World Report sits down with Nicholas Hadjiyiannis of Cooperative Central Bank to discuss the restructuring and opportunities in the cooperative banking system, and its strength as an alternative to the commercial banks. With a focus on providing alternative banking in a simple way, primarily to households and SMEs, Cooperative Central Bank is committed to stimulating economic growth in the real economy.
Cyprus has seen a remarkable economic turnaround, with current economic indicators now very positive, returning to 0.4% GDP growth for the first quarter of this year. Where do you see the main strength of the ongoing recovery?
It all has to do with confidence, and in the banking system and the economy there has been stabilization. For example, we can see that the growth of NPLs (non-performing loans) has more or less stopped.
However, people are still not confident enough to go into new lending. The events in Greece have not helped in terms of confidence, not because our economies are connected, but because of the close cultural associations.
What is happening in Cyprus is indeed remarkable. The country has responded extremely well to this economic shock because it was seen as an opportunity to make changes.
Cyprus was the first country where these new regulations and actions took place and it responded very well. We are a unique case; it is not easy to analyze our economy, as it is a divided island economy, with an oversized banking system.
Moreover, it is the second smallest member of the EU with no real influence; it is geographically isolated, and politically it’s an economy that doesn’t really matter. This is not an easy set of circumstances for recovery.
On the other hand, these factors make it much easier, if we take the right measures, to grow quickly. We saw a lot of negative developments, but with a positive development, things will accelerate.
Now we have an opportunity for structural change. Looking back, a lot of things were done that were impossible, but still we have a long way to go if we want to be internationally competitive.
There have been major reforms with regards to supervision and restructuring, which have been very important for the health of the banking system. However, key challenges remain, such as NPLs. How are you addressing these issues and challenges?
The Cooperative was really created by force, one and a half year ago, so almost everything is new for us. Dealing with NPLs is a priority for us because it affects our balance sheet.
We have set up a structure to handle this major issue, a year ago, as it was unchartered territory. We had over 100 different co-ops of different sizes, in the cities and rural areas, so we had diversity in terms of size, professionalism, competencies, and a largely non-regulated environment.
We had cooperatives that would be working with a board of directors that were elected from a community, and they would make business decisions on giving loans etc. This was a recipe for disaster.
On the other hand, there were certainly some positives when compared to the wider banking system. The Co-op did not fail, as there was a system of collateralized lending.
Regarding NPLs, which are the main challenge, we set up a new division where we allocate significant human resources internally, which was no small task.
We had to train them, implement systems, and get ourselves organized in a sector that had just merged on paper. We had a merger that represented 80% of GDP; our balance sheet is about 15 billion.
The merger was made up of 100 different banks, and it took place with no management; everything had to be brought under the Cooperative Central Bank with a new regulatory regime.
So it was scary; we were undercapitalized, we had negative equity, negative capital, and we were losing deposits.
We had to create a consolidated balance sheet to establish what our real NPLs were, and there was no local expertise to really tackle this.
We created a department, and after six months, I have to say that we are on a good path. We can see some light at the end of the tunnel and it’s not the light of an oncoming train; we have taken the initiative and pioneered within the Cyprus banking system.
At the end of last year, we were significantly behind the rest of the banking system; we had only restructured 4% of our NPLs by the end of 2014, and the rest of the market was at 15%.
Now they are somewhere around 24%, and we are at 15%, so we are closing the gap. I’m quite confident that we will be able to continue addressing this issue, but much depends on macro issues, such as the economy, which is improving. It also depends on technology and innovation, and we are implementing new technologies to make sure we are ahead.
When we sat down with the Minister of Finance, he was very specific in mentioning that there has been a real change in culture, and in particular management culture, within the banks. Is that something you have felt?
I would say that the culture has changed at the top level. It still has to filter through the system, but the biggest change has been the way that banks operate.
They operate more professionally and this can be seen in the reviews that we receive from the Troika. For example, going back a year and a half, it was chaos. However, today, when we go and meet the Troika, it is a professional meeting: there is a discussion, there are facts, and there are arguments, and then a way forward.
So yes, in terms of corporate governance, risk management, internal audit, in terms of technology, and in terms of expertise, there have been big changes.
There is now a lot of international expertise coming into the banking system and we have managers with international experience; we have executives that are not local; we have foreign investors; and we have foreign monitoring.
