Cyprus’s banking sector is looking ahead to a period of major change, with domestic mergers and foreign takeovers expected in the coming years.
Joining the EU has internationalised what was a relatively closed domestic loan market, with strict exchange controls, officially set ceilings on interest rates, and little chance of foreign takeovers.
That has all changed since EU accession, and international investors are now becoming more familiar with top names such as Bank of Cyprus (BOC), Hellenic Bank and Laiki Group.
Profits are up, and bad loans are being reduced. After the 2000 stock market crash there were many problems across the financial sector, but it has since recovered, and 2005 was a good year. Leading the way was BOC, which saw its profits after tax rise by 88% in 2004, to C£72.4m (€126m).
Bank of Cyprus has done the most to internationalise its name. In 2000, it took the step of getting a dual listing on the Athens Stock Exchange (ASE), in addition to its primary listing on the Cyprus Stock Exchange.
The result has been greater name recognition among global investors, which, coupled with strong underlying growth in profits, has propelled the stock price upwards.
In April this year, the bank successfully sold a €200m offering of Tier 2 Capital, in the form of 10-year subordinated bonds, which were primarily bought by institutional investors in Greece, the UK, France and Italy. The lead managers were Barclays Capital, UBS Investment Bank and Alpha Bank. This followed the December 2005 C£109m rights issue, with strong international buying of any unexercised rights by institutions.
“Clearly our appetite for capital could not be absorbed by the Cyprus stock exchange,” says Yiannis Kypri, group chief general manager at BOC. “With hindsight it is clear that we would not be where we are today in terms of size without tapping into capital on the ASE.”
About 80% of daily BOC trading volume is now in Athens, and the stock has been bought by a broad base of new European institutional investors. BOC is now covered by research analysts at UBS, Deutsche Bank and JPMorgan, the kind of international coverage that would be hard to attract for a stock only listed in Cyprus.
International expansion
One issue being faced by all banks in Cyprus is the fact that the small domestic market (the population of Cyprus is about 800,000) is mature in terms of lending compared with GDP, and there is a high level of competition.
There is a three-tier system. First come the local commercial banks, dominated by the big three, which are BOC, Hellenic Bank, and Cyprus Popular Bank (commonly referred to as Laiki).
Then there are the former offshore banks, 30 of which elected to stay in Cyprus after EU accession. Most use Cyprus as a regional hub, and have limited involvement in domestic corporate lending. The third tier is the very strong co-operative banking system, which holds about 25% of the loan market, including loans to small businesses and mortgages.
Small businesses
Commercial banks are increasingly offering their services to small businesses, which dominate the Cypriot economy. An institution such as BOC categorises many of these clients as retail customers, and rival bankers say that BOC has set the pace by aggressively offering cheaper funding in order to win business.
But taking away its market share will not be easy, suggests Soteris Eliophotou, senior manager, finance, trading and insurance operations at Co-operative Central Bank (CCB).
The CCB is a fully fledged banking institution, and is audited by external auditors. It acts as a banker to the co-operatives by accepting their surpluses as deposits, and granting loans to those societies in need of credit.
The CCB also acts as lender of last resort for liquidity and general support purposes, as well as providing services such as cheque clearing, cash machine systems and credit cards.
“The co-operative banks are able to respond very quickly to the needs of their customers, and will be able to respond to the commercial banks, which are increasingly targeting our customers,” says Mr Eliophotou, while adding the familiar refrain that “Cyprus is overbanked”.
Against this background, Cyprus does not look particularly attractive on the retail side to new banks looking at entering the market. The one foreign bank that has made a push in recent years is Société Générale, which is building up a branch network and increasing its marketing activity.
But generally there is little incentive for new banks to come in aggressively and try to grow organically. Takeovers are a more likely route.
For the Cypriot banks, the strategy is to stay competitive at home but seek new opportunities overseas. BOC has 4% of the deposit base and 4% of the loan market in Greece, where it has 111 branches.
“BOC already has 40% of its assets and 40% of its profits in Greece, and we are now looking at markets such as the Balkans and Russia,” says Mr Kypri. In April, BOC took the first step towards the establishment of a banking subsidiary in Russia, getting approval from the central bank of the Russian Federation.
Laiki Group is strong in Greece, and since 2001 has expanded as far afield as Australia. Hellenic Bank is also pursuing an overseas expansion strategy.
“Half of our balance sheet comes from international business, with 20% of our balance sheet in Greece,” says George Appios, group chief financial officer at Hellenic Bank, which has 25 branches clustered around Athens and Salonica. Hellenic also intends to expand in eastern European countries such as Bulgaria.
But there is some growth domestically. “Insurance products are being marketed more and more,” says Mr Appios. “With the insurance sector not as saturated as the banking sector, it is offering more growth opportunities.”
Hellenic has an insurance venture with AIG, while German insurer Allianz is offering products via the co-operative banks.
But while Cypriot banks expand abroad, and become better known internationally, they will also inevitably become more attractive targets for foreign banks looking for acquisitions. This may lead to defensive moves towards consolidation among Cypriot banks.
Defensive stations
The first major sign of activity came in April, with the Greek operations of Laiki Group being merged with Greek institutions Egnatia Bank and Marfin Financial Group. Athens Stock Exchange-listed Marfin recently announced that Dubai Investment Group will be buying an initial 31.5% stake. This will create a new super-regional bank with strong links to Dubai.
“Since EU accession, there are no rules prohibiting foreign ownership of local banks, though the central bank must give its approval for any stake over 10%,” notes Michael Kammas, director-general of the Association of Cyprus Commercial Banks.
“Foreign banks may want to buy a small Cypriot bank, and some co-operative credit societies are very large and may wish to merge with a local commercial bank,” says Mr Kammas. “Over the next five years the banking market will undergo a lot of changes, and we see strategic alliances being formed between foreign and local banks, as well as mergers and acquisitions involving local and foreign banks.”