STRICKEN Bank of Cyprus (BoC) has taken another step in the long road toward its restructuring by absorbing the balance sheet of Laiki Bank, the banking regulator said yesterday.
The absorption of Laiki’s balance sheet into BoC’s books took place late on Monday. Sources close to the Central Bank confirmed reported figures placing BoC’s assets at €38.3bn and liabilities at €34.7bn.
The BoC has equity capital amounting to €3.6bn, of which €3.1bn from a 37.5 per cent ‘haircut’ on uninsured deposits at BoC, plus another €500m from the sale of assets of the ‘bad’ Laiki.
These estimates are provisional, the sources stressed.
Under a decision by eurozone finance ministers taken in March, Laiki is to be wound down with the full contribution of equity shareholders, bond holders and uninsured depositors. Laiki is to be split into a good bank and a bad bank. The bad bank will be run down over time while BoC would absorb the good bank.
Laiki would transfer to BoC all of its assets, property titles and rights apart from certain exceptions. The exceptions relate mostly to Laiki shares in subsidiary companies outside Cyprus, Laiki assets and rights in the United Kingdom and Greece, and provisions relating to the offsetting of loans owed towards Laiki with deposits held therein.
In return BoC will take on some of Laiki’s obligations, including the €9bn of Emergency Liquidity Assistance debt that Laiki has accumulated, as well as Laiki’s insured deposits (i.e. deposits of less than €100,000).
The BoC, itself currently under administration by the Central Bank, is headed by an interim board of directors.
The bank is also struggling with capital restrictions, put in place to avert a feared bank run. A Central Bank spokeswoman said yesterday that a further and substantial easing of restrictions should be expected on Friday.
Under an agreement between Cyprus and international lenders (the Memorandum of Understanding of April 2013), 37.5 per cent of uninsured deposits in BoC will be converted into class A shares with full voting and dividend rights, providing the largest part of the capital needs with additional equity contributions from the legacy (old) entity of Laiki. The remaining uninsured deposits of BoC will be temporarily frozen.
Should the 37.5 per cent conversion turn out not to be enough in order to secure the 9 per cent capital adequacy that BoC requires, then up to a further 22.5 per cent of uninsured BoC deposits may be converted into Class A shares. In other words, 60 per cent of the uninsured part of BoC deposits is susceptible to a ‘haircut’ or conversion into equity. The remaining 40 per cent of uninsured BoC deposits is for the time being not subject to such conversion but 30 per cent of it remains frozen.
To ensure that BoC’s 9 per cent capitalisation targets are met, a more detailed and updated independent valuation of the assets of BoC and Laiki must be completed by the end of June. The valuation’s terms of reference will be agreed in consultation with the European Commission, the European Central Bank and the International Monetary Fund - the troika of international creditors.
According to the MoU, “Following that valuation, and if required, an additional conversion of uninsured deposits into class A shares will be undertaken to ensure that the core tier one target of 9 per cent under stress by end-program can be met.”
Sources tell the Mail that, following the valuation which should be completed by end of June, it would take about an extra 90 days to sort out the final balance sheet for BoC. That would determine the final ‘haircut’ on BoC uninsured depositors - essentially the new shareholders - and thus pave the way for a shareholders AGM to elect the new bank board.
The same sources said the Attorney-general’s office has furnished the Central Bank with a legal opinion, which recommends that BoC’s status of administration should end only once the haircut amount has been finalised. This is now the policy of the banking regulator, the sources added.
Determining the new shareholder base is a key stage toward returning the island’s largest lender to normalcy. But the size of the ‘haircut’ will depend also on the success or failure of a string of lawsuits filed by depositors against the decision to seize their cash.
The government is anxious that BoC return to normal business as fast as possible, arguing that this would end the period of uncertainty and inject some confidence back into the liquidity-starved market. But commentators have highlighted another factor: a power play between the government and the Central Bank. A law passed in March has given the banking regulator sweeping powers over commercial banks.
Still, government spokesman Christos Stylianides yesterday sounded an upbeat note on BoC’s prospects:
“The efforts for the survival and rescue of the Bank of Cyprus are on a solid path. The crisis is not over..but positive signs are emerging indicating that we are in a better position than a month ago,” Stylianides said.
Another important step is the appointment of a new CEO, who needs the blessing of the Central Bank. Central Bank Panicos Demetriades yesterday met with an undisclosed number of candidates for the job. Among them, according to media reports, was the leading contender, 58-year-old Michalis Kolakides, currently deputy CEO of Eurobank EFG.
The absorption of Laiki's balance sheet into BoC's books took place late on Monday