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Josef Ackermann: Still Committed to Cyprus

Josef Ackermann: Still Committed to Cyprus

Bank of Cyprus will continue to serve the needs of the Cypriot economy, not only because this is consistent with its traditional role but also because it is in the best economic interest of its shareholders, says Chairman Josef Ackermann. 

By Antonis Antoniou


Were you acquainted with Cyprus and its economy before taking over as Chairman of the Board at Bank of Cyprus?

Josef Ackermann: I was broadly acquainted with the adjustment challenges facing Cyprus’ financial system, the Cypriot economy and Bank of Cyprus more specifically. Naturally, I got a complete picture once I assumed my duties as Chairman of the Board, as the more detailed information was not publicly available. I did, however, have sufficient information to appreciate the new realities facing the Bank after the events of March 2013, and the challenges and opportunities that lay ahead.


GOLD: Since the Eurogroup’s decisions on Cyprus in 2013 and a subsequent period of deep recession, the Cypriot economy has demonstrated strong growth. Do you believe that we are now on the right track and that this growth is sustainable?

J.A.: I am delighted to note Cyprus’ strong growth since 2015, which gained momentum during 2016 and the first half of 2017. This has largely reflected the good policies implemented by the authorities during Cyprus’ three-year Troika-supported adjustment programme and the sacrifices of the Cypriot people but also positive exogenous  developments. The strong growth, while evident in many sectors of the economy, has reflected primarily a steep expansion in the tourism sector, continued strength in the professional services sector, and a recovery in construction activity, albeit from a very low base. This recovery has a large cyclical component and, in some sense, is rather fragile and narrowly based. Cyprus’ growth outlook is fairly positive. To solidify and support this outlook, going forward, it is essential to maintain fiscal discipline and regain the momentum in the implementation of key structural reforms, as recognized by the authorities, particularly in the areas of further enhancing the business environment, reducing rigidities and the cost of doing business, and improving the effectiveness of the legal system. Such policies require a broad political consensus for their adoption but their implementation would pave the way for attracting foreign direct investment, further diversifying the economy and boosting the growth of potential output. High potential output growth is necessary to facilitate an acceleration of the ongoing deleveraging process, as the public and private sectors are both still highly indebted.


GOLD: How significant is the problem of non-performing exposures (NPEs)?

J.A.: The level of non-performing exposures (NPEs) in the banking system remains high, notwithstanding the major reduction in such exposures achieved by Bank of Cyprus and, in part, by the other banks. A steep reduction in NPEs remains a key priority. As we all know, the origins of this problem reflect inter alia the buildup of imbalances in the banking system prior to 2013, the scars of the events in March 2013, the impact of the two-year recession that followed, but also a significant incidence of strategic defaults – a reluctance by some borrowers to service their bank loans even though they have the ability to do so. Sustained strong growth would certainly help, but, as I mentioned in my speech at the recent Annual General Meeting of shareholders, a steeper reduction and the eventual elimination of NPEs depend not only on the banks’ actions but also on the engagement of borrowers and, more broadly, the whole of Cypriot society. To achieve accelerated progress in reducing non-performing loans we need first and foremost a stronger commitment by individual borrowers, both large and small, to cooperate with their bank and to adhere to the principle that borrowers should respect and honour their financial obligations. 


GOLD: On the matter of those strategic defaulters, how can banks increase pressure on them and, more importantly, how can you differentiate between strategic defaulters and borrowers who genuinely cannot service their loans? 

J.A.: There is no readily available clear indicator of strategic defaulters but such a practice can be discerned through detailed information on the economic and financial position of individual borrowers and their close family members, their spending patterns and the size of their debt servicing liabilities. The available rough estimates of such practices rely on broad information and judgments. Lack of cooperation, however, from borrowers makes such judgments more difficult but the process of solving all non-performing loans is the same. Once again I would encourage all borrowers with remaining non-performing loans to come forward and cooperate fully with their banks. This would make it possible to find appropriate solutions to their debt-servicing difficulties that are consistent with their financial constraints, their income opportunities and their true debt-servicing abilities, including, where appropriate, debt write-offs and DFASs. As the Bank has emphasized, we also continue to be mindful and protective of the vulnerable groups.  


GOLD: What is the real problem with the Cypriot banking system? The high level of NPEs or the amount of private debt?

J.A.: The real problem with the Cypriot banking system relates to the legacy inherited from the fragile nature of the steep expansion prior to 2012 in the size of bank assets and liabilities. The relative size of the banking system is still large in comparison with the rest of the Europe and continues to shrink. The declining level of gross bank exposures reflects, in the case of Bank of Cyprus, an increasing reduction in NPEs through debt write-offs and debt-for-assets-swaps (DFASs). As a consequence, the declining level of bank loans compresses interest rate margins and bank revenues and puts pressures on bank profitability. It is true that high levels of private debt have contributed to the emergence of NPEs and are constraining the expansion in the demand for new bank credit. However, the restructuring in the economy and in bank non-performing loans over the past few years, as well as the recovery in growth and the improved outlook for the cash flows of many businesses, have given rise to a strong pickup in the creditworthy demand for new bank loans, albeit from a low base. For example, Bank of Cyprus roughly doubled its new loan issuance in Cyprus in 2016 over the previous year and again in the first half of 2017 over the first six months of 2016. Naturally, we would like to see a further strong increase in credit demand in the period ahead. Speaking for Bank of Cyprus, the admittedly high level of NPEs and the challenges that still face the Bank should not mask the great progress that has been achieved since the painful restructuring of March 2013 in enhancing the financial health of the Bank, as highlighted in its recent financial statements. Let us not forget that, in March 2013, the Bank came very close to sharing the fate of Laiki Bank. What a difference four years can make!


