Bank of Cyprus is the largest player in its home market, holding roughly 40% of both domestic loans and deposits. |
Bank of Cyprus PLC is on track to book a return on tangible equity of 10% and resume dividends in 2023 despite growing macroeconomic challenges as it capitalizes on billions in bad loan reductions and recent ECB rate hikes, CEO Panicos Nicolaou said in an interview with S&P Global Market Intelligence.
Cyprus' largest bank has been loss-making for most of the past decade as it worked through a heavy load of nonperforming loans following the eurozone debt crisis in 2011/2012. Now, however, the bank has shed over 95% of its nonperforming exposures, or NPEs, cut costs and booked its highest return on equity since before the financial crisis.
The progress has not gone unnoticed, with U.S private equity firm Lone Star Global Acquisitions Ltd. making three takeover bids earlier this year, all of which were rebuffed.
With an improving rate environment in Europe and the Cypriot economy performing better than the rest of the eurozone, management is bullish on the bank's profitability prospects for next year, according to Nicolaou.
"Rate rises coupled with the reduction of our NPE and cost base will move us to sustainable profitability," the CEO said.
Profit growth
For the first half of 2022, Bank of Cyprus posted an underlying return on tangible equity of 7.3%, its best result since before the eurozone financial crisis, Market Intelligence data shows.
Over the last two years, the bank's return on average equity has moved to positive 4.86% from negative 11.63%.
The bank's balance sheet is heavily geared toward higher rates, with €9.9 billion, or 44% of its average interest earning assets, held as cash balances at the ECB, Nicolaou said. Therefore, any eurozone rate hikes have "an immediate and significant positive impact" on Bank of Cyprus' profitability, the CEO noted.
The bank expects its net interest income to jump by between €100 million and €120 million in 2023 from the €320 million expected in 2022. This will be a key driver in achieving the bank's 10% return on tangible equity goal in 2023 and enabling the resumption of "meaningful" dividend distributions in 2023, subject to regulatory approvals and market conditions, Nicolaou said. He declined to comment on the size of a potential dividend or the dividend ratio.
Bank of Cyprus has not paid dividends since 2011.
Balance sheet cleanup
Bank of Cyprus' NPE peaked in 2014 when the NPE ratio hit 63%, equivalent to roughly €15 billion, Nicolaou said. Putting the amount in the context of Cyprus' €22 billion GDP at the time, the bank's NPEs were equal to almost 70% of total economic value, the CEO said.
Since then, Bank of Cyprus has managed to slash its NPE ratio by more than 57 percentage points and its NPE stock by €14.4 billion, the CEO said. As of June 30, the bank's NPE ratio stood at 5.7% and its NPE stock was €600 million on a pro forma basis, taking into account held-for-sale assets of roughly €612 million, according to the bank's financial statement.
Under Nicolaou, who took over as CEO in September 2019, Bank of Cyprus' problem loan stock and problem loan ratio have decreased roughly threefold, S&P Global Market Intelligence data shows.
The NPE reduction has been "remarkable" given that it was achieved without government support, Nicolaou said. In Cyprus, there are no government schemes like Hercules in Greece or GECS in Italy, which provide state guarantees for the most risky loans and reassure investors interested in buying bank nonperforming loans.
NPE outlook
Preventing asset quality deterioration as geopolitical uncertainty and rising inflation weigh on the domestic economy will be a key challenge for the bank over the coming quarters, Nicolaou said. There is already some pressure on the loan book, but the resilience of the Cypriot economy in the current environment gives Bank of Cyprus confidence new defaults will remain contained and manageable, the CEO said.
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The Cypriot economy is expected to grow 5.5% in 2022, according to central bank data released Sept. 22. This is more than double the 2.6% GDP growth rate expected in the euro area this year, according to European Commission data.
Despite a slight increase in cost of risk expectations, Bank of Cyprus remains on track to reach its targets of reducing the NPE ratio to 5% in 2022 and to 3% in 2025, Nicolaou said. Given the small size of the remaining NPE stock, the reduction will be achieved organically rather than through further portfolio sales, the CEO said. In the first half of 2022, Bank of Cyprus booked organic NPE reduction of €170 million, according to its financial report.
Bank of Cyprus' successful NPE reduction is relevant for the Cypriot market as a whole, Nicolaou noted. With a share of 41% of total loans and 37% of total deposits in the country, the bank holds more sway over its domestic market than many other banks in the eurozone. The bank has a key role to play in the Cypriot economy, Nicolaou said.
Lone Star interest
In August, Bank of Cyprus said it had rejected three takeover proposals made by Dallas-based Lone Star's LSF XI Investments LLC fund, saying they "fundamentally undervalued" the bank and did not adequately address the complexities of acquiring an institution of high strategic importance for the domestic economy.
The latest rejected proposal made in July valued Bank of Cyprus at €1.51 per share, or roughly €674 million. After a short period of considering another proposal, Lone Star said Sept. 27 it would not make a new offer for Bank of Cyprus.
Speaking to Market Intelligence prior to Lone Star's withdrawal, Nicolaou did not comment on the private equity firm's proposals. The bank subsequently said in a statement that it remains confident in delivering on its strategic goals and achieving sustainable profitability as it confirmed its 2023 return on tangible equity target.
The bank's shares dropped more than 9% following Lone Star's announcement. Nevertheless, Bank of Cyprus' shares have outperformed their European peers, rising 26.21% year-to-date compared to a 14.25% decline in the STOXX Europe 600 Banks index.
