The Cyprus Weekly - Banking Special

FRIDAY MARCH 20 2015

BANKING SPECIAL

21

Banks have started to lend again despite the fact that the foreclosure issue remains pending

Lending starts to climb December and January saw the biggest increase in loan stock on record

By Fiona Mullen (Sapienta Economics)

T

wo years after the financial crisis that saw banks closed for 12 days in a row, the Cypriot banking system has finally started to lend again.

The absolute stock of loans rose by €2.9bn in December and €3.2bn in January to reach €64.8bn at the end of January, compared with a low of €57.6bn in November.

In percentage terms the stock of loans rose over the previous month by 4.9% in December and 5.1% in January.

One caveat to these figures is that the Central Bank of Cyprus, while publishing the absolute stock of figures, also reUntil local financial ports what it calls the ‘net’ change institutions lend to the in loans and deposits.

When reporting the net change, local economy, it is not the Central Bank includes “the adyet time to pop open the justment for exchange rate fluctuachampagne bottles tions”. This is apparently in line with European Central Bank rules and the Central Bank says it is more accurate. But that really depends on what you are measuring.

If you want to know if the banking system’s liquidity is improving or if the loan book is increasing, you need the absolute figures, not the adjusted ones.

When looking at the absolute stock of figures, the change is remarkable, as the level of increase in loans is unprecedented.

In a series dating back to November 2005, the largest monthly rise before this was in July 2008, the year in which Cyprus adopted the euro, when an increase of €2.2bn was recorded.

Assuming this trend continues, then we could just be seeing the end of the financial crisis.

Financial corporations lead the way The largest increase in borrowing has come from

Loans jumped by 4.9% in December and 5.1% in January

financial intermediaries (banks).

Total lending to financial intermediaries rose by €4.6bn in December-January, accounting for 77% of the increase.

This category does not include insurance and pension funds, so it could mean the resumption of interbank lending, which pretty much dried up as the crisis accumulated and banks did not trust their money with anyone else.

However, household lending has also risen slightly, by €784m in December and January.

Within this category, lending for housing purposes rose by €438m, while ‘other lending’ (neither consumer credit nor housing loans) increased by €322m.

Banks have started to lend again despite the fact that the foreclosure issue remains pending.

One reason why banks have started to lend again

Staff costs come down The 2014 results published in February show that both Bank of Cyprus (BoC) and Hellenic Bank have managed to cut staff costs as part of their restructuring processes.

Staff costs at BoC dropped by 11.7% to €234 million at the end of last year from €265m in 2013.

At Hellenic, staff costs dropped by 16.1% to €75.3m in 2014 from €89.4m in 2013.

Cutting staff costs is only one part of the equation, as

when enterprises restructure, other costs tend to rise.

The good news is that both banks have managed to reduce their overall cost to income ratios.

BoC cut its cost to income ratio to 37% in 2014 from 43% in 2013, while Hellenic’s dropped to 47.2% from 53.6% in the same period. One reason for the improvement was a strong increase in net interest income: BoC enjoyed an increase of 9.9% while Hellenic saw an increase of 9.1%.

despite the fact that the foreclosure issue remains pending is the expansion of deposits, which in turn allows them to fund loans.

On an absolute basis, deposits rose from a low of €45.7bn in October 2014 to €46.5bn in January, thanks it seems to the successful conclusion of the EUwide stress tests at the end of October, which increased trust in the banks.

Who is lending?

One question that is tricky to answer is who is lending, as the Central Bank of Cyprus stopped publishing bank-by-bank loans and deposit figures in early 2013.

The bank that is in the best position to lend is Hellenic Bank, which saw its deposits rise to €6.3bn in 2014 from €5.5bn in 2013 and has a strong liquidity position with only €3.2bn in loans.

However, its financial statement shows a decline in gross loans between the end of September and the end of December.

The same is true for Bank of Cyprus.

Given that the increase in lending has been concentrated among financial corporations, it could be that the international banks are the real cause of the increase.

The banking system is considerably more stable than it was in March 2013.

