The head of Cyprus' largest bank expressed hope Aug. 29 that a decision to beef up reserves will appease European regulators with whom dialogue has thus far been "fraught."
Bank of Cyprus Holdings Plc, parent of Bank of Cyprus Public Co. Ltd., flagged the additional €500 million bad loan provision on Aug. 21, and it reported total charges of €727 million in the first half, up from €180 million in the first half of 2016. That helped push the lender to a first-half consolidated after-tax loss attributable to owners of the company of €554 million.
But CEO John Hourican said it had been a worthwhile exercise in changing the tone of conversations with the ECB, which oversees the eurozone's largest banks.
"Our dialogue with the supervisors is on a positive tone at this point in time, and we believe that the actions we've taken through last week's announcement and this week's results have put behind us a very contentious part of our supervisory engagement on provisioning," the CEO said on an Aug. 29 earnings call.
On top of boosting provisions, Bank of Cyprus also changed its assumptions regarding loan recoveries by further discounting the value of collateral and extending the recovery period for certain assets to six years from three years.
The bank's nonperforming exposure ratio dropped to 50% at the end of June, from 55% at the end of December 2016, and it is now aiming to bring NPEs to below 40% of total loans in 2018 and below 30% later on. NPE coverage was 48% for the period, with Hourican saying it will likely rise to above 50% by the end of the year and about 55% in 2018.
"This material increase in provisions should facilitate a more rapid de-risking and potential selldown of our delinquent exposures," he told the audience.
As a result of the changes, the bank's common equity Tier 1 ratio fell to 12.3% as of June 30 from 14.5% at the end of 2016.
Assuming that the impact of a new accounting standard known as IFRS9, which will be implemented at the beginning of 2018, is phased in over five years, the bank's CET1 ratio is projected to be above 13% in 2018, in line with the medium-term target. Hourican refrained from giving a precise estimate of the impact of IFRS9 on the capital ratio, citing ongoing research into the matter.
The bank is projecting EPS of 40 cents in 2018, Hourican said, thanks to a recovery in lending driving total assets above €24 billion after years of balance sheet shrinkage. It lost €1.24 per share in the first half, when its balance sheet stood at €22.1 billion; that was down slightly from €22.2 billion at 2016-end, although first-half new loans of €1.1 billion were more than double the amount in all of 2016, the CEO noted.
Hourican also said the bank's management was preparing to have some "difficult conversations" with staff over the coming months, with the cost-to-income ratio having risen to 46% in the first half from 42% in 2016. The medium-term target is 40% to 45%, which Hourican noted will come against a backdrop of falling operating income.
Hourican also said the bank is examining the possibility of issuing Additional Tier 1 and/or Tier 2 debt equivalent to 1.5 percentage points of capital.