the Eurosystem’s latest Household Finance and Consumption Survey, according to which, the poorest 20 per cent of Cypriot households would need to spend almost two thirds of their income to meet their debt repayment obligations.
“Furthermore, there is evidence that CCB management is increasingly pressing the staff to extend loans to existing and new customers in its competition with other banks, running the risk of more NPLs if the ability of customers to repay has not been properly scrutinised. Moreover, the future viability of the Co-op will depend crucially on its ability to generate profits from new loans,” he added.
Stavrinides, the Co-op executive, added that the bank is “fully aware” of the next steps needed. “With respect to political interference, let me say that our relation to the state is governed by an agreement (with the EU),” he said.
“The situation however is not ideal as this agreement is exploited by third parties, not part of the deal,” he continued in an apparent reference to last year’s dispute between Attorney General and the finance minister on whether the Co-op was subjected as a state-owned enterprise to audits by the Auditor General.
The impending CSE listing and the subsequent supervision by the Cyprus Securities and Exchange Commission would address the remaining distortions, Stavrinides said.