But until we see a real rise in lending from local financial institutions to the local economy, it is not yet time to pop open the champagne bottles.

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FRIDAY MARCH 20 2015

BANKING SPECIAL

Scandal is damaging Cyprus Could hinder potential involvement in ECB bond-buying programme

By Samantha Shields

P

andemonium surrounding President Nicos Anastasiades’ attempts to have Central Bank Governor Chrystalla Georghadji removed from her post over a perceived conflict of interest damages international perception of Cyprus’ banking system and could hinder the island’s potential future involvement in the European Central Bank’s govern‘This is sending ment bond-buying programme, analysts said absolutely the worst week. message at absolutely this“This is sending absothe worst time’ lutely the worst message at absolutely the worst time,” said Marios Zachariadis, Associate Professor in the Department of Economics at the University of Cyprus.

Anastasiades says Georhadji is in breach of her contract because her estranged husband’s law firm represents the former head of now-defunct Laiki Bank, Andreas Vgenopoulos, who is embroiled in a legal battle with the central bank.

The row goes all the way back to October, when Anastasiades publicly criticised Georghadji for not disclosing that her daughter worked for the law firm, prompt-

Stelios Kiliari accused Georghadji of having a list of lawmakers with overdue loans at the Bank of Cyprus

ing a revision of her contract and assurances that the matter would be resolved.

But it resurfaced in spectacular fashion during a parliamentary ethics committee meeting on March 12, when central bank executive board member Stelios Kiliari, who has since resigned, accused Georghadji of having a list of lawmakers with overdue loans at the Bank of Cyprus that she could use to get them to drop the conflict of interest allegations.

Georghadji, whose predecessor Panicos Demetriades resigned a year ago after Anastasiades accused him of incompetence, says she never ordered any such list and only made enquires about it after she found out that it existed. She also says she has no intention of resigning.

Geoghadji, like all eurozone central bank governors, reports directly to ECB President Mario Draghi, so Anastasiades can’t fire her himself, but his spokesman Nicos Chistodoulides says he has discussed the situation with Draghi.

According to ECB sources, for a central bank governor to go he or she must be incapacitated or have committed a serious crime.

The furore erupted just as it was beginning to look like things were improving for Cyprus’ banking system.

Earlier this month the ECB’s decisionmaking Governing Council met in Nicosia, and Draghi said some positive things about the Cypriot economy.

He praised the government for being well ahead in meeting targets set in 2010 to get its public finances in order. There were also hints during the meeting that Cyprus might be able to be involved in the ECB’s €1.1 trillion quantitative easing programme once it passes foreclosure legisla-

tion, even though it has yet to attain investment grade.

“The ECB has already given Cyprus some leeway, and you don’t know what is going on behind the scenes after this, it could be hurting our image,” said independent financial analyst George Markides.

Georghadji said during the meeting with Draghi that Cyprus would be able to benefit by up to €500 million.

Michalis Florentiades, Chief Economist at XM forex broker, said he believes the ECB’s focus will continue to be on foreclosure law.

“But what this incident does show is that Cyprus has a problem with weak institutions,” he added.

Finance Minister Harris Georgiades said this month that Cyprus is hoping to borrow on international markets this year and associate its economy in institutions’ perceptions with bailout-turnaround Ireland rather than Greece.

Zachariades said that while Cyprus is a different case, its proximity to and links with Greece could put it in a precarious position.

“Some subjective decisions might have to be taken if Greece goes down, and we really need the ECB to be positive about us,” he said.

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FRIDAY MARCH 20 2015

banking special

23

Recovery is a testament to our resilience

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wo years ago Cyprus faced very dark days.

Laiki Bank was shut down and Bank of Cyprus was recapitalised through the bail-in of its bondholders and depositors. Uncertainty and fear prevailed across all levels of society. The bailin, the rescue package and the effective loss of sovBy John ereignty shocked this young nation.

