By Stelios Orphanides
Bank of Cyprus said on Friday it will outsource the management of up to €800 million in non-performing loans to Australia’s Pepper Europe (UK) Ltd as part of a ‘strategically important’ agreement after it got the go-ahead from its board of directors and its workers’ union, Etyk.
The lender, which pioneered in the fight against non-performing loans in 2013 by setting up an internal restructurings and recoveries department, said that the agreement with Pepper will help resolve bad loans, extended small and medium-size enterprises (SME) and retail loans, which the bank will continue to own.
“Pepper will bring their own experienced workout professionals, initially amounting to around 40 employees, who will focus on resolving a specified portfolio of circa €800m retail and SME non-performing loans,” the lender said in an emailed statement on Friday. “This will accelerate the pace at which the bank can resolve specific problematic small ticket loans, which is critical to, and entirely consistent with, the bank’s commitment to fully resolve the non-performing exposures issue in the shortest possible time”.
Pepper, established in 2001 and listed on the Australian Stock Exchange, specialises in loan servicing and manages over AUS$52.2bn (€33.3bn) in assets, according to its website. It expanded its operations to the UK in 2012. Bank of Cyprus’s agreement with Pepper is the third of its kind, after Hellenic Bank and the Cyprus Cooperative Bank entered similar agreements with the Prague-based APS Holdings and Spain’s Altamira.
The bank, which ten days ago announced €553m in after-tax losses for the first nine months of the year and its intention to set up a real estate fund and have it listed at the Cyprus Stock Exchange, said that its own team has an ‘impressive track record’ which helped reduce bad loans to 47.6 per cent in September or €9.2 billion, from 50 per cent and €9.8bn three months before.
“This team is unaffected by this announcement and will continue to operate in the same way and with the same staff as it has done in recent years,” the bank said.
This reference appears to be directed to Etyk. The union announced its opposition to the bank’s plans to reduce non-performing loans and its members working for the largest Cypriot lender’s recoveries department staged a two-hour work stoppage a week ago.
In a statement on its website, the union, known for its militant rhetoric, said that the bank had pledged to respect agreements and as a result ‘Etyk’s approval was requested to enter certain cooperation agreements with third parties’.
“Given the differentiation of the bank’s stance and taking into account the information given by the bank and the safety valves introduced, our organisation decided to give its approval, confirming once again that outsourcing operations to third parties cannot be done without any control but only after our organisation’s approval,” Etyk said.
The agreement with Pepper ‘improves the ability to deliver non-performing exposures reduction across Cyprus in a category of loans critical for the entire economy’ said the bank, which in August announced an increase in its provisioning levels by €0.5bn after being encouraged to do so by its supervisor.
“Given that the dialog with Etyk is successfully completed, Pepper will commence their work immediately,” Bank of Cyprus said. “We also expect the servicing solution to be scalable during 2018, which will allow the Bank to achieve greater pace in delivering asset quality improvements. This could also provide opportunities to assist other banks on the island in delivering faster improvements and wider strategic options”.
Bank of Cyprus head of restructurings and recoveries Nick Smith said that the Pepper team ‘has worked extensively on similar portfolios in different jurisdictions’ and will as a result bring a ‘wealth of knowledge’ to the bank.
Pepper’s Fraser Gemmell said that his company was keen to explore other opportunities in Cyprus and is looking forward to placing its team into the bank.