A bank claws itself back from the brink
THE banking woes of Italy, the euro area’s thirdbiggest member, pale next to those that, four years ago, plagued Cyprus, its second-smallest. Now there is cause for cautious optimism. This month Bank of Cyprus, the biggest local lender, finished repaying EUR 11.4bn ($12.2bn) of emergency liquidity assistance from the country’s central bank. It followed that by returning to the bond markets, raising EUR 250m in a sale of unsecured notes, albeit with a stiff 9.25% coupon.
Even better, on January 19th Bank of Cyprus listed on the London Stock Exchange. This, says John Hourican, the chief executive, fulfils a promise to investors in 2014, when the bank raised EUR 1bn of equity, to list on “a liquid, index-driven European exchange”. It is quitting the Athens bourse, now that it “no longer has any business of significance in Greece.” (Its listing in Nicosia remains.) It has also rid itself of operations in Romania, Russia, Serbia and Ukraine. Although its return on equity is still meagre, just 2.7% in the third quarter, its ratio of equity to risk-weighted assets, a key gauge of strength, is respectable enough, at 14.6%.
All this marks a big improvement since 2013, when Cyprus seemed in grave danger of tumbling out of the euro area. Banks closed their doors and capital controls were imposed for the first time in the zone’s existence. The price of a rescue by the IMF and the rest of the currency club was steep. Owners of bonds and uninsured deposits in Bank of Cyprus and its closest rival, Laiki, were “bailed in” (the losers included many Russians). Laiki was wound up, its bad loans were put into a “bad bank” and its good ones and deposits were transferred to Bank of Cyprus.
The last of the capital controls were lifted in 2015. The economy returned to growth the same year. It managed 2.9% in 2016; Moody’s, a rating agency, expects 2.7% in 2017. But it is still smaller than before the bust. Sustained growth will be needed to grind down Cypriot banks’ worryingly large heap of nonperforming loans—which as a share of the total is second only to that of Greek lenders, according to the European Banking Authority (see chart). Progress in recent talks on reunifying the Greek-Cypriot south of the island and the Turkish-Cypriot north, which is recognised only by Turkey, would surely be a boon.
The bad-loan pile has, however, been shrinking for almost two years.