By Ben Rosenburg
In line with our previous analysis the Bank of Cyprus has now decided to go ahead with a capital increase of up to one billion euros. The bank’s management decided last Friday to proceed with exploring international investor interest for a capital increase at a rumoured price of around 25-30 cents per share. Depositors who saw the value of their holdings depreciating amid a surge in non-performing loans and trading in the shares suspended will face another blow as their stakes will be significantly diluted.
On the basis of an offering price of 30 cents a share the bank will have to issue around three billion new shares in order to reach the one billion euro target. As a consequence the bank will then have around 7.8 billion issued shares and a nominal equity of around 3.5 billion euros whereas at the end of the first quarter the bank had 4.8 billion issued shares and equity of around 2.5 billion euros. Consequently the book value per share will drop from 52 cents per share to 45 cents per share. Given that only a small percentage of non-performing loans are provisioned for and furthermore keep rising, the real equity is probably closer to three billion euros after the capital increase which would translate into a book value of 38 cents per share. Shares in a distressed/stressed bank normally trade between 30-50 per cent of book value which would give us a theoretical fair price of between 11.4 cents and 19 cents per share.
At the same time the bank has announced plans to be relisted on the Cypriot and Athens’ stock exchange which in our view will probably happen sometime in September.
What does all this mean for existing deposit/shareholders?
Existing shareholders will be given the opportunity to participate with a limited amount in the new share offering. However considering the fact that deposit holders never wanted to become shareholders, rather they were forced to do so as part of the bail-in, we believe the appetite from existing shareholders will be very limited.
Once the shares are relisted on the stock exchange they can be freely traded, but clients are left with deposits which will still be subject to strict cross border transfer restrictions
The fact that the bank is planning to be relisted on the stock exchange once the capital increase has been successfully concluded is good news in a way as every shareholder can trade the shares freely and transparently. However what clients may overlook is the fact that the value of the deposits -in case they are contemplating selling them – will decrease significantly the moment the relisting takes place. International investor with a long term view will most likely not be interested in acquiring deposits only, as the downside risk by far outweighs any upside.
Despite the capital increase which we believe will be successful, the situation at Bank of Cyprus is still dire. In a recent report the IMF concluded click here that Bank of Cyprus’ liabilities toward euro-area central banks total almost 60 per cent of Cypriot gross domestic product. The bank has “limited collateral buffers”, and non-performing loans ballooned to about 55 per cent of its gross loans, or 14.5 billion euros, in the first quarter of this year. Tendency rising!
The only party which will probably be still interested in buying BoC deposits will be real estate developers as they can off-set these deposits with money they owe to Bank of Cyprus. However, the deposit holder should be reminded that the purchase price will be received within Cyprus and not on an overseas account i.e. the funds received will still be subject to cross border transfer restrictions.
So why not wait until cross border transfer restrictions are lifted which is supposed to happen at the end of 2014?
This would be of course another option, but we believe it is unlikely that all cross border transfer restrictions will be lifted at the end of this year. The Cypriot economy seems to have stabilised on the one hand and tourists are rushing back to the island with suitcases full of much needed money. On the other hand, however, the stubbornly high unemployment rate and the unprecedented high level of non-performing loans which constrains the ability of banks to supply credit to the economy makes a quick recovery rather unlikely. The IMF has recently confirmed that the recession in 2014 might be less severe than expected, but at the same time predicts that the recovery in 2015 will be more shallow than initially believed.
The removal of domestic transfer restrictions was a good test case as to what would happen if cross border restrictions were lifted too early and too quickly. Confidence in the fate of Bank of Cyprus has not really been restored, as otherwise deposits with Bank of Cyprus would not have been decreased by an enormous amount of one billion euros in the first quarter alone. It looks like that as soon as clients have the opportunity to move money away from Bank of Cyprus they will do so. Hence we don’t think that Cyprus can afford to fully lift cross border restrictions by the end of the year. Instead it looks rather more likely that the government will gradually remove restrictions starting with small amounts which can be transferred abroad on a monthly basis. Should however the economic situation unexpectedly deteriorate (geopolitical events etc.) restrictions will most likely stay in place for a much longer period.