Patrick The treatment of Cyprus seemed harsh when Hourican compared with the help afforded to other nations across Europe. The bail-in was a particularly dangerous economic “Rubicon” to cross. It is a testament to the resilience and maturity of Cypriots that the country coped so well with this unprecedented experiment on their banking system. Our job has been, and continues to be, the repair of the bank and the creation of solid foundations from which to rebuild a strong bank capable of playing its part. Today, the Bank of Cyprus is better capitalised than it ever has been. We still have significant The Cyprus economy challenges in recovering and rehabilitatnon-performing loans but we have has proven to be more ing addressed many of the challenges. We resilient in recession have stabilised our funding, repaid huge than most economic amounts of Emergency Liquidity Assistance (ELA), and significantly reduced commentators the complexity of the bank by shedding expected unnecessary overseas businesses and returning the funding to Cyprus.

Credibility test

The writer is Group Chief Executive Officer of Bank of Cyprus and an executive member on the Board of Directors

An important test of credibility has been our ability to attract investors. In the late summer of 2014, we raised €1 billion of new money from abroad. This new equity injection represented the largest ever Foreign Direct Investment into Cyprus since the foundation of the state. Investors validated our strategy and signalled a vote of confidence in the country.

Investors put their money alongside that of our bailed-in depositors, which allowed us to confidently pass the European Central Bank stress tests as well as accelerate the re-listing of the stock in Cyprus and Athens. The bank gets criticised for not moving quickly enough on loan restructurings. We have restructured billions of euros worth of loans

Moral hazard

At the Bank of Cyprus, we are turning our attention to making our bank more customer-centric

but there remains a huge amount to do.

We have been very active amongst the economically vulnerable. We have restructured 51% of housing loans in arrears for the unemployed. We do all we can to recover performing loans that are delinquent. It is an inconvenient truth for those who have chosen not to meet their obligations that this money belongs to our depositors.

From here, as we work together to build a future for ourselves and our children, there remains much to do. The economy is still contracting at a modest rate and growth in 2015 is not yet assured. The country remains “at war” with its economic circumstances and we must collectively do all we can to create the foundations necessary for recovery and the country’s future prosperity.

It is essential that Cyprus puts in place an effective, implementable and appropriate foreclosure and insolvency regime.

We need simple law which contains the necessary moral hazard to ensure that money lent to borrowers can be effectively and speedily recovered if the borrower defaults. We also need regulation that ensures lending practices are fair and that the economically vulnerable receive appropriate protections. This must be underpinned by a framework that upholds the basic principle that “if you borrow money, you should pay it back”.

There remains much to do to restore the Bank of Cyprus to a trusted position in Cypriot society. We are making progress. We have a world-class Board.

We have some of the world’s most sophisticated investors backing the bank. We have made good progress on simplifying the bank. We have stabilised and improved the banks funding. We have stabilised non-performing loan levels. We have some of the highest levels of capitalisation of any bank in Europe.

The Cyprus economy has proven to be more resilient in recession than most economic commentators expected.

We have the foundations in place to change gear and drive out of recession.

At the Bank of Cyprus, we are turning our attention to making our bank more customer-centric. We are listening to customer feedback about our bureaucratic and sometimes slow processes and we intend to address this. We are examining our technology, our products, our approach, our role in the economy and we are determined to learn from the crisis to position Bank of Cyprus as the bank of choice for Cypriots and businesses in Cyprus.

The economy has shown good signs of resilience.

Reform momentum continues and the foundations for a conversation about how to build prosperity are in place. We want to encourage a meaningful debate about where the country wants to go. We are absolutely ready to play our part in this discussion and to provide lending to support such plans as they materialise.

A delicate balancing act

By George Appios

C

yprus will slowly but steadily emerge stronger following the unprecedented and challenging events the banking system and the economy as a whole faced in early 2013.

Reforms have taken place and there is a positive movement both with regards to domestic rebuilding of trust leading to a sustainBanks are most likely able economic growth as well as to the restoration of confidence and stability to focus on effective amongst international customers. It is management of the very satisfying to see the determination non-performing loans in implementing restructurings and rewithin the revised code forms largely prescribed by the ECB, the IMF and the European Commission. of conduct and legal A determination that is already delivframework ering promising results in rebuilding financial institutions in the areas of sound corporate governance, strict AML regulations and best practices in credit management. These were, after all, the main areas in which shortcomings contributed to the overall crisis.

