BANK of Cyprus published its Group Financial Results for the quarter ended 31 March 2014 a short while ago and the local and international media were quick to hail the results.
With the help of Exito Capital International, we looked a little deeper and despite reporting a positive result of €31 million, we still found some concerns which make us believe it is far too early to suggest that the biggest Cypriot bank has turned the corner for good.
Key facts
- The Bank of Cyprus reported €944 million outflow in customers deposits from €14.9 billion to €14 billion which is a decrease of 6% within 3 months.
- The Bank is still heavily dependent on emergency funding from central banks which still stands at €10.9 billion and without this funding the bank would basically be illiquid (and thus potentially insolvent).
- Its loan book is very much concentrated in Cyprus which represents about 86% of the overall loan portfolio – approximately 65% of the Cyprus loan portfolio relates to construction, real estate and private individuals (of which 65% relates to housing). Thus, one can conclude that the Bank’s outlook is very closely linked to Cyprus’ real estate sector and the macroeconomic growth.
- The portion of overdue and impaired loans has further increased from 53.2% as of year end 2013 to 53.8% as of the first quarter of 2014 and only 44% of the impaired loans are provisioned for. In the first quarter of 2014, the bank only set aside €184 million in new provisioning (whereas in 2013 the average quarterly provisioning was €320 million) which is just 2% of the total value of impaired loans and overdue loans. Furthermore, €6 billion of loans have been rescheduled of which €1.27 billion have already been classified as impaired up from €1.18 billion as of year end 2013.
- The liquidity ratio (the ratio of liquid assets to total deposits and other liabilities falling due in the next twelve months) has fallen from 12.28% at the end of 2013 to 12.14% as at the end of the first quarter of 2014.
- The sale of its Ukrainian subsidiary will result in an accounting loss of €100 million in the second quarter.
Outlook
The Bank of Cyprus is the largest banking institution in Cyprus and given its very high credit exposure to the Cypriot businesses and households, the Bank’s future financial performance is interlinked with the Cypriot economy, real estate market and is highly correlated with the trajectory of economic activity in Cyprus.
The Troika also noted that while the recession in 2014 is expected to be somewhat less severe than anticipated, the outlook remains challenging. The contraction of output for 2014 has been revised down to 4.2% from 4.8%, given the better-than-expected outturn for 2013 and other recent indicators pointing to gains in confidence.
Unemployment remains very high, and large non-performing loans are constraining the ability of banks to supply credit to the economy. As a result, the recovery is now expected to be more subdued than previously forecast, with moderate growth projected at 0.4% in 2015 and gradually improving thereafter, as domestic demand is weighed down by the need to reduce very high levels of indebtedness.
Borrowers are expected to continue facing challenges, while property prices may fall even further (Exito Capital, 2014).
The ability of Bank of Cyprus to continue as a going concern is dependent on:
- The successful implementation of the Group’s Restructuring Plan and the realisation of the macroeconomic scenario which formed the basis of its preparation.
- The period over which the restrictive measures and capital controls are in place.
- The continuing reliance on and availability of the Central Bank liquidity facilities.
- The actual outcome of litigation and claims mainly relating to the bail-in of deposits and the absorption of losses by the holders of equity and debt instruments of the Bank.
Summary
Though there are signs that things are slowly stabilising at BOC and hence chances of survival have increased, it is obvious that the bank (speaking in medical terms as per Ben Rosenberger – Exito Capital) is still in intensive care and on life support. Without the emergency funding from the ECB the bank would literally be illiquid with potentially severe consequences.
The outlook is challenging and linked to a lot of uncertainties. The recovery – if successful – will certainly take several years. As Ben Rosenberger (Exito Capital) stated, media suggestions that the bank may be floated on the London stock exchange in the near term is in our view totally unfounded. It would be suggesting that a patient who is just recovering from a cardiac arrest can participate in the next London marathon.
An excellent assessment of a still-worrying Report on BoC, and rightly it sounds several key cautions. Some when linked together especially worrying:
– very high proportion of debt ‘secured’ on property, property development and individual’s debts, (which are also largely based on property)
– NPLs worryingly high still
– Provisioning looks inadequate
– ‘BoCs future very much linked to real estate sector’ (and we all know about double lendings on many private residential properties! – with no hint yet anywhere as regards any solutions regarding these massive overlaps)
– forecast to see property values (and therefore security values) fall still further
Never mind the bank wrote to me, unaffected thankfully by bail-in and other nasties – to say how well their switchover of Laiki bank accounts onto BoC systems had gone earlier this month.
Ha! : I had to spend 30 minutes on the ‘Help’ line, then – having made zero progress via them – make two visits to my branch, spending 30 mins and 40 mins respectively whilst very helpful, if embarrassed, staff tried to unscramble the tangle their IT people had managed to get my four accounts into. I sincerely hope others got better service than I did, I’d rate the whole ‘systems integration’ experience 3/10!! – and the 3 would be for local branch staff who so diligently set about ‘sorting’ out the mess.
@MartynG on 2014/06/20 at 10:21 am – As a former Laiki customer my accounts were also transferred to the Bank of Cyprus over the weekend. Absolutely no problems – everything went smoothly and I was up an running with their online 1Bank in a matter of minutes.
The only thing I found confusing initially was that their on-line bank statements have the transactions listed in reverse chronological order.