Pressure to raise provisions prompted Co-op to forge ahead

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By Stelios Orphanides

The decision of the Cyprus Cooperative Bank last week to speed up developments and invite investor interest to buy the lender or part of its assets, was triggered by the need to further increase provision for loan impairments, which the lender did not have the capacity to absorb, a senior manager said.

“As Cypriots, we are accustomed to crying over ruins,” said Yiannos Stavrinides, head of strategy and communications at the state-owned lender in a telephone interview on Tuesday. “We decided not to act proactively instead of waiting for the shock to occur”.

As the bank, struggling with a mountain of €6.5bn in non-performing loans which makes up more than half of its loan portfolio, has received clear messages from supervisors that it will ultimately have to increase its provisions again, which totalled over €3bn in September, he said.

The bank’s decision to seek private equity, while prescribed in a restructuring plan approved by the European Union’s directorate general for competition five years ago, triggered an outcry among Cypriot opposition political parties unhappy to see the Co-op, bailed out with almost €1.7bn, switching to private owners.

“We are dealing with a particularly sensitive portion of non-performing loans that involve primary residences, plus the legislative framework needs changes,” Stavrinides said. “As we are not legislators, we are taking timely action to address the situation with business solutions. More provisions, mean more capital”.

Stavrinides said that the transformation which the bank, the product of a successive mergers of initially over 300 saving banks over the past decade, has been undergoing since the 2013 banking crisis, allows it to forge ahead at this point. “I now have a bank which is beginning to become more cohesive and it is not like it was in 2013,” he said.

The bank which announced on March 19, its decision to invite private investors, gave them a deadline until Thursday, March 29 to submit their interest before inviting them to file binding offers in the second stage, expected to be completed by the end of May.

“We are ready to take the bank out of the restructuring plan, and we do it because we now can,” he said.

The Co-op, the second largest bank in Cyprus with a network of less than 200 branches, exhausted all margins of receiving additional state aid. It posted in 2016 a net profit of €7.1m against a loss of €176.4m in 2015. In the first nine months of 2017, it generated a net loss of €28.6m. The bank’s loan portfolio is granular, i.e. it has extended a large amount of relatively small loans to mainly households.

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About Author

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

  • Kevin Ingham

    No one is going to invest in the Co Op bank until such time as they have a legal framework and government back up to go after defaulters and their guarantors assets

    • Terryw45

      ‘Trust me, I know what I’m doing’, ring any bells ?

  • Colin Evans

    There will be no material change on the NPL’s until such time as the nonsense of primary homes being protected fro being re-possessed. The sooner that there is a change in the law and common sense takes over the better. Then, and only then, will there be a true valuation of what any particular property is worth.

    • Bananaman

      Well said indeed, the whole valuation system is based on price fixing and the primary residence is set in stone it is nothing more than artificial value, Any investor would have to be from a looney bin !!!

  • Bob Ellis

    Why not wait unitl the banking sector is on its needs and then buy it all ? Cyprus is still bluffing whilst everyone knows we only have a pair of twos. The clock is ticking, we either have to show our hand or fold. This is why we are such bad gamblers.

    • Terryw45

      ‘on it’s knees’, apart from that, Joe citizen does not put his life savings in a Cy bank (2013), how do they expect a entrepreneur to invest, Cy does not have a very good reputation.

  • Copernicus

    The guideline below from the Single Supervisory Mechanism is what has led the Co Op to expedite not their work of restructuring of bad portfolio of loans which are worth very little.

    “As part of the prudential framework, a bank needs to be able to realise its credit protection in a “timely manner”. If collateral has not been realised after a period of several years from the date when the underlying exposure was classified as non- performing, because of failures in the internal processes of the bank or because of reasons beyond the bank’s control (e.g. the length of time it takes to conclude legal proceedings), the collateral would in principle be deemed ineffective and as such, the exposure is expected to be treated as unsecured from a prudential perspective in the context of this Addendum. This means that full prudential provisioning is considered prudent after a period of several years.”

    Given that it took them at the CoOp to realise that they have primary residences which are protected by law and they have no “timely manner” to collect they will have to fully provision. This is the fact and you can read the guideline from the SSM.

    The real question is why did the management and board do nothing to move these loans off the balance for all these years and waited for the new guidelines. Was the owner of the bak aware of what was happening and what did he do? 1.7bln of tax payers money may be wasted and some accountability would be highly desirable.

    • Kevin Ingham

      and no one is going to buy Co op bad debt until such time as they have a legal framework and government back up to go after defaulters and their guarantors assets

      • Copernicus

        A bond with a government guarantee from the government would be swapped for the NPLs with the collateral. If there is no repayment the payment will be from the government. This is what was proposed for Italy and will be the only way for local banks to buy such NPLs. The recovery and timeliness of repayment is the biggest problem which will not change with the composition of Parliament as stands. There will be a cost for this guarantee to comply with EU regulations.

        • Kevin Ingham

          but both the Cypriot and the Italian governments are broke- how would a “government guarantee from the government ” assure anyone buying the debt ???????

          • Copernicus

            Local banks will have an asset (bond) which is treated better for capital adequacy. The local banks would be the obvious choice to offer the guarantee.

          • Kevin Ingham

            What do you mean by local ?

          • Copernicus

            If you need a tutorial about the meaning of these words I am sorry. You should know better

          • Kevin Ingham

            You don’t get away that easily- you seem to think you know what you are talking about and I know the “definition” of the words you used , but what do you think your own words actually mean or (more importantly) imply ?

          • Copernicus

            You seem to be the only one who does not understand. About time you grow up.

        • Bail-in ?

          • Mist

            I think some times some debtors think a “bail-in” is where you remove all debt over the 100k mark

          • Copernicus

            There is not much money over 100K, which is guaranteed, that can make up the shortfall. Bank levy will destroy confidence in the rest of the banking system.

  • Jeremy Rigg

    Close the bloody business down and make them all redundant, then perhaps sanity might return to this little island.

    • Terryw45

      This would my extended family out of business !

  • Terryw45

    The biggest display of red tape I have ever seen was the inauguration of Roosvelt, and then I came to Cyprus!

  • Barry White

    Cyprus Air redux. Move on to the Electrcity company plus CYTA.

  • Mist

    I am still wondering why Messers Ross & Hourican bought Bank of Cyprus, they saw something in the wind. Will they take this as well?

    • Maybe they will inherit the good part ?

  • Bernard Smart

    More than half the bank is worthless so who in their right mind would take it off the governments hands?

    Maybe they could sell it to Putin a man always known to extend a helping hand and he knows a thing about toxic entities.