The current economic environment continues, however, to give rise to volatility and uncertainties The writer on the level of future earnings for both businesses and is Managing Director and individuals.

Chief ExecuThe subsequent credit risk level reduces the banks’ tive Officer desire to lend money. At the same time and for the of Piraeus same reasons, entrepreneurs and individuals are Bank (Cyprus) reluctant to invest capital in new ventures. The com-

bination of the above two factors suggests that the credit expansion in the next 12 months is not likely to be substantial.

Banks are most likely to focus on effective management of the non-performing loans within the revised code of conduct and legal framework. The target is to facilitate the restructuring of loans of cooperative customers with viable prospects.

The upcoming legal framework reforms will lift the obstacles regarding mortgaged property and force the customers who are not cooperating with

viable debts to cooperate for the restructuring of their loans and at the same time it will assist in the workout of non-viable loans. The legal framework will also provide protection to groups of lenders who became non-viable due to the economic crisis.

During the above struggle, banks will have to balance out the benefits of foreclosures and collateral auctioning with the possible damage that may be caused because of the drop in the value of real estate due to excessive offer and lack of demand.

The tax and other advantages of Cyprus continue to attract international businesses that continue to use Cyprus as a hub for their activities. Banks are now in a better position to manage the resulting risks and this is likely to have a positive impact on the quality of the new business generated in this field.

International banking is therefore expected to continue to be one of the main business development activities for banks.

The adoption and the implementation of the new banking regulatory and compliance framework created after the takeover of banking supervision of all eurozone banks by the European Central Bank will undoubtedly be in all banks’ priorities in the next few months.

The changes may create pressures for a re-definition of the business banking model that will have to be adjusted to the new tighter regulatory environment, the new market conditions, more demanding clients and higher required returns from shareholders that need to reflect the risks taken.

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FRIDAY MARCH 20 2015

BANKING SPECIAL

Learning from experience Interview with Khalil Letayf, CEO of Societe Generale Bank – Cyprus

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n the aftermath of the bailout, do you think the Cypriot banking sector is out of the red?

The Cypriot banking sector is gradually getting over the straining episode that was that of the bailout. Looking back, it is clear that banks have come a long way: significant capitalisation efforts were made and the island’s main banks have passed the stress tests with no major difficulty.

Still, although the sector has undeniably evolved towards greater soundness thanks to great efforts put in to overcome the crisis, SGBCy was actually it is important to face the painful truth: the banking less impacted by the crisis in Cyprus was the crisis than the rest of outcome of banks’ misthe sector. Indeed, our management. relation to a major Has the sector learned global banking group from past experience? I should hope so! In the afwas very positively termath of the crisis, all of perceived by the the banks and the bankmarket ing authorities have focused on implementing more sound credit policies, stricter internal procedures, and more thorough risk assessment. These managerial efforts,

supported by a more solid regulatory framework, are expected to yield positive results down the line.

Now that we are getting out of the crisis, the banking sector is today in a position to support the domestic economy.

The international mobilisation to back the island’s reconciliation with growth continues. Forecasts put Cyprus’ growth

at a modest 0.4% in 2015 and at 1.6% in 2016.

Therefore, banks will now have to anticipate economic recovery.

What is Societe Generale Bank Cyprus’ strategy today?

SGBCy was actually less impacted by the crisis than the rest of the sector.

Indeed, our relation to a major global banking group was very positively perceived by the market that has seen in it a token of strength and solidity. In fact, as part of Societe Generale Group, our credit policies have always been very strict and our risk policy based on close monitoring.

Our present strategy is focused on playing a major and active part in the island’s economic recovery.

We believe recovery will stem from the economic sectors that relate to essential consumer needs as well as from tourism. We are therefore extending loans targeting specific sectors with a promising outlook.

