BAILED-OUT Bank of Cyprus BOC.CY is reviewing its restructuring plans in a move that could result in billions of euros of its troubled assets being put into a “bad bank”, chief executive John Hourican said.
Hourican took the top job at Cyprus’ largest bank in October after it was rescued during an international bail-out of the island, which had run into financial problems partly because of the exposure to debt-laden Greece.
At that time, a plan to put the bank’s 22 billion euros ($30.32 billion) of good and bad loans into one legal entity was just being finalized. This plan also envisaged the bank remaining reliant on some emergency funding from the Central Bank of Cyprus until 2017.
But Hourican, former investment banking head at Royal Bank of Scotland (RBS.L), wants to look again at all the options.
“We have appointed HSBC to help us look at our overall corporate finance agenda including the entire structure of how the group is organized,” Hourican told Reuters in an interview.
“What I’d like is to re-open the entire option list for the bank – do we continue with the plan we currently have? Is there a possibility of a more formal good bank/bad bank? Is there another set of options we could approach in terms of accelerating our restructuring plan?”
The creation of a bad bank would free Bank of Cyprus from its problem loans and make it easier to forge a “normal” bank better able to fund itself and support the country’s economy. The bad bank was considered as an option in the terms of Cyprus’ 10 billion euro bailout from the European Union and International Monetary Fund.
Bad banks have been used successfully to cleanse banking systems in Ireland and Spain, and one is being created in Slovenia.
The HSBC (HSBA.L) team is being lead by its head of European financial institutions group Tim Sykes, a former senior official at the UKFI which managed the UK’s banking stakes including its 82 percent share in Hourican’s former employer RBS. The HSBC review will take several weeks. HSBC confirmed its involvement but declined to comment further.
Bank of Cyprus is now the country’s biggest bank after it merged last year with collapsed rival Cyprus Popular Bank CPBR.CY as a result of the EU/IMF bailout.
The bank was the first in the euro zone to force depositors to give up some of their savings to help to recapitalize it.
The original restructuring plan, which Hourican said was still its core ambition, focuses on actively managing non-performing loans, selling off non-core assets like its Ukrainian arm, and integrating Laiki, a rival bank wound down under the EU/IMF bailout deal.
So far, Hourican’s management team have stopped short of a full bad bank and instead split the bank internally into a “restructuring and recoveries division,” which is managed separately and is funded by about 10 billion euros of emergency liquidity assistance (ELA) from the Central Bank of Cyprus.
“At the end of the day, funding will be what determines whether you can separate out your good bank and your not so good bank,” Hourican said.
A fully-fledged bad bank would be a separate legal entity that would not qualify for central bank funding and so private cash – potentially bonds or shares – would be needed to back it.
“(Emergency liquidity) ELA is only available for deposit taking institutions,” Hourican said. “If you were to create an AMC (asset management company) you are not a deposit-taking institution … What we have to do is try and find a private solution that doesn’t further burden the Cyprus state.”
Hourican said that Bank of Cyprus’ small size would make it easier to find a private sector solution than much larger banks in the so-called periphery of Europe. He said investor interest had been building in the bank, which had a balance sheet of 30 billion euros at the end of 2013.
“Pre-Christmas, Cyprus and the Bank of Cyprus was just a ‘too hard to look at’ category of funding or investment for any external party,” he said. “Post-Christmas the incoming (feedback) has been quite significant in terms of people saying, this is now becoming very interesting, as opposed to being too difficult.”
Since the start of the year, financial markets have become more optimistic about the outlook for some of the weaker economies in the European Union. The lure of juicier investment returns has attracted investors back to Greece and Portugal.
Investors have also been attracted to crisis-stricken countries after watching the big wins reaped by those who invested early on, like investors from North America who trebled the value of their 2011 investment in Bank of Ireland (BKIR.I).
“I think a lot of possibilities and opportunities will open up over the coming few months on how we might go about tackling this problem,” Hourican said, referring to the bank’s reliance on emergency liquidity.
He said the bank was looking at lots of solutions including private finance solutions and issuing bonds.
“It is good to see the Greek banks back raising money at very tight spreads,” he said, referring to 500 million euros in bonds sold at a yield of 5 percent by Piraeus (BOPr.AT), which became the first Greek bank to issue debt in five years.
He pointed out that Greece was at a different stage in its bank restructuring than Cyprus and that the country does not have capital controls in place.