Stand­off at OK Cor­ral

Financial Mirror (Cyprus) - - FRONT PAGE -

Bank of Cyprus board mem­bers are faced with a dilemma – do they drag their feet and in­sist on find­ing their own in­vestors to re­cap­i­talise the bank (a process that could take ages) or do they con­sider of­fers al­ready on the ta­ble and pro­ceed im­me­di­ately with new in­vestors well in time for the stress tests to be con­cluded by Oc­to­ber?

This dilly-dal­ly­ing by a num­ber of board mem­bers has forced Cen­tral Bank Gover­nor Chrys­talla Ge­orghadji to ap­peal to the bank’s board twice in a week to make up their minds fast, other­wise po­ten­tial in­vestors who are will­ing to in­ject up to 1.9 bln eu­ros might walk away.

The con­flict has dis­heart­ened staff and cus­tomers alike, who were only now see­ing signs that the bank was on a slow path to re­cover when it an­nounced 31 mln eu­ros in prof­its for the first quar­ter.

HSBC and Credit Suisse have ad­vised the board on how to pro­ceed with fu­ture re­cap­i­tal­i­sa­tion plans, as well as the dis­posal of non-core as­sets, with the lender’s di­rec­tors agree­ing af­ter a marathon 10-hour board meet­ing last Thurs­day to adopt the rec­om­men­da­tions. These in­clude is­su­ing new share cap­i­tal both to new in­vestors and present share­hold­ers, as well as those who saw their shares evap­o­rate into thin air af­ter the bail-in on un­se­cured de­posits im­posed last sum­mer.

How­ever, some in the board are now hes­i­tant to go the mar­kets and find new in­vestors, for fear of di­lut­ing the con­trol of ex­ist­ing share­hold­ers and want to find white knights of their own, a process that govern­ment sources say could take a long while and would push the bank closer or past its stress-test dead­lines.

The Cen­tral Bank’s Ge­orghadji has told the board to re­call its last de­ci­sion that re­scinded an ear­lier agree­ment to seek new in­vestors, while telling them to for­get about chang­ing the bank’s struc­ture and ap­point two deputy CEOs to keep the cur­rent chief ex­ec­u­tive John Houri­can in check.

This last minute turn­around by the board in­fu­ri­ated Ge­orghadji who has now de­manded that the board make up its mind within the next two days and stick to a strict roadmap, whereby a new in­vestor must be found by Au­gust 7 af­ter which the board will seek share­holder ap­proval at an EGM, se­cure the funds and be fully re­cap­i­talised by Septem­ber.

Po­lit­i­cal par­ties of all shape and size have joined the de­bate, some even sug­gest­ing that the govern­ment should not med­dle in the bank’s op­er­a­tions, while oth­ers have even chal­lenged the cen­tral­banker’s author­ity, not re­al­is­ing that her man­date is clear – she can sack an en­tire board if she be­lieves they are un­fit to man­age the bank.

In any case, sources sug­gest that the bank could meet the strin­gent liq­uid­ity lev­els of the stress tests con­ducted by the Euro­pean Cen­tral Bank, even with its cur­rent cap­i­tal sit­u­a­tion. The bench­mark core tier 1 ra­tio is be­lieved to be around 11%, be­yond the cush­ion of safety needed to keep the bank afloat.

Bank of Cyprus is the only one of the 128 Euro­pean sys­temic banks that will be sub­ject to the stress tests that has not yet un­der­gone additional re­cap­i­tal­i­sa­tion. Hel­lenic Bank raised 100 mln eu­ros last last year when it at­tracted three lo­cal and in­sti­tu­tional in­vestors (New York-based Third Point, Wargam­ing and the lo­cal Deme­tra Fund), while the Co­op­er­a­tive Cen­tral Bank re­ceived 1.5 bln in a state bailout and sub­se­quent na­tion­al­i­sa­tion and down­siz­ing.

Only last week, the govern­ment agreed to re­turn about 950

mln eu­ros to Bank of Cyprus as part of the 1.8 bln eu­ros bur­den it was forced to carry when it ab­sorbed the now de­funct Laiki Pop­u­lar Bank, it­self ex­posed to some 9.5 mln eu­ros in Emer­gency Liq­uid­ity As­sis­tance.

CEO Houri­can, who seems to en­joy the sup­port of both Ge­orghadji and Fi­nance Min­is­ter Haris Ge­or­giades, has con­tin­ued with cost cut­ting mea­sures ini­ti­ated by his pre­de­ces­sors last year and in­tro­duced some mea­sures of his own, such as the dis­posal of some over­seas bank­ing and in­sur­ance op­er­a­tions and sell­ing off non-es­sen­tial prop­er­ties, while re­duc­ing the branch net­work and staff size.

On Mon­day, the stand­off be­tween the board and Ge­orghadji seemed to have abated, but the cen­tral­banker wanted clear de­ci­sions, which is why she sent off a sec­ond let­ter on Tues­day.

“For the govern­ment the is­sue of cap­i­tal in­creases by commercial banks is a mat­ter of strate­gic im­por­tance to the Cypriot econ­omy,” govern­ment spokesman Nikos Christodoulides warned on Mon­day. “It is be­ing han­dled by the Cen­tral Bank and we are mon­i­tor­ing de­vel­op­ments closely.”

The big­gest prob­lem fac­ing the Bank of Cyprus is the dif­fi­culty in lower the level of non-per­form­ing loans, cur­rently es­ti­mated at 45% of its to­tal loans port­fo­lio, while re­cov­er­ies is tak­ing time, with ma­jor debtors pulling all stops to get board mem­bers and the bank’s man­age­ment to stand down from ag­gres­sive collection.

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