Bank of Cyprus Holdings Public Ltd. Co., parent of Bank of Cyprus Public Co. Ltd., is boosting its loan loss provisions by €500 million and will take a loss of €550 million for the first half, despite previously guiding the market to expect "modest positive" profitability, but given its coverage levels, the announcement should not come as a surprise, said one analyst who follows the company.
The bank said it needed to "draw a line under its discussions with the ECB on the levels of provisioning that the ECB expects to see" against bad loans, and comes ahead of "transformational initiatives" for which "detailed work is underway with a number of external counterparties." It also said it would take additional discounts on the recoverable value of collateral and extend its assumption of the time it takes to recover that collateral.
Bank of Cyprus' nonperforming exposures, which include nonperforming and some restructured loans, declined to 51.8% of total loans, or €10.4 billion, at March-end, from 54.8% in December 2016 and 61% in March 2016. Its NPE provisions covered 42% of total delinquent assets as of March-end, a number that Alex Boulougouris, a bank equity analyst with Wood & Co in Athens, characterized as low.
"The news is not such a big surprise to us as the coverage ratio was low vs. regional peers," he told S&P Global Market Intelligence in an email.
Greece's Eurobank Ergasias SA had an NPE coverage ratio of 50.8% at the end of the first quarter, and a 45.0% ratio of NPEs to total loans, while Cyprus Cooperative Bank Ltd. had 42.42% NPE coverage at the end of 2016, against an NPE ratio of 58.66%.
Bank of Cyprus said the fresh provision would raise NPE coverage to 48% as of June-end and push down its common equity Tier 1 ratio to roughly 12.3% from 14.4% in the first quarter. The bank reported a profit of €2.2 million in the first quarter of 2017, down from €50.2 million in the same period of 2016, having carried on with a strategy of allocating most operating profit to de-risking its balance sheet.
The lender emphasized that the increased provisions do not require it to raise new equity, but the London-listed shares of the holding company fell as much as 7.6% following the statement and closed down 5.7%.
"Although we could see some pressure on the share price today, the news was partly expected, in view of the low NPE coverage ratio. We also welcome that management is dealing with one of its weaker areas, and could lift a burden off the [profit and loss] from 2018-end onwards," Boulougouris wrote in a note to investors.
The bank is slated to release first-half results Aug. 29.
Cypriot banks are going through a period of recovery after a deep crisis that ended in an EU bailout and so-called haircut of deposits. The wider Cypriot economy is also growing, with tourism and construction in particular lifting the lending business, according to rating agency Moody's.
"The tourism industry's revival is having positive ripple effects across the economy," Moody's said Aug. 21.
"The growth in tourist arrivals, which has led to a 22% increase in tourism revenue in the January-May 2017 period versus a year earlier, is credit positive for Cypriot banks because it supports improvement in their weak asset quality and offers more lending opportunities," it added, referring to recent travel statistics published by the government. The local tourism sector supports 10% of all lending.
As the largest bank in the country, Bank of Cyprus is likely to reap the most benefit from these improvements, Moody's said.