Cyprus has a strong track record in providing professional services, but the key to future growth is to find efficient ways to export these services internationally, says Hellenic Bank’s Chief Risk Officer Stefano Capodagli.
You recently joined Hellenic Bank as their Chief Risk Officer, making you the first foreign risk manager of a major Cyprus company, could you tell us a bit about your background?
I have had a kind of hybrid career path. I started my career as an auditor at Ernst & Young, after which I moved into investment banking and then into international commercial banking. Due to my passion for emerging markets and working in an environment with a strong entrepreneurial aspect, I have gained extensive development finance experience in the last 23 years through my work in Europe, Africa, MENA and Central-Asia.
With your varied banking experience, what brought you to risk management?
With business there is always risk, and to succeed it is imperative that you manage it effectively. I have worked in various corporations throughout my career building and implementing risk assessment and management strategies. Also, on a personal level I enjoy working on developing and restructuring the way a company works, and to design and build better strategies and products. It is an inspiring process and very rewarding to see the turnaround of a company once effective procedures are put in place. The most extreme example of this was when I was tasked to restructure a bank that still operated with an old-fashioned paper client register. It was a former post office that was making the leap to becoming a post bank. It was an interesting challenge to create a whole new system for operations and automation, which resulted in the bank having a fully computerised system for the first time. It was almost like setting up a start-up bank and a true entrepreneurial task.
As a risk officer and a newcomer to Cyprus, how would you assess the Cyprus economy in terms of risk?
Overall the progress has been very positive, and the situation is stable and presents many opportunities for investors. However, looking at Cyprus as a so-called outsider I do think the country needs a boost of fresh blood into its business landscape. The time is ripe to bring in new talent to accelerate change and spark new ideas. One route for this, which is already being done by many local companies, is to attract the many professional Cypriots living abroad to repatriate and bring with them all the training and experience they have gained over the years. Attracting these types of professionals is a major asset to companies operating in Cyprus, who can benefit from the wealth of insight they can bring to a business. Not to mention, many Cypriots long to come back home, and companies can certainly leverage on this fact.
Another route is attracting foreign nationals to bring new ideas, connections and approaches to business. For example, Cyprus is ideal for executives like me who have spent decades around the world, but find that there are limited opportunities in their home countries in mainland Europe. Cyprus offers multiple benefits for us, in addition to tax breaks for high-earners, we can return to Europe, and find new and interesting challenges in a growing EU economy.
In terms of risk management, I think Cyprus has all the elements to forge ahead in good stead, but it is essential to create a more dynamic and diverse landscape to ensure future development. Another risk is that there is currently too much concentration on business that does not really create value. For example, there is a big boom in building luxury marinas all over the island. This is all well and good, but is there really enough yacht traffic to live up to all the infrastructure being built? Also, there are numerous hotels being built in very concentrated areas. These types of developments will inevitably have an environmental impact, which in turn could cause drawbacks in the future. I think there needs to be a more long-term approach and vision on how Cyprus wants to develop and not only focus on the short- and medium-term gains. As an economy, I think Cyprus also needs to also diversify in terms of the markets it targets, keeping all your eggs in one basket leaves you very exposed to a spill-over risk of problems in your source countries.
Due to the 2013 bail-out and unprecedented bail-in of bank deposits, Cyprus became synonymous with the term ‘banking crisis’, how are the banks doing today?
The 2013 events were a culmination of years of bad practice, but it should be noted that these practices were happening in many other countries too. Today, the banks are fully recapitalised and stable, and most have taken positive steps in restructuring and rebuilding their systems, and have learned from the painful mistakes of the past.
Although robust reforms were put in play following the crisis, I do feel that progress is slow. This is mainly due to the heavy burden of non-performing loans (NPLs), which are strongly related to the local real estate sector. The danger is the over-reliance on the property market, and despite recent signs of recovery, I don’t think the real estate sector will recover as fast as the more positive estimates project. We need only look at the numerous examples around Europe and beyond, to see what the long-term impact of this kind of scenario can have on an economy.
I also foresee some banks needing more capital to ride out these tough times of NPLs weighing on balance sheets. This doesn’t necessarily mean external capital, as this could be achieved through measures to optimise operations or through more consolidation in the market.
SMEs have been some of the hardest hit companies in Cyprus, what risks do they face in the current climate?
As with so many southern European countries, my home country Italy included, SMEs are often longstanding family businesses. And yes, in Cyprus they suffered a hit in the 2013 crisis, but they also face another risk. These types of companies, where the leadership and shareholder positions have been in the same hands for too long, tend to stagnate and lose their competitive edge. This is a big risk for many companies today, they fail to recognise the lifecycle of a business. They urgently need new blood and talent to transform antiquated operating models and to bring in new ideas and knowledge of the current international market.
