FEARS that institutional investors will pull out from local companies are completely unrelated to President Demetris Christofias’ recent election, and have everything to do with analysts’ misgivings over the Bank of Cyprus’ ability to make good on its promises.
“In my opinion it is not political at all,” a senior financial consultant said.
“The whole situation was created when the Bank of Cyprus (BoC) announced its three-year strategic plan.”
Financial circles initially hinted that fears of economic stability brought on by the election of a left-wing president had put institutional investors under pressure to pull out from local companies.
But the financial consultant said what had affected the market was the BoC’s efforts to conceal its “genuine ability to deliver”, tarnishing the reliability of the whole economy.
On Thursday, the Cyprus Stock Exchange (CSE) general index plummeted 9.7 per cent, following a massive drop in Bank of Cyprus shares.
He said analysts’ primary fear was that if the BoC, as the island’s largest institution, had demonstrated a weakness in delivering on its profits, then this was possibly a problem that extended to the entire economy.
On Wednesday, the BoC announced net profit up 55 per cent to €485 million in 2007 and estimated net earnings of €540 million for 2008.
Analysts said the profits were lower than expected, prompting a 14 per cent drop in shares on the Athens bourse on Thursday. This had an immediate knock-on effect on the Cyprus Stock Exchange (CSE) banking sector, bringing it down 10.24 per cent.
Foreign analysts also said the bank’s three-year business proposal appeared overly ambitious and difficult to achieve.
The Cyprus-based consultant said the BoC had announced an aggressive business plan for 2008-2010, claiming it would double its profits, but had simultaneously reduced its risk provisioning from 0.7 to 0.3.
Effectively, part of this profit is driven by a reduced risk provisioning of almost 60 per cent.
“The investors see this. The profit they announced was close to the numbers they had, but some said they reduced the provisioning to increase profits. Analysts say if the biggest institution in Cyprus had this [problem] maybe it’s happening to the whole economy and they won’t deliver on what they’ve promised in the past,” he said.
He said the bank’s strategic plan showed reduced numbers in 2008 and then an increase in volume in 2009 and 2010. Investors simply perceived this as a shift from 2008 to 2009 and 2010, he said.
“The bank tried to hide this small weakness for 2008 and some could view it as manoeuvring,” he said.
An independent economist said analysts were usually unhappy with profits driven from reduced risk provisioning because they tended not to be profits from an operational increase.
“The profit is partly done by changing the assumptions of risk. It could be construed as financial meddling of sorts. It [profit] could be genuine, but it might not be, which is why analysts don’t like it,” he said.
“Risk provisioning is the amount of money you allocate for your projected losses.
So reducing your risk margin/provisions will increase forecasted profits by definition.
This is not a bad thing if it is accurate… They probably changed their risk provisioning because their losses this year were not as bad as they had initially forecast. But analysts won’t like it because it’s not an operational increase in profits,” he added.
He said other banks would likely try to demonstrate to investors that the problem was not the economy, but the specific bank.
He said: “So far investors haven’t started pulling out. It has done some damage to the market but it is salvageable. Banks and companies will point out it is not a weakness of the system or market, but a weakness in the BoC: about what it said, what it presented and what it said it would do. The numbers are not adding up. Because it happened to the BoC, investors fear it’s likely to happen to others. They will have to show them it won’t and that their policies are stable.”
FINANCE Minister Charilaos Stavrakis said yesterday the CSE general index fluctuation was totally unrelated to the election of Demetris Christofias.
“I am certain it has nothing to do with the new government,” he said.
Stavrakis added that his policy was not to comment on CSE share prices.
He was speaking to reporters after officially being sworn into President Demetris Christofias’ newly appointed Cabinet.
Stavrakis took the opportunity to assure both local and foreign investors that the island’s mixed economy, which had helped create a competitive economy and fair society, would continue.
“We must give the message to our European partners that life here goes on and we are speaking about a robust economy with a social face,” he said.
“The message is clear, no one should worry, on the contrary all investors, foreign and Cypriot, should feel confident that we will continue this mixed model, which has offered Cyprus so much, creating a more robust and competitive economy on the one hand, and a fairer society on the other,” he said.
On Monday, the minister will attend the EU Ministers of Finance Council in Brussels.