We also remain dedicated to supporting our customers, especially during hard times. We are hence restructuring loans to help our clients head for a fresh start.

Practically, we have entered into a partnership with the European Investment Bank to help our clients access cheap medium and long term funding.

With our good image and this new approach of the market, we are hoping to contribute to Cyprus recovery and grow our presence on the island.

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FRIDAY MARCH 20 2015

After the events of 2013, the banking sector is strong but must remain vigilant

On track Steps towards restoring trust

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n the aftermath of the economic and financial turbulence in 2013, a number of macroeconomic imbalances are being corrected. While the correction of imbalances resulted in a deep but unavoidable recession, the economy

By Bert Pijls of Cyprus has proved to be resilient and, although still in recession, the overall performance has been better than expected.

Two years after the challenging and unprecedented events that took place in the Cypriot economy and the banking sector, significant steps have been taken towards restoring the soundness of the local banking sector and rebuilding depositors’ and market confidence.

Stabilising the banking system and restoring better lending conditions to the real economy has also been an essential part of ongoing efforts.

The core domestic financial sector has now been downThe full recovery of the sized, recapitalCypriot banking sector ised and restrucpivots on the successful tured. Following and sustainable resolution the measures undertaken, the of non-performing loans disposal of noncore bank assets and loan-book deleveraging, the domestic banking sector reduced to circa 300% of GDP in 2014 from 550% at end-2012.

Overall, the bank restructuring process has been successful. The better-than-expected results from the consolidation of the banking system should not be regarded as a permission to relax the efforts for reform. The full recovery of the Cypriot banking sector pivots on the successful and sustainable resThe writer olution of non-performing loans. is Chief ExWhile most recent data indicate the ecutive Ofslowdown recorded in the build-up ficer and a member of on non-performing loans, the inefthe Board ficiencies in the current Cypriot leof Directors gal system do not provide adequate of Hellenic incentives to work out the high Bank Cyprus stock of problematic loans.

The immediate reform on the legal regime for foreclosures and insolvency in order to prevent strategic defaults would be an invaluable tool in that direction. This will be vital to create incentives for debtors and creditors to agree on debt restructuring, thereby helping reduce banks’ non-performing loans. The absence of orderly and effective insolvency procedures has an adverse impact not only on the balance sheet of banks but also on the real economy, as the ability of the banks to grant new loans on to the real economy becomes limited.

Furthermore, it hampers the overall investment climate because of the uncertainty created for international investors.

Taking into consideration all the above and with full awareness of the prevailing economic environment, the primary targets of Hellenic Bank for 2015 are the effective management of non-performing loans and the expansion of its loan portfolio, combined with the preservation of its capital adequacy for maintaining healthy liquidity.

Hellenic Bank, as one of the leading financial institutions in Cyprus and being the only systemic bank that has not been impacted by bailin or bail-out measures, is taking an active role in the stimulation of the Cypriot economy. Armed with strong capital adequacy and using its comfortable liquidity, Hellenic Bank intends to finance new credit facilities with favourable terms for viable firms and households. With regard to the effective management of non-performing loans, the bank proceeded to create a specialised team for the management of loans in arrears, with a focus on debt restructuring of viable customers while fulfilling its social obligation and responsibility.

Hellenic Bank, recapitalised and strengthened, without assistance from any Support Mechanism, with transparency and effective corporate governance, is dedicated to maximise the prospects of the Cypriot economy towards a sustainable path.

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FRIDAY MARCH 20 2015

BANKING SPECIAL

Same values, new perspective

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t is has been two years since the March 2013 Eurogroup decision which led to the closure of Cyprus Popular Bank (Laiki) and the transfer of its Cyprus assets, its insured deposits and its emergency

By Marios liquidity assistance to the Bank of Clerides Cyprus.

What followed was the sale at “gun point” of the Greek operations of Laiki, Bank of Cyprus and Hellenic Bank to Piraeus Bank, the bail-in of Bank of Cyprus depositors in order to capitalise it. Cyprus’ 93 coops were then merged into 18 subsidiaries of the Cooperative Central Bank, as a condition of state aid that the Co-ops took to avoid their own bail-in.

