March 19, 2013 8:15 pm

Cypriot banks: ugly picture

Depositors unlikely to be assuaged by the offer of shares in lenders

So Cyprus’s lawmakers balked. The principle of imposing a one-off “levy” on depositors of all sizes was problematic enough. The possible carrot of shares in either Laiki or Bank of Cyprus did little to convince the doubters. The proposal could return but a look at the implications illustrates why the lawmakers were so appalled.

Some things about the banks in which the depositors would hold shares are fairly certain. On the asset side of the balance sheet, the two are heavily exposed to Greece and Cyprus. The countries represent about 85 per cent of the loan book at both banks, despite the wide ranging provenance of the deposits that back the assets. Business loans are more than two-thirds of the total. The deterioration of the loan book is also a given. In the first nine months of 2012, Laiki’s bad debt provisions were four times higher than they were in the same period in 2011, while at the Bank of Cyprus the figure almost trebled. Given what is happening in Cyprus, there could well be more to come.

The liability side of the balance sheet looks even uglier. Morgan Stanley estimates that Cypriot banks as a whole need €8bn-€12bn of capital. And there could also be liquidity problems. The traditional strength of Cypriot banks was that loans were funded by deposits, rather than by bonds or other wholesale instruments. But even before this week, that backing was weakening. At the end of September, deposits accounted for 80 per cent of Laiki’s loan book, down from 95 per cent two years earlier. That is still a chunky figure, though, and if the possibility of a deposit levy leads to a bank run, the banks will need some form of liquidity help.

Finally, there is the shareholder structure. The combined market capitalisation of Bank of Cyprus and Laiki is €550m, so the €5.8bn of shares that could be given to depositors would dominate the shareholder bases. What chance that these depositors turned shareholders stick around in the hope of a profit?

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