I don’t believe in this idea that an entrepreneur should stay in his or her enterprise forever, this is especially true in family businesses, where there needs to be a generational succession at the right time. To optimise and excel, they must allow the new generation to take over or to bring an outsider, an external manager, to keep the train moving so to speak. The role of the old guard should be to give strategic guidance, but to move away from day-to-day operations. Allowing this transition is crucial to remain competitive and is the only way to open minds and horizons to recognise new opportunities for Cyprus. You need to give space to the younger generations to inject fresh energy into the business landscape and implement efficient practices.
I come from a long line of entrepreneurs from the Italian region of Marche, which is renowned for its strong manufacturing history and family business tradition, and where my great grandfather was a silk producer. In this region, the two things that were the most important was work and family, life was about working hard to create a living. So, I truly understand the SME mentality. I think this legacy has had a strong impact on me and my ambition to work hard and create new ways to make business more efficient, which is why I thrive in helping companies transform.
What sectors or industries should Cyprus focus on developing in your view?
In Cyprus, we are all too familiar with the over-used adage of the country being strategically situated at the crossroads of three continents. However, it really is true and has been a key reason why empires throughout centuries have coveted the island. It constitutes a major advantage that is not exploited enough. Cyprus maintains great relations with all its neighbours in the region, and has remained a neutral ally to all of them. Although it already has bilateral agreements and trade relations with most of these countries, Cyprus has not fully capitalised on its position. It really could be a secure and neutral gateway and a so-called ‘ambassador’ of many of its neighbours in the region in relation to the rest of Europe – and many other countries.
Cyprus also has a strong track record in providing professional services, but the local demand can only act as the buffer and a means to stabilise the economy. The key to future growth is to focus on efficient ways to export and internationalise these professional services beyond its borders. It should be a key government policy to find a more integrated way to coordinate the entire value chain of these services to international clients.
In parallel, my other passion is academia and teaching, and I have also been lecturing at the European University of Nicosia. I strongly believe that linking business and academia is an essential part of creating new business. There should be stronger cooperation between universities and companies. Universities are natural incubators of new ideas, but in order to develop these ideas into products and services you need the infrastructure of businesses. Connecting these sectors provides a winning formula to create the right environment for innovation and progress.
Being a small economy is another advantage for Cyprus. If it can coordinate all these contributors, create the right links and efficient chains, the country could reap the benefits of all the talent it already has in place. One way this could be achieved is by creating an association or a company, or perhaps a development bank, to coordinate and manage this type of activity. For example, to attract funds from different investors from various countries, such as China, Russia, the US and UK, start seed and equity financing with banks helping with debt financing, to develop ideas into start-ups and in turn into tangible business products and services. Cyprus should definitely expand its cooperation with its immediate neighbours, such as Israel, where innovation and start-up culture is very strong. This cooperation could help Cyprus build a better ecosystem in this sector.
Cyprus is currently building up an investment funds sector, what opportunities do you see in this industry?
Investment funds could be a big opportunity for Cyprus. There have been positive developments so far and the industry is growing slowly. I think investment funds could be especially successful if they work in boosting the start-up landscape and become a convenient vehicle to invest abroad. I don’t see many opportunities for funds investing in the local arena, as the real advantage currently is for funds to set up in Cyprus thanks to the beneficial tax framework and low operational costs, and to invest into other markets – in a similar fashion to the Luxembourg model.
How do you see Cyprus developing in the next five years?
I think Cyprus has all the elements in place to keep developing and to be a success story, but to achieve this the country needs to hone in on what it’s identity is. It’s all about brand equity today, and the message you as a jurisdiction project out to the world needs to be clear. Reputation, transparency and being known for efficient regulation is what companies are looking for today, and the country needs to ramp up its efforts in proving that it can provide these important aspects to businesses seeking a base to operate from or through. You need to show that you are dynamic and strong in order to compete in today’s cut-throat environment. For me personally, building a strong and dynamic company is the goal, and if people come to work with a smile and also leave work with a smile, I know my work is done.
Stefano Capodagli, a native of Italy, has 23 years of commercial, investment banking and development finance experience in Europe, Africa, MENA and Central-Asia. He joined Hellenic Bank from Arab Banking Corporation where he was Chief Risk Officer of the Algerian subsidiary, heading 25 staff in four departments. He had previously served as Chief Risk Reforms Officer within the newly created Group Chief Risk Officer Vice Presidency of the African Development Bank, after having served as Managing Director/Deputy CRO with Unicredit Bank Austria AG in Kazakhstan, heading the Arrears Management Division composed by 80 staff. Previously he covered South-East Europe as Regional Portfolio Manager at the European Bank for Reconstruction & Development's Risk Management Vice-Presidency in 2007.