In rough numbers, more than 80% of the domestically active banking system was directly affected by the The successful passing Eurogroup’s decisions, the remainder of by the Cypriot banks while the system had to cope of the SSM stress test with the indirect effects has led to a stabilisa- of capital controls, both domestic and internation of deposit outtional. flows and lessened Two years on, we can fears of further haircuts take stock and see how the system has fared, the challenges it has had to address in this period and also the challenges that lie ahead.

During this period, apart from the logistics of mergers, sales of foreign operations and the administration of capital controls, banks have had to cope with a variety of other issues: new directives on the way new lending is assessed, directives on money laundering and directives on loan restructurings, to mention The writer just a few. is General From the business side, banks Manager of have had to deal with frightened the Central depositors who kept fearing new Cooperative Bank haircuts, raising fresh capital in an-

In rough numbers, more than 80% of the domestically active banking system was directly affected by the Eurogroup’s decisions

ticipation of the Single Supervisory Mechanism (SSM) stress tests and devote significant resource to managing the SSM transition.

Last but not least, banks have had to deal with the issue of rising non-performing loans (NPLs) in a political and social environment that has been hostile to banks, who are trying to collect from their problem loans.

Where do we stand now? a) The successful passing by the Cypriot banks of the SSM stress test

has led to a stabilisation of deposit outflows and lessened fears of further haircuts, though confidence in the banking system is not yet fully restored as evidenced by the high cash holdings that Cypriots still maintain. b) NPLs are still increasing but at a reduced rate and the expected passage of the legislation of the insolvency legislation will help speed up restructuring, since there is currently a “wait-and-see” attitude from borrowers and guarantors with respect to meeting their obligations.

One challenge in NPL management remains the high degree of private sector debt in relation to income. c) The final challenge concerns the granting of new loans to the private sector, which will help put the economy back on a growth path.

The problem here is both the overleveraged private sector, which means that extra lending might not be prudent, but also the unwillingness of households and companies to borrow in the environment of extreme uncertainty that exists.

Encouraging signs of progress in the banking sector The rate of economic recovery in Cyprus has exceeded expectations and the banking sector has been recapitalised, with the injection of significant foreign investments.

This, we believe, is tangible proof that the Cyprus banking sector has started to gain trust and will eventually recover and it should be acSince 2013, credit insti- knowledged as a significant tutions in Cyprus have achievement. addition to overcomto operate in an even ingInthe disastrous consemore heavily reguquences of 2013, credit instilated and supervised tutions in Cyprus have to operate in an even more heavframework ily regulated and supervised framework.

There is no arguing as to the need The writer is CEO and for proper regulation and compliance, Chairman however it is a fact that banks worldof the Board wide are now faced with a significant of Ancoria increase in cost, time and resources reBank Cyprus quired in order to comply.

By John Loizou

No complacency It should be emphasised that the encouraging signs and the progress made so far should not allow us, on the other hand, to become in any way complacent. We feel we should express our concern regarding the delay of passing the law on foreclosures and the insolvency framework bill, as well as all the uncertainty that this delay creates.

This bill can provide the necessary tools for banks to manage more effectively the biggest challenge they face today which is the non-performing loans.

In addition, we are apprehensive as to the practical implementation of the provisions of the proposed legislation and whether these provisions promote an efficient, just and effective framework for the timely containment and reduction of the non-performing loans.

The situation in Greece, coupled with the economic uncertainty in Russia, and the depreciation of the Russian rouble,

Ancoria Bank will be operating its first branches at the K Athienitis Developers building in Nicosia and the Paris Business Centre in Limassol (pictured) may also be a hindrance to the projected recovery of the banking sector in Cyprus and the Cyprus economy overall.

Finally, since exogenous factors cannot be controlled, there seems to be only

one way forward that we can strive for.

This is the way to reforming the system, creating the conditions for healthy and long-term growth of the economy to help Cyprus reach its full potential.