articles | 01 June 2017

BoC successfully tackles NPL problem

Under John Hourican, Nick Smith, and his predecessor Euan Hamilton, Bank of Cyprus, the island’s largest lender, did not only lead the way by setting up a specialised department for loan restructuring and recoveries, it also made it work.

The lender, which repaid its entire central bank emergency liquidity in January, can boast for reducing its non-performing loans by €4.8bn in two years, from €15.2bn in March 2015, to €10.4bn two months ago. In other words, a third of the bank’s NPLs have already disappeared, setting the bar even higher for its competitors.

By comparison, the drop the two other major Cypriot lenders achieved can only be described as modest.

Hellenic Bank managed to reduce its NPLs by €202m in the same period, to below €2.5bn, or 7.6%, in two years, while the state owned Cooperative Central Bank can boast a reduction of its delinquent portfolio by €281m from March 2015 to December 2016.

The failure of other banks to cope with that pace set by BoC may be behind the Central Bank governor’s concern over the slow pace in reducing bad loans which prompted her to reveal on Friday that the bank supervisor is preparing proposals to amend the rather ineffective foreclosure and insolvency legislative framework, enacted two years ago after overcoming fierce opposition in parliament.

“An important reason for the unsatisfactory reduction of NPLs so far is the fact that the new legislative framework has been rendered to a large extent unimplementable or less effective because of the large number of amendments included in the initial bill,” governor Chrystalla Georghadji had said.

Changes in the legislation that would allow things to work faster in a more

“British, Anglo-Saxon form of law” may help further accelerate the NPLs reduction on the one hand, but on the other, hoping for that may prove a pipedream, a Bank of Cyprus banker said.

“What we have in place today, allows us to do our job,” said the lender’s official on condition of anonymity, when asked about the changes he would like to see in the legislation. “Given that there is no majority by any party or an easy majority through party combinations in parliament, it is not realistic for me to sit here and hope that, heading into a presidential election, we will get much positive help from the legislature in changing the nature of our ability to do things in a different way”

“Is that a realistic prospect?” he asked. “I don’t think so”.

Still, the bank is considering additional, unspecified measures, to speed up the reduction of bad loans in a more “aggressive” manner and so help Cyprus avoid the “embarrassment” of failing to reduce bad loans in its banking system, which is roughly half of total loans.

BoC can be rightfully credited for its contribution in stabilising the system — it also reduced its bad loans ratio from 63% in the first quarter of 2015, to 52% two years later. In the absence of any realistic prospect of making the legislative framework more effective, it also increases pressure on other lenders to make their NPL management departments work.

The Cyprus Business Mail understands that Hellenic, which announced in January its agreement with Czech debt servicing specialist APS Holding to which it will outsource the management of its NPLs, is close to implementing the agreement after it secured regulatory approval.

Time for Hellenic is pressing; in March 2015, the NPL ratio stood at 59%, compared to 57%, at the end of the first quarter.

Time is even more pressing for the cooperative banking sector. The co-op reported an NPL ratio of 60% in December against a 57% in March 2015, casting doubts on the government- owned lender’s ability to effectively tackle the problem.

Unlike other banks, in addition to constant political interference, the Cooperative Central Bank also has to deal with a large number of comparably smaller NPLs.

It therefore hired 590 staffers at its restructurings and recovery department to help manage loans in arrears and recently submitted a three-year plan to its supervisors, Yiannos Stavrinides, the co-op’s top strategist said.

The co-op “continuously invests through training in the development of its human resources.” he added.

“The corporation is in a process of evaluating methods and strategic options that will help optimise NPL management,” Stavrinides said. For the time being, he added, the lender is relying on pre-formulated loan restructuring proposals to its borrowers.

A Bank of Cyprus banker explained the recipe for success: working on reducing non-performing loans “is part of our DNA”. This means others too have to mutate.

Source: Cyprus Mail

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