Four years after the economic crisis that resulted in the bail-in of depositors of two of the biggest banks in Cyprus and the EUR 1.7bn state-aid to the Cooperative Central Bank, the banking system stands now on a much more solid foot. Having overcome previous re-capitalization needs, the banks are now more focused towards dealing with the ‘number one’ problem of the Cypriot economy; their nonperforming exposures (NPEs).
From a macroeconomic perspective, efforts to set the economy back on the right path have been fruitful and the economy recorded positive growth rate; in 2016 real GDP growth reached 2.8% and continued at a higher pace of 3.3% in 1Q17. The unemployment rate declined to around 11% in May, following a peak of 16.9% in 1Q14.
The Cypriot banking system has undergone a deep transformation as the macroeconomic and banking realities over the last few years at European level caused a serious change in perception and resulting focus of the competent authorities and the banks themselves. The Cypriot government, enjoying economic support from the centrist DIKO, facilitated the passing through Parliament of significant legislation that is likely to prove instrumental in the banks’ efforts to mitigate the large stock of NPEs; the property foreclosure legislation and the sale of credit facilities law are examples that, in combination with a fertile economic climate, have supported banks in their efforts to deal with NPEs. Furthermore, and equally prominently, the banks have taken additional initiatives, including the creation of inhouse specialized units as well as the introduction of NPE platforms, partly due and certainly in line with forward-looking European banking standards.
The biggest bank on the island, Bank of Cyprus (BoC), has achieved a rather remarkable turnaround. In January 2017, BoC announced the full repayment of ELA, which had peaked at EUR 11.4bn in April 2013. During the same month, the bank proceeded with the issuance of a 10-year 9.25% EUR 250mn Tier 2 capital note with the option of earlier redemption in five years, a wise move considering the impacts of the upcoming EU regulation. In mid-January, BoC achieved a double listing on the London Stock Exchange, completing a commitment of its most recent management. With regard to NPEs, the bank proceeded with the establishment of an in-house NPEs management unit, the Restructurings and Recoveries Division (RRD), which has managed to reduce the stock of NPEs from a peak of EUR 15bn in 2014 to EUR 10.4bn in 1Q17. In early 2016, BoC announced the full operation of its Real Estate Management Unit (REMU), which is responsible for the treatment of all assets on-boarded to the bank through debt-for-asset swaps. In 1Q17, REMU’s assets totalled EUR 1.4bn, while it has managed to sell circa EUR 276mn of assets since the unit’s inception. To date, BoC did not express its intention to move ahead with the outsourcing of its NPE portfolio through the creation of a servicing platform.
Cooperative Central Bank, the second largest and state-owned bank on the island, recently announced the creation of an NPE platform in cooperation with the second largest Asset Management Company (AMC) in the EU, the Spanish Altamira. A new joint venture will be established in which CCB will hold 49% of the share capital and Altamira the remaining 51%. The agreement has ten-year duration and provides for the servicing of the bank’s NPEs (EUR 7.2bn) and the management of its real estate portfolio (EUR 0.4bn). The fees payable to the joint venture will be based on progress achieved in reduction of NPEs. The bank is entering a new era, being re-named to “Cooperative Cyprus Bank Ltd” while also getting ready to list on the Cyprus Stock Exchange (CSE) in a bid to reduce the State’s shareholding to levels below 25% by 2020, as agreed during the country’s bail-out programme. To that end, 6bn ordinary shares will be listed on the Main Market of the CSE at a listing price of EUR 0.10 per share.
In mid-January, Hellenic Bank (HB) was the first Cypriot bank to announce a 10-year agreement with the Czech AMC, APS Holdings, for the management of its entire NPEs (EUR 2.3bn) and real estate portfolios (EUR 150mn), which will remain on HB’s balance sheet. To that end, a new company was created and commenced operations on July 1, “APS Debt Servicing Cyprus Ltd”, in which HB holds 49% while APS Holdings owns 51%. The administration fee payable to APS Cyprus comprises of a fixed and variable element, as the level of fees will vary according to the progress of collections with the majority of fees being driven by the successful resolution of the portfolio.
Overall, the Cypriot banking system appears to stand on a more solid foot than prior to the crisis. The Cypriot banks are, for the moment, adequately capitalized and their provisioning levels are sufficient compared to EU averages. The supportive recovery and flexibility of the economy, alongside the new and effective legislation in place, have helped contain (but farfrom solve yet) the problem of NPEs. The recently announced joint venture platforms are a step in the right direction but their results will need to be recorded and assessed over time. Looking at what lies ahead, challenges feature prominently; the difficulty in utilizing the banks’ excess liquidity in a small economy with many players during periods of low interest rates is likely to persist while a series of penalizing regulations are upcoming. The IFRS 9 introduces for the first time the concept of expected loss provisioning methodology, which is expected to negatively, although to a limited extend, affect the profitability of the banking sector at least for the next five-year horizon. MREL is also coming and, in such a challenging environment, the banks and the authorities on the island should insert every effort to prove resilient in order to safeguard the future of the economy.
Authors: Ms. Damiani Papatheodotou, Research Analyst, AXIA Ventures Group Ltd., Mr. Eleftherios Kouppas, Intern in the Research Division, Axia Ventures Group Ltd
Ms. Damiani Papatheodotou joined AXIA in January 2016 as an Analyst in the Research Division, after successfully completing a three month-internship during the period July to September 2015. Damiani primarily focuses on macroeconomic and political research vis-à- vis Cyprus and is the author of AXIA’s Cyprus weekly research note. At the same time, she actively monitors a number of European banks in Cyprus, Greece and Portugal with the help of AXIA’s Financial Institutions research team. Damiani holds a BSc in International, European and Economic Studies from the University of Cyprus and is due to complete her MSc in Finance.
Mr. Eleftherios Kouppas joined AXIA in June 2017 as an intern in the Research Division. He is currently pursuing a Bachelor in Finance at the University of Cyprus which is due for completion in May 2018.