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Our view: Successful share issue would be vote of confidence for BoC

June 25, 2014



FINANCE minister Haris Georgiades urged the banks to bolster their capital through share issues on Monday. In an interview on CyBC radio, the minister said the banks should follow the example set by the government, which successfully raised €750 million from the markets only last week.

This was a polite way of pressuring the Bank of Cyprus to go ahead with a share issue that members of its board oppose, even though Georgiades made of a point of saying that he was referring to all systemic Cypriot banks and not just the BoC. The other banks were the co-ops, which were re-capitalised by the taxpayer, Hellenic, which had carried out a share issue this year and Russian Commercial Bank that is not known to have any capitalisation concerns.

But the minister could not be seen to be singling out the BoC nor could he have issued direct orders, which was why he drew parallels with the example of the government. Technically speaking these are two completely different cases. The government is in an assistance programme and has put public finances in order, whereas the non-performing loans (NPLs) of the banks are close to 50 per cent and on an upward path. There is uncertainty over their ability to recover a substantial part of these and after last year's bail-in the banks are having difficulty keeping deposits, let alone being able to borrow funds.

The share issue the minister was referring to is quite different. While it would substantially improve the capitalisation of the BoC, it would also change the ownership regime, diluting the shareholding of the existing shareholders. This would be grossly unfair because the bank took almost half their uninsured deposits in the bail-in and gave them shares in exchange. And now if new capital is issued, it would dilute the value of the existing shares, thus penalising shareholders a second time.

This is why many members of the BoC board are opposed to the idea of a new share issue, which the CEO seemed to think is the only way forward. The Governor of the Central Bank also shares this view and, a few weeks ago, met the members of the board to urge them to issue new capital. Georgiades, in effect, was telling the BoC directors to heed the Governor's advice, ahead of tomorrow's scheduled board meeting.

The truth is that the board does not have a choice. An injection of new capital would help the bank get through the planned stress tests this autumn, put it on a healthier footing and also boost confidence. If foreign investors cover the issue, which will be in the region of €800 million, it would be a big vote of confidence in the BoC that could help its recovery. This is what the members of the board should bear in mind in taking their decision tomorrow.

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Source: Cyprus Mail


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