Piraeus Bank issue depends on protecting shareholder value
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Bank of Cyprus Pcl (BOC) is seen maintaining its double digit income growth while at the same time keeping cost increases under tight control with a good possibility of delivering another set of satisfactory results in 2007, said Charilaos Stavrakis, Cyprus CEO and Group Deputy CEO.
BOC delivered an excellent performance during the first nine months of 2006, lifting total income by 26% while cost increases were limited to 2,4%, while net profits surged by 158% YoY to CYP 130 mln or EUR 226 mln. A decline in provisions and higher-than-expected gains from investments also contributed to the excellent performance.
The bank has said it will beat its own year-end forecast of CYP 160 mln, with the Financial Mirror predicting that profits could exceed CYP 180 mln.
Stavrakis is confident that BOC will deliver satisfactory results in 2007 on the expectation that the bank will maintain double digit income growth while keeping cost increases at 8,5% over 2006.
“The introduction of new Central Bank regulations, changes related to euro preparations and many other issues have been factored in and taken into consideration,” said Stavrakis who cautioned that a sudden deterioration of the economy or a price war among banks could negatively affect his bullish expectations.
Stavrakis points out that with the bulk of profits originating from core banking operations, BOC is well cushioned from adverse developments in international markets that may affect anticipated trading or investment gains, which nevertheless is being generated year-after-year by the BOC Treasury.
“There is no ideal mix, but I would favour an 80:20 ratio (80% core banking and 20% investment/trading).”
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Housing loans
Part of the reason why BOC managed to increase its interest income is its ability to increase its market share of housing loans. This, nevertheless, raises the concern that in case of a decline in property prices or repayment difficulties by borrowers if the economy is negatively affected, it may lead to higher provisions as was the case with stock market related loans in the 2001-04 period, which played havoc with the results.
“We have been successful in increasing our share of housing loans, but not through increased risks. The ratio of loans to value is still conservative and we are meeting Central Bank guidelines (lending up to 70% of value of the property),” said Stavrakis.
He added that BOC is grabbing market share as it is well positioned with very user-friendly products to service a growing market of people resorting to housing loans to finance property purchases.
He is also a firm believer of the theory that the last thing a borrower will want to do is default on his/her house and risk foreclosure.
Citing a Basle II guideline, Stavrakis points that the capital requirement on housing loans is 35% while in some cases concerning corporate loans, the capital requirement imposed on the banks is 10%.
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Staff Pension Fund
Stavrakis confirmed that the BOC Staff pension fund liability has been fully covered at the end of September 2006 compared to a shortfall of CYP 116 mln in 2003, helped mostly by the impressive appreciation of the bank’s share price and increased contributions to the fund.
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Share options
In contrast to Laiki Bank which recently announced a EUR 2.000 per person cash bonus to all staff, Stavrakis insists that the BOC scheme of giving share options to staff, which this year will cost some CYP 2.5 mln or EUR 4.3 mln and probably the same next year, is a much better way of rewarding performance.
“We believe a share option scheme is better because it aligns the interests of employees with those of shareholders,” insists Stavrakis, stressing that the full cost of the share option scheme is deducted from the profits and is treated as an expense.
In fact, Stavrakis believes that following his appointment to the bank’s board earlier this month, he will be in a better position to bring the interests of the two (employees and shareholders) closer for the benefit of all.
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Stavrakis would not be drawn into discussing a possible takeover bid from
His only comment was, “whatever sort of proposal is presented to us, we shall consider it seriously and evaluate it carefully with only one concern in mind, that it should be good for shareholders, and also for employees and the country in general”.
“Given the track record of the present management, the opportunities of further restructuring in Cyprus and the expansion in Greece as well as the promising prospects of the expanding international presence such as in Russia, the benefit to shareholders of an autonomous expansion cannot be lightly dismissed,” concluded Stavrakis.
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