Bank of Cyprus Said to Mull Capital Boost Before Stress Test

Jun 25, 2014 7:20 am ET

(Adds Cypriot central banker’s comments in third and last two paragraphs.)

June 25 (Bloomberg) -- Bank of Cyprus Pcl, the Mediterranean nation’s biggest lender, is weighing a capital increase of as much as 1 billion euros ($1.36 billion), said three people familiar with the matter.

The bank may raise between 800 million euros and 1 billion euros by selling shares, said the people, who asked not to be identified because the discussions are private. The board of directors tomorrow will discuss “funding and capital options that could expedite the implementation of the group’s restructuring plan and, in tandem, could further strengthen the group,” the Nicosia-based lender said in a filing yesterday.

The governor of the Central Bank of Cyprus, Chrystalla Georghadji, said today that the island’s regulator will urge Bank of Cyprus to raise capital and use proceeds to repay part of the Emergency Liquidity Assistance it has received from the European Central Bank.

“It would be prudent for the Bank of Cyprus to raise capital,” Georghadji told reporters in Nicosia. “We can’t force them to do so.”

The Cypriot economy veered to the brink of collapse in 2013 as the balance sheets of its banks ballooned to several times the size of the national economy and then suffered a nearly fatal blow from a writedown on holdings of Greek bonds.

Under an emergency funding deal in March 2013 backed by euro-area and International Monetary Fund loans, Bank of Cyprus absorbed its nearest rival, Cyprus Popular Bank Pcl, and seized nearly half of all uninsured deposits from its customers.

Confidence Shaken

With euro-area stress tests this year, the island’s central bank has urged Bank of Cyprus to boost capital this summer, before bigger lenders in Europe absorb funds from investors, two of the people said. The central bank has pushed the company to build sufficient buffers in time to ensure a strong result in the test after last year’s losses on deposits and the imposition of capital controls shook confidence in the country’s financial system, they said.

Last week, Cyprus became the euro area’s final bailed-out nation to return to international markets amid a surge in demand for the region’s higher-yielding debt. It raised 750 million euros in a sale of five-year notes.

Finance Minister Haris Georgiades said on June 18 that Cypriot banks will benefit from the sovereign’s return from bond-market exile, and find it easier to attract capital.

The central bank’s Georghadji said today that she sees loan rates falling in Cyprus after the completion of the ECB stress test, which will also give the government enough leeway to consider lifting remaining capital controls. The country’s banking system has stabilized since the lifting of internal capital controls, she told reporters.

She said she is confident the island’s banks will pass the ECB stress test, even as the economy is projected to contract by 4 percent this year and commercial lenders still need to build effective mechanisms to deal with ballooning non-performing loans.

--With assistance from Paul Tugwell in Athens.