 GOLD: Some observers are of the opinion that European Banks are over-regulated. What is your view?

J.A.: I do not believe that European banks are over-regulated at present, even though the uncertainties about how MREL (Minimum Requirement for own funds and Eligible Liabilities) might eventually be calibrated and its implementation phased in over time among banks with different sizes could pose serious challenges down the line. What is of concern in some cases is the challenge that the regulators under the Single Supervisory Mechanism are facing in maintaining an appropriate balance between micro and macro prudential considerations for banks operating under different economic conditions.


GOLD: Do you believe that the decision to list Bank of Cyprus on the London Stock Exchange was correct? We haven’t seen any increase in the share value or the volume of transactions.

J.A.: It was an excellent decision and we have already seen some of the expected benefits. The volume of transactions on the LSE has risen above the average level of transactions in the Athens Stock Exchange. In addition, the market has handled very well the recent sale of half of the holdings in Bank of Cyprus by the Laiki Administrator, equivalent to almost 5% of all shares outstanding. The depth of the market was demonstrated by the large oversubscription to the share offer, while the share price in fact increased marginally after the sale. We continue to aim at achieving a premium listing in due course, that would offer even more benefits to Bank of Cyprus and its shareholders.


GOLD: Four years after the 2013 crisis, Bank of Cyprus appears to have regained the trust of its clients and of the Cypriot community in general. How satisfied are you with the current situation and what is your ultimate goal?

J.A.: I am gratified by the substantial progress that has been achieved by Bank of Cyprus in regaining the trust and confidence of our clients and of Cypriot society in general since the dramatic events of 2013. Our ultimate goal is to nourish and enhance further this confidence and trust. The Bank’s strategy remains centred on becoming a stronger, safer and more focused institution, capable of serving the needs of our clients, supporting the recovery of the Cypriot economy and delivering appropriate returns to its shareholders over the medium term.


GOLD: Bank of Cyprus has been seen as a genuine “pillar of society” in Cyprus since it was founded in 1899. Today, many people feel that Bank of Cyprus is “no longer Cypriot”, especially as the main shareholders and most of the Board members are non-Cypriots.  Is the Bank dedicated to making money for its shareholders only or is it still dedicated and loyal to Cyprus as well? 

J.A.: There is no conflict whatsoever between the best interests of Cyprus and the best interests of the Bank of Cyprus, its Board and its shareholders, whoever they may be. We at the Bank are very aware of the origins of Bank of Cyprus and its traditional principal role in the Cypriot economy and banking system. We are committed to maintaining and enhancing further this role. It remains committed to serving the needs of its clients and the Cypriot economy, not only because this is consistent with its traditional role but also because it is in the best economic interest of its shareholders. As I have indicated on a number of occasions, the Bank and the Cypriot economy are in the same boat and we need to work together with the whole Cypriot society. The Cypriot operations of the Bank account for 90% of total bank gross loans and deposits, and the Bank has an increasing share in the total local loan and deposits market. Moreover, despite its incorporation in Ireland and its listing on the London Stock Exchange, the Bank of Cyprus remains headquartered in Cyprus, its Board meets in Cyprus and its shareholders’ meeting take place in Cyprus. Bank of Cyprus has been, and will remain, a Cypriot bank.


GOLD: It is not obvious to many people why a senior, prominent banker like yourself would accept the position of Chairman of a small bank like Bank of Cyprus. What was the attraction of Bank of Cyprus and the island?

J.A.: I recognize that some people in Cyprus seem to be fascinated by my decision to assume my current position with Bank of Cyprus! However, recent trends in investor placements have demonstrated that both Bank of Cyprus and Cyprus itself are attractive destinations indeed, even though there is scope to enhance this image further. I joined the Board of Bank of Cyprus because it was challenging and because I felt I could help make a difference. As you may know, during my previous professional activities, I had been very intimately involved in the discussions and policy deliberations facing the eurozone and its banking system, as well as the difficulties faced by the highly indebted European countries, including Greece. I was deeply involved in the sovereign debt restructuring for Greece by private creditors in 2011-12 and I have always been attracted to Greek and Cypriot history and culture. My decision was, in fact, a natural extension of my previous commitment and involvement.


GOLD: How much of your time do you spend in Cyprus and at the bank?

J.A.: My engagement with the Bank of Cyprus is not limited solely to the actual time I spend in Cyprus. But in a narrow sense, I tend to spend about a week every month in Cyprus. I am currently residing in Zurich and I have no plans to change my permanent residence. 


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