BOC to raise provisions by €0.5bn in H1, sees no need for fresh capital

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By Stelios Orphanides

Bank of Cyprus, the island’s largest lender, has said that it will post a loss of €550m in its half-year results as a result of an increase of provisions for loan impairments by €500m and will return to profitability next year.

Following the increase in provisioning aimed at de-risking its balance sheet, the bank, which posted a 14.4 common equity tier 1 capital ratio at the end of the first quarter, will not require additional equity as its “capital levels remain adequate,” it said in an emailed statement on Monday.

“Although allocating an incremental €500m of capital to de-risk the balance sheet through increased provision coverage will result in the group posting a loss of approximately €550m for the half year to 30 June 2017, the reality is that the strength of the group’s capital position has allowed the group to accommodate this without the need to raise any additional core equity capital,” the bank said. “The landmark €1bn equity raise carried out in the summer of 2014 has to date proven sufficient to support the group’s recovery and allowed it support the recovering economy. The group does not expect to have to raise any further core equity and expects to rebuild further strength in its capital base during 2018 through posting results which will reflect a more conventional credit-cycle cost”.

The bank said that the decision to increase provisions will help “draw a line in its discussions with the European Central Bank (ECB) on the levels of provisioning” expected against non-performing loans, which dropped to 51.8 per cent in March from 54.8 per cent in December. The provisioning coverage ratio rose to 42 per cent to 41 per cent respectively.

The step is part of its effort to explore “innovative strategic solutions” to accelerate the balance-sheet de-risking.

“It is too early to go into detail on what these transformational initiatives could include but it suffices to say that detailed work is underway with a number of external counterparties,” it said.

The lender, whose depositors saw almost half of their uninsured deposits turned into equity in the 2013 banking crisis, added that it already extended €1bn in fresh credit to the economy in the first half of the year, roughly as much as the whole of 2016, supporting growth. In the first quarter this year it posted a €2m after tax profit.

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About Author

Stelios Orphanides is a journalist at CyprusBusinessMail.com. To contact Stelios Orphanides: [email protected]

  • AnalogMind

    Very good. As long as the bank avoids additional recapitalization, which dilutes existing investors, everything is fine.

    • SuzieQ

      Surely you’re joking? They posted a loss of 550 million.

  • hornet

    and here was silly me thinking it was now safe to deal with CY banks….
    first the coop bank that is a total basket case and now this one which looks wobbly….

  • Bob Ellis

    For such a small fiscal population the numbers are scary. Time to buy sterling again.

  • Bruce

    Reading between the lines it seems that the BOC needs to raise capital but can not do so without diluting substantially the equity of existing shareholders. In collusion with “external counterparts” good loans and NPLs probably will be sold to third parties including hedge funds at a discount of say 25% and packaged into tradable bonds. And since provisions equate to around 42% of NPLs it would make accounting gains on the sale of such loans averaging say 17 percentage points.The BOC would then use these gains to increase its capital on a lower asset base denominator because of loan sell-offs to raise its capital ratio toward a level required by the European supervisors.
    Do these possible transactions represent dubious and creative accounting that would hijack provisions that in turn would mitigate the need for the BOC to make efforts to raise fresh capital from outside? My understanding is that provisioning is used as a tool to help in the restructuring of impaired loans accounting for the prospect that part of the loan might eventually not be repaid. The creaming-off of provisions would largely terminate ongoing efforts to restructure and reduce debt for many borrowers. Third parties will endeavour to collect the maximum possible from these debtors.
    Hence,it would appear that such a scheme may only benefit the BOC and certain third parties. With its sale of loans the BOC will end up with abundant liquidity, and like Hellenic Bank and even the Cooperative Bank with ample funds, would not be able to use these funds for financing profitable projects as most private entities will still be heavily indebted and not creditworthy customers. Only constructive debt restructurings and project financing arrangements at least for business entities by competent bankers will bring about real benefits for the Cyprus economy and restore the profitability to the BOC needed for capital injections.