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Bank of Cyprus has stayed silent on the issues at hand (CNA)

ALTHOUGH there is nothing official yet, one of the issues Cyprus’ lenders would be looking to address is the large size of the banking sector compared to the island’s GDP.

Cyprus’ Central Bank Governor Panicos Demetriades has already signalled that authorities would be looking into the matter with the help of experts and the International Monetary Fund, which along with the ECB and the EU, make up the so-called troika of lenders currently putting together the island’s bailout.

“It is a fact … that the banking sector is very large compared with the size of the Cypriot economy,” Demetriades said in a speech at the end of last month.

Including cooperative banks, the sector is eight times the GDP – 5.5 times if only domestic lenders and co-ops are included.

In the next few months, the Central Bank of Cyprus, with the help of experts, will carry out an in-depth examination” to determine the best size of the sector and the best structure, Demetriades said.

The International Financing Review (IFR), reported recently that Cyprus’ bailout could result in consolidation of the industry and a partial merger of the two biggest banks – Popular (CPB) and Bank of Cyprus (BoC).

Quoting Michalis Sarris, chairman of CPB, IFR said this was a kind of thing that is done when the situation is calm.

“It’s hard to do when there is so much uncertainty,” Sarris told IFR. “I think co-operation makes sense in a number of areas,” he said. “We’re all active in a number of countries such as the UK, Serbia, Ukraine and Greece. I think there could be synergies there that could save capital and reduce costs.”

BoC has not said anything on the matter yet, presumably because there is nothing concrete.

Both lenders have asked for state assistance to cover shortfalls in their capital, battered by their exposure to Greek debt – CPB needs at least €1.8 billion while BoC said it needs €500 million in temporary assistance.

But analysts remain cautious, pointing out at the absence of a plan at this point.

Would they be asked to sell their loan portfolios, dump overseas subsidiaries, cut lending or reduce deposits?

Marios Demetriades, fund manager at Piraeus Bank, suggested that some of the expansion undertaken by the two big banks abroad did not really make sense.

Regulators may now force them to focus on the core operations and get rid of overseas assets, although at this time, it could be at a loss.

It does not mean it must be done immediately, Demetriades said.

But cutting overseas operations would mean the head office would not need the same number of staff to support them.

Admittedly, banks are overstaffed, but according to Demetriades, they will try to avoid layoffs.

Popular has already said it would not replace retiring staff, a policy that BoC also appears to be following. 

Both lenders have shut down branches and staff at Popular, which is now state-controlled will see their wages cut by an average 12.5 per cent.

BoC has not said anything about wage cuts yet but the figure floating in the hallways is 15 per cent.

Merging the two lenders could raise other issues related to competition.

Financial analyst Alecos Sergides also believes that a merger would have the opposite result.

“How can you speak of cutting down the size and speak of merger,” he said.

Sergides said the biggest problem faced by the banks is their excessive loan exposure – not only in Cyprus.

And the main problem are the banks’ loans in Greece.

Together, the two lenders have a private and business portfolio of around €23 billion, with ever increasing non-performing loans due to the bad state of Greece’s economy.

The CB Governor said his aim is to detach the Cypriot banking sector from Greece by turning the branches there into subsidiaries.

“Greece will not accept this, unless they are adequately capitalised,” said Piraeus’ Demetriades.

That would mean Cyprus putting up more billions to satisfy Greece’s Central Bank.

Difficult as it may be, if it does go through it would mean at least that if things in Greece worsen, the risk for Cypriot banks would end there.