There is no differentiation in how we all handle Cypriot banks compared to German banks. We still have to do more in technology, and we need to do more in terms of balancing risk, but it must be said that the whole banking system has made significant positive changes.
Where do you see Cooperative Central Bank stimulating economic growth going forward? What are the main opportunities there?
We at Cooperative Central Bank are placing ourselves as an alternative to the commercial banks, because we believe in a balanced system. In the eurozone, in the developed countries, the cooperative banking model is the third biggest in the industry.
Our role is providing alternative banking in a simple way, primarily to households and SMEs. That is where we have lowered interest rates compared to other banks. We want to do ethical and responsible banking.
There is no banking with small letters – that will destroy confidence. We remove all these hidden charges, for example working on a cost-plus basis, and this will force us to become more competitive.
A lot of changes and developments are self-enforced; we come out and announce a destination, and that forces us to do it. We have an economy that is deleveraging; it is deleveraging about 2-3 billion, or around 4% in terms of banking assets every year.
We need to make sure that for every 3 euros of repayment, there will be 1 euro of financing; that is not the case yet. It has to do with confidence; it has to do with the way the economy is structured; it is not yet internationally competitive in terms of productive sectors and exports.
Additionally we need to simplify banking.
We need to cut through red tape, because after the financial crisis, people became risk-averse. We need to have this new culture of responsibility, but working in a more structured environment.
We have to identify a new lending process at all levels, whether it is households or SMEs, but in a responsible way.
We have a role to play as a co-op, and we decided that our business model is to create a European co-op, or nationwide co-op as in the UK.
We decided as a strategic decision, not only for us, but also for the economy and the benefit of everyone, that in the medium to long term our interest rates have to converge with those of the eurozone.
That is why we took this strategic decision to reduce interest rates. We believe that as an alternative banking option, and as we have about 25-30% of the market, we have to lead the way.
In terms of leading the way, what are your key priorities in terms of management?
Co-op is primarily a retail operation, so we want to keep our DNA. We want to do banking based on steady principles. The principles that have to do with co-op are transparency, quality, fairness and long-term value creation. We have a profitable organization with no big swings in profitability. Co-op banks are by nature risk-averse, because they don’t engage in business investments to expand abroad or anything like that.
So what we want to be is a steady, boring bank, but with top technology.
For those investors looking into Cyprus and perhaps making comparisons with countries like Malta, why should they be investing here in Cyprus, rather than elsewhere?
There are opportunities in the tourist sector, and if there are specific developments or investments in the connectivity of Cyprus, then there is untapped potential there for an investor.
If we manage to steer Cyprus to become a 10-months-of-the-year destination, the results will be incredible. Can you imagine that Cyprus has less tourist arrivals than Crete?
Cyprus’ infrastructure is considerably better, and we are an island state; in a unified Cyprus, the opportunities are amazing.
Investors should also look into Cyprus by considering its potential as a regional business hub. Cyprus is stable; and it offers a lot of advantages, such as its accounting system, legal system, and infrastructure.
The opportunities are even greater as there is much turmoil around us, whether it is Greece or the Middle East. So it makes sense for companies to do business and create substance.
We can see a trend in companies setting up substance with real offices and real employees and doing real business through Cyprus. This helps create employment opportunities as well.
With regards to reunification, there have been significant positive developments recently. Is reunification something you see as a positive and viable?
First of all, we believe that the economy of Cyprus will benefit greatly in terms of flows, either from investors, or new flows from its own people, because there is wealth inside and outside Cyprus.
More importantly it will create confidence. A unified island will create a lot of opportunities because the country has importance in the region; it will not be an island anymore, but connected to the mainland through Turkey, and Europe.
You will have this basis of unified tourism and the potential is unlimited.
After 2013, Cyprus’ image suffered on the international stage, it is now being rebuilt, perhaps to mean something more than it did previously. What is your perception of the Cyprus’ brand?
It was damaged a lot and we are now recovering. We are moving towards a more balanced brand. We are moving away from just international business on a transaction basis.
We are trying to add value. That is why, as I mentioned before, companies are locating here and they have substance.
Beyond this, it is a nice place to live with many incentives such as stable government, strong laws and regulations, good employees, who are qualified and very competitive.
We are moving towards a more specific and quality-based brand; this is what we are aiming to build.