Bank of Cyprus Depositors Face New Blow With Share Sale

Less than a year after the conversion of almost half their deposits over 100,000 euros ($136,000) into equity, Bank of Cyprus Pcl shareholders face another potential blow as the lender’s management prepares to woo international investors for a stock sale.

The board of directors of the Mediterranean nation’s biggest bank decided today “to proceed with exploring investor interest for a potential capital increase,” according to a Cyprus bourse filing.

The lender was responding to an ultimatum this week by Central Bank Governor Chrystalla Georghadji to raise at least 1 billion euros in new capital by Aug. 8 before euro-area bank stress tests. Such a move was opposed by shareholders, many of them Russian, who are concerned their stakes will be diluted, according to a senior Bank of Cyprus official who asked not be identified because the discussions are private.

Some shareholders asked board members to seek a delay until the end of August to allow them to raise funds to maintain their stakes, the official said. They also told the board that a price of less than 30 cents in the offering would be unacceptable and sought to be given preference over new investors in the stock sale, the official said.

Wiped Out

“A possible capital transaction will be structured in a way that allows the opportunity for existing shareholders to participate,” the lender said in today’s filing. The final terms will be decided at a future board meeting, according to the filing.

As part of the nation’s 10 billion-euro rescue package in 2013, Bank of Cyprus absorbed its nearest competitor, Cyprus Popular Bank Pcl, and was recapitalized last July through the conversion of deposits into shares. Existing shareholders were almost completely wiped out, and 21,000 bank clients who had deposits of more than 100,000 euros saw 47.5 percent of their uninsured savings converted into equity at 1 euro a share.

That left depositors with 81.4 percent of the bank’s stock. Many of those shareholders are Russian as their deposits on the island before the bailout were estimated at $20 billion.

Now, with the value of their holdings depreciating amid a surge in bad loans and trading in the shares suspended, they face dilution from the stock sale, Spyros Stavrinakis, former deputy governor of the country’s central bank, said in an interview in Nicosia yesterday. External capital controls remain in place to protect against financial collapse.

Russian Investors

“These people didn’t want to become shareholders,” he said. “They were forced to do so.”

When Bank of Cyprus depositors elected a new board last September, they gave sizable representation to Russian investors, naming Vladimir Strzhalkovsky, the former chief executive officer of MMC Norilsk Nickel OJSC, as deputy chairman. The Bank of Cyprus has 164 branches in Russia, more than in Cyprus, according to its official website.

Cypriot media published a scanned copy of a letter this week signed by Georghadji, the central bank governor, asking the chairman of the lender’s board, Christis Hassapis, to confirm within three days that the bank would raise capital before the stress tests.

John Hourican, who became CEO last year after previously working at Royal Bank of Scotland Group Plc, said in May that souring loans are the biggest impediment to the country’s banking system and economic recovery.

Bad Loans

Bank of Cyprus’s liabilities toward euro-area central banks total almost 60 percent of Cypriot gross domestic product, according to an International Monetary Fund report on July 2. The bank has “limited collateral buffers,” the report said, and the island’s government has committed to provide additional guarantees of almost 3 billion euros.

Doubtful loans ballooned to about 55 percent of its gross loans, or 14.5 billion euros, in the first quarter of this year, according to a European Commission report this week.

That hasn’t stopped investors from expressing interest in buying a stake, according to a central bank official. Record low interest rates have flooded Europe’s most troubled economies with funds. The official said Bank of Cyprus, which reported a 2 billion-euro loss in 2013, should ride the wave of abundant cash to raise capital and ensure a strong result in the stress tests.

The Bank of Cyprus official said some shareholders are concerned hedge funds that have expressed their willingness to participate in the offering will securitize these loans and buy them at low prices. The two officials didn’t say which hedge funds have shown interest in the capital increase.

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