By Stelios Orphanides
The Bank of Cyprus’s decision to increase its provisions for loan impairments on Monday was expected, said an economist, who did not rule out similar steps by other lenders that could also need more equity.
“The European Central Bank was pushing for a capital increase not only at Bank of Cyprus but throughout the system,” said economist and former banker Marios Clerides on Tuesday.
The pressure to increase provisions is a result of more pessimistic supervisor estimations on the time needed for banks to sell collateral of non-performing loans, he said. This highlighted the ineffectiveness of Cyprus’s foreclosure and insolvency legal framework, modernised as part of the 2013 bailout agreement.
While Bank of Cyprus ruled out a new capital increase, after having done so in 2014 and issuing a tier 2 bond in January, the situation may be different with the state-owned Cyprus Cooperative Bank, which is already preparing to raise private equity. The Co-op, which like Hellenic Bank also entered an agreement with a specialist company to manage its non-performing loan portfolio, received from the government in addition to the €1.5bn initial capital injection in 2014, another €175m the following year to meet capital requirements. The latest capital increase was made necessary after dialogue with the supervisor made an increase in provisions necessary.
The Cyprus Cooperative Bank, Bank of Cyprus, Hellenic Bank and RCB Bank are the four Cypriot lenders jointly supervised by the European Central Bank’s Single Supervisory Mechanism and the Central Bank of Cyprus.
The Co-op’s chief executive Nicholas Hadjiyiannis, said he expected an “increasing” need to reduce bad loans, which the bank, so far, has been unable to reduce adequately. The figure rose marginally to €7.2bn or 60 per cent of the total in the first quarter.
“There is an imperative to show immediately a considerable reduction in non-performing loans,” said Hadjiyiannis in a telephone interview, adding that he expected earnings in the third and fourth quarter this year to reflect an expected reduction in delinquent loans.
The bank, which following the 2015 capital increase exhausted all available margins for tapping state aid, is working on a Cyprus Stock Exchange listing which will allow it to raise private capital via the successive share issues over the next three-year period, starting next year. According to Hadjiyiannis, the first capital increase will take place by June next year.
On Monday, Yiangos Demetriou, the head of the Central Bank of Cyprus’s supervision department, said that governor Chrystalla Georghadji asked finance minister Harris Georgiades to delay the implementation of a government decision to donate Co-op stock in the possession of the government until the bank completed the first stage of its capital increase. He also warned that the bank could go out of business unless it was allowed to implement its plans to reduce bad loans.
Hadjiyiannis said that the Co-op’s agenda, which in addition to establishing access to private equity, including institutional investors, envisaged co-operation with Spain’s non-performing loans specialist Altamira. The aim, with the help of Altamira, was to reduce non-performing loans to about €4bn by the end of 2019. This was a “one-way road” for the lender, he said.
The Co-op, ordered in March by the financial ombudsman o return €111m to overcharged borrowers, had to subsequently readjust its 2015 results to reflect a net loss of €176.4m, slightly over the capital increase of the same year. It originally posted a net loss of €165.6m.
The bank had a 15.5 per cent core equity tier 1 (CET1) ratio in the first quarter against a minimum regulatory capital requirement of 9.5 per cent.
Bank of Cyprus, the island’s biggest bank, meanwhile saw its share plunge on Tuesday as low as €2.85, 10 per cent down on Monday’s closing price before recovering later in the afternoon to €2.94 at the London Stock Exchange. This was a reaction to the increase in provisions by €500m and the forecasted loss of €550m this year. The bank expects to return to profitability next year.
The lender had provisions totalling €4.3bn in its balance sheet in the first quarter of the year against total non-performing loans of €10.4bn, or a provisioning ratio of below 42 per cent.
The bank had a CET1 ratio of 14 per cent in March, made via loan-to-asset swaps. This was the fastest progress so far in reducing its delinquent loan portfolio, which stood in March at 52 per cent, from more than 63 per cent in December 2014.
A source at Hellenic Bank said that while the lender considers its provisioning levels and capital as adequate, the dialogue with the European Central Bank was continuing. The bank was scheduled to post its second quarter results on September 28, which would show a more updated picture on its provisioning and capital levels, the source added.
Non-performing loans at Hellenic Bank, which was the only major Cypriot bank, which did not have to bail in deposits or seek state assistance for its recapitalisation following the 2013 banking crisis, fell slightly in recent years, and stood at almost €2.5bn in March, or over 57 per cent. The provisioning level also stood at 57 per cent. Hellenic’s CET1 ratio in March stood at 13.7 per cent, also well above the minimum requirement of 11.75 per cent.
Hellenic’s share was traded at around €0.85 in early afternoon, 1.3 per cent down compared to Monday’s closing price and recovered in the afternoon to €0.885, 2.8 per cent up.