articles | 31 October 2017

CBC and commercial banks support the creation of a 'bad bank' in Cyprus

The Central Bank of Cyprus Governor and top officials from the island’s major commercial banks have said they support the creation of an asset management company (AMC), or a 'bad bank' that would assist the banks to reduce their massive non-performing loans, which amount to €21.9 billion.

“I support this proposal,” said CBC Governor Chrystalla Georghadji, recalling that the idea of an AMC was included in the draft bailout memorandum that was under negotiation between Cyprus and the European Commission, the ECB and the IMF, collectively known as the Troika. 

Excluded from the financial markets and faced with an ailing and oversized banking sector, Cyprus applied for a bailout in June 2012. However, the final bailout concluded with the Troika featured a bail-in of uninsured deposits to recapitalise the island’s largest lender, Bank of Cyprus while Laiki bank was resolved and its local assets, along with its €9.4 billion emergency liquidity assistance liability, was absorbed by Bank of Cyprus. As a result, a total of €7.4 billion in deposits were wiped out.

“The CBC was the first organisation that raised and supported the issue (of a bad bank) from the minute the Troika arrived. Unfortunately for some reason which no one is aware of and we will never know, the proposal disappeared from the table,” Georghadji said, replying to a comment during an event organised by the CBC and the Representation of the European Commission in Cyprus.

On his part, Nicolas Hadjiyianis, Chief Executive Officer of the nationalised Cyprus Cooperative Bank said he supports such an initiative “which would lead to a more radical and holistic approach in tackling NPLs.” He pointed out that proper planning should be in place as issues related with state aid are sometimes vulnerable.

“This option could be done earlier but even now there is time for correct planning and gradual implementation,” he said.

On his part, Lars Kramer, the Hellenic Bank’s Chief Financial Officer, he would support any mechanism that could help the resolution of this issue.

He suggested that this discussion should tackle issues such as state aid, funding, the structure of a mechanism and the pricing of the assets to be transferred from the banks’ books.

“But it would be helpful, I support any mechanism that could help resolve this issue,” he said.

There is no magic bullet to reduce NPLs

Addressing the event, Georghadji said NPLs in the Cypriot banking system declined to €21.9 billion from a peak of €28 billion in the end of 2014 but still represent 44% of the total loan book.

“However, we still have a long way ahead of us before NPLs are no longer a threat to the banks, the economy and to financial stability,” she said, adding “Cyprus is faced with an extraordinary level of NPLs across all sectors and addressing this will take time. There is no magic bullet.”

Georghadji also said that given the positive growth rates in the economy, “the CBC is considering revising the current targets by setting targets and key performance indicators for the level of NPLs rather than for the restructuring activity.”

Referring to the possibility of a secondary market for distressed assets in Cyprus, Georghadji said although this might be considered as shallow, due to the small size of portfolios and the perceived illiquidity of the real estate market, “recent collaborations of two significant banks with foreign servicing platforms for the management of NPLs, the gradual recovery of the real estate sector and the continuous increase of NPLs provisioning can potentially support distressed assets transactions.”

Banks prepare for loan sales

Two of the island’s major banks said they are considering options relating to the sale of loans.

“We do have a number of transactions under consideration but it is too early to say,” Christos Patsalides, deputy Chief Executive Officer of the Bank of Cyprus, said.

He acknowledged that without a sale of loans the bank’s medium-term target of reducing NPLs rate below the 30% level “will take a little longer.”

Referring to the efforts to reduce the bank’s NPL loan book, Patsalides said delinquent loans declined by €5.2 billion since their peak. “This is good progress but not good enough. A 50% NPL rate is unacceptable and we need to do more,” he added.

On his part, Hadjiyiannis described the reform in the Cooperative sector as the largest banking transformation ever in Cyprus.

He added that the CCB is preparing a joint venture with Spanish asset management company Altamira which will undertake the management of the bank’s NPL portfolio and real estate.

“We are looking for optimising the way with which we are managing NPLs,” he said, noting however that “time is the biggest enemy or the obstacle to NPL management.”

"We have to de-risk our balance sheet and the target is to normalise our NPE levels based on the eurozone standard. It is not acceptable at EU level to have NPE ratio more that 30%,” he said.

Lars Kramer said the bank is currently examining options for the sale of loans.

“We are currently looking at our first NPL sale,” he said, without giving any further details.

On the joint investor with loan servicer, APS recovery, Kramer said this “would allow foreign investors to feel more comfortable in terms of buying NPLS.”

He said the bank has restructured 50% of its loan book while NPLs declined to 56% in June 2017 from 61% September 2014.

He explained that NPL continues hand in hand with deleveraging, resulting in flat curve.

“So, we have been working hard the past years just to be at a standstill,” he added.

Addressing the event, Gergios Markopouliotis, Head of the European Commission’s Representation in Cyprus said Cyprus was subject to a strong and unprecedented banking crisis.

“Although Cyprus has shown significant recovery, challenges remain,” he said adding “while banking recapitalisation and reforms have taken place, the size of the NPLs remain extremely high and in fact is the second highest in the eurozone,” he concluded.

Source: Famagusta Gazette

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