articles | 29 May 2017

Citi announces coverage of BOC with €4.10 target price

Citi Research, a division of the US bank and financial services provider Citigroup Inc, said that it will initiate coverage of Bank of Cyprus with a target price of €4.10 per share with a 'buy rating', adding that it expects a €4.5bn reduction of bad loans by 2019.

“We expect that the bank will be able to meet its targets for NPE (non-performing exposures) reduction, given the operational performance so far and the improving macro outlook for Cyprus,” with the European Commission forecasting a 2.5% growth rate this year, Citi said in a May 26 statement. “We think corporate loans should prove easiest to restructure, while retail loans will be more difficult, but overall we see a €4.5bn reduction in NPEs over the 2017-2019 period and expect the performance of forborne loans to continue to improve”.

Citi added that it does not expect additional austerity measures in Cyprus, citing the economy’s 2.8% expansion last year accompanied by the fiscal surplus of 0.4% of economic output.

“While we concede that NPL (non-performing loans) cash provisioning by the bank remains on the low end of peers that we cover, we see this improving on account of elevated provisioning and a decline in the absolute amount of non-performing loans,” Citi said. “Total coverage including collateral remains among the highest of peers in Greece, Spain, Portugal, Ireland and Italy”.

Citi added that Cyprus’s largest lender risks running into more difficulties than expected in restructuring bad loans accounting for €11bn or 54.8% of the total.

“The restructuring of the bank’s non-performing loans could prove more difficult than anticipated, with larger haircuts required on the value of forborne loans, while lower renegotiated rates could put NIMs (net-interest margins) under pressure,” Citi said. “The performance of restructured loans could slip, with larger than expected inflows back into the non-performing bucket”.

In addition, the bank may fail to generate the expected revenue from the disposal of real estate it accumulates mainly via debt-to-asset-swaps, Citi said.

Other macroeconomic and political factors which may affect the bank’s performance include the exposure of Cyprus’s economy to the tourism and real estate sector that may be negatively affected by the performance of the Russian economy that relies on energy exports, the exchange rate of the British pound ahead of the Brexit negotiations and the stability of the euro area, Citi said. Also, possible “major negative news from Greece” could affect investor sentiment and impact the bank’s performance.

Further, the high rates of both consumer and corporate debt as a percentage of the economy amid continuous deleveraging constraining asset growth, could also affect the bank’s performance, Citi said.

“The present administration could take populist steps in the run up to presidential elections in 2018 or a new administration could be sworn in and the pace of reforms slow down,” the US bank said.

The Bank of Cyprusshare, which closed at €3.325 on Friday at the London Stock Exchange which is closed on Monday, was traded at around €3.30 at the Cyprus Stock Exchange on Monday at 11:30 am.

Source: Cyprus Mail

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