RBS Veteran Pulls Cyprus Bank From Brink Year After Euro BailoutMaria Petrakis and Elisa Martinuzzi
John Hourican is no stranger to a banking crisis.
The native of Ireland, where property loans sank the financial industry, spent 16 years at Royal Bank of Scotland Group Plc, which in 2008 received the world’s largest bank bailout to date. He left a year ago following a scandal over interest-rate rigging. Now, he’s running Bank of Cyprus Pcl, where he must whittle down a lender that ballooned to twice the Mediterranean island’s economy.
“This is a great case study in what you shouldn’t do with an island bank,” Hourican said in an interview in Nicosia, the Cypriot capital. “This is a story of the entanglement of the financial system with a country’s destiny.”
It falls to the 43-year-old to unpick the Gordian Knot of Bank of Cyprus, an endeavor key to the success of the 10 billion-euro ($13.9 billion) international financial rescue of Cyprus a year ago this month. In the same way that RBS grew too big to fail for the U.K. economy, Bank of Cyprus doubled in size and expanded abroad while being anchored in a country that couldn’t afford the bank not to survive.
Hourican swapped offices in a glass building by the 17th century Spitalfields market in the City of London financial district for the colorless surroundings of Nicosia’s 1970s concrete in October. That was eight months after he resigned as investment banking chief of RBS in the wake of the Libor-rigging scandal, in which he wasn’t accused of any wrongdoing.
“If he wants to go back to the City, he needs to save Bank of Cyprus,” said Alexander Apostolides, a lecturer in economic history at the European University Cyprus. “His skin is in the game in a way someone else’s might not have been.”
As chief executive officer, he is busy selling assets, poring over the daily movements of deposits and trying to recover money from bad loans. They soared to 53 percent of gross lending in part as budget cuts demanded in return for European Union and International Monetary Fund aid weighed on the Cypriot economy. The number of branches in Cyprus has been cut to 130 from 203 and the workforce scaled back.
As part of the March 2013 funding deal for the island, Bank of Cyprus absorbed its nearest rival, Cyprus Popular Bank Pcl, and seized nearly half of all uninsured deposits from its customers to resuscitate the bank.
The “bail-in,” prompted by 4.5 billion euros of losses at Cypriot banks from Greece’s sovereign debt restructuring, was accompanied by the euro area’s first capital controls.
Those restrictions, including the suspension of trading in the Bank of Cyprus’s stock, remain in place 12 months after the rescue to provide a bulwark against total financial collapse and still fragile confidence.
European leaders are trying to draw a line under the debt crisis sparked by Greece in 2009. Ireland emerged from its bailout program in December and Portugal is set to follow in May. Key to containing the risk of future crises is the creation of a single mechanism to manage bank failures through a common plan that will see more stakeholders being bailed in.
Cyprus’s rescue, in which debt holders and uninsured depositors absorbed bank losses, is still a work in progress and one that may determine how future crises are tackled.
As long as Cyprus’s biggest bank and one of its largest employers remains in intensive care, it will remain a drag on growth, while a falling property market and shrinking economy are keeping the stakes high. Finance Minister Haris Georgiades said on March 10 that while he was optimistic about the banks, the main challenge was to re-establish credit to the economy.
Hourican calls Bank of Cyprus “an experiment that cannot fail” and draws on his experience at RBS.
He was assigned to shrink its faltering investment-banking business in late 2008 just as the Edinburgh-based lender was about to receive Britain’s biggest bailout. He cut 10,000 jobs, reduced the balance sheet and exited the equities business.
“We were very clinical about what we were doing, why we were doing it, who we were doing it for and how does it create value,” Hourican said on March 5. “We did a lot of heavy lifting towards an objective and that’s what we’re doing here.”
Hourican said he’s not engaging with investors that have expressed an interest in buying a stake in Bank of Cyprus betting its valuation will bounce.
The new management “seems to be addressing its problem loans and cutting costs,” said Athanasios Vamvakidis, head of Group of 10 currency strategy at Bank of America Merrill Lynch in London. “The challenges ahead are still substantial, but they seem to be doing the right things.”
A month after taking the helm in Nicosia, Hourican chaired his first annual meeting with aggrieved shareholders, people who eight months earlier had more than 100,000 euros in the bank before 47.5 percent of their savings were seized.
The Bank of Cyprus shares received in return, one told Hourican, weren’t worth enough to buy a packet of cookies.
Hourican listened patiently. With bad loans rising and the economy contracting, he told them there would be no quick and easy fixes. The shareholders cum deposit holders are gradually realizing that withdrawing deposits limits the ability of the bank to recover and reward them, Hourican said.
On Feb. 28, the bank reported a loss of 2 billion euros for 2013, the third consecutive annual loss. While rising loan delinquency continued to exert pressure, deposit outflows abated in the fourth quarter in a sign of “good behavior.” The bank duly released another 940 million euros of deposits. It will report final results for 2013 at the end of this month.
“He needs to walk a fine line because his shareholders are also his deposit holders whose money is stuck in the Bank of Cyprus,” said Apostolides. “He needs to give them confidence in order not to see too much capital flight and I think he’s been very good at that.”
Bank of Cyprus’s Restructuring and Recoveries Division, assigned to Hourican’s ex-RBS colleague Euan Hamilton, has brought in British bank strategies of acting early when clients are set to not service their debts.
It’s “a little bit like rugby, which is not a very eastern Mediterranean game, but it’s a game of inches,” says Hourican. “You’re constantly trying to move forward, backwards and forwards, the strategy is one of detail, it’s borrower by borrower, process by process, it’s onshore versus offshore, it’s about making progress steadily.”
At Bank of Cyprus, Hourican is tasked with finding other banks that will step in and replace the loans, negotiating a way out from clients or alternatively assisting them in selling bonds to swap with the loans, he said.
“There are no weird and wonderful derivatives,” he said.
The Cypriot economy contracted at an annual rate of 5.1 percent in the fourth quarter and is forecast by the European Commission to shrink 4.8 percent this year. Unemployment will peak at 19 percent in 2014, the Commission said.
At RBS “it was really a matter of fighting a rearguard action, constantly reducing staff,” said Christopher Wheeler, an analyst at Mediobanca SpA in London. “In terms of Bank of Cyprus, yes, he knows how to deleverage, but it’s tougher.”
The Ukraine crisis has added another wrinkle: while Hourican says he’s confident about the sale of the bank’s Ukraine unit to Russia’s Alfa Bank going through, the threat of EU visa sanctions and Ukraine’s financial woes may further dent both business and tourism in Cyprus.
Revenue from tourism last year rose 8 percent, with Russians among the best-spenders. Hourican’s vice-chairman of the board is Vladimir Strzhalkovsky, a former CEO of OAO GMK Norilsk Nickel, Russia’s largest mining company.
Cyprus became a haven for Russian individuals and businesses to reinvest back home, forging tight financial links between Nicosia and Moscow.
“We have to be pragmatic as a small island nation,” said Hourican. “This island has been to date, certainly in recent years, far better served by its relationships with the north eastern geography than it has been with its western geographies. I think that Cyprus should look to where it is fed.”