How to Smart-Manage a Bank Through a Crisis - Exclusive Interview with George Appios, CEO, Piraeus Bank Cyprus

29 April 2016

George Appios, Chief Executive Officer, Piraeus Bank Cyprus


From a closed economy with strict capital controls and interests rates set by the Central Bank, Cyprus experienced a 180 degrees change when entering the European Union in 2004 and adopting the single currency in 2008. The stability brought to the economy by the introduction of the euro gave international investors the confidence to come to Cyprus, which fueled a substantial but not sustainable economy growth, with a credit expansion at around 20 percent year on year between 2008 and 2012. The effects of the crisis of 2013 were devastating to the country’s banking system, but Piraeus Bank Cyprus was able to maintain a sound liquidity management, without suffering the consequences of the Greek crisis, and it is uniquely positioned to cater to the rigorous demands of international investors.
BIU: You’re an experienced professional in the banking industry in Cyprus and you’ve witnessed throughout your career its rise and fall. Tell us about its evolution and current standing.
George Appios: I think the best point to start the conversation is the moment Cyprus joined the European Union [in 2004]. Before that we used to be a closed economy and we had our own currency with strict capital controls. The Central Bank used to set the interest rates for lending and deposits and there was no real competition.  Live was easy for a banker.
When we joined the European Union (EU), the system was liberalized, interest rates were allowed to float freely and our currency was pegged to the euro, which was eventually officially introduced in 2008. The main concern of the banking system at that time was how this change would be perceived by the international businesses coming to Cyprus and how it would affect the tax advantages that Cyprus had as a jurisdiction.
Things turned out to be better than expected and the stability brought to our economy by the introduction of the euro gave international investors the confidence to come to Cyprus. We had an influx of new businesses and as a consequence a substantial increase in deposits. The banking sector was riding this wave. Banks started lending the excess liquidity aggressively creating a real estate bubble with prices spiraling out of control. The credit expansion was around 20 percent year on year between 2008 and 2012.
Competition between banks led to a disregard of the fundamental lending principles and a sudden expansion overseas. Almost half of the banks’ balance sheets were exposed to Greece (mostly the Cypriot largest banks, Bank of Cyprus and Laiki Bank) and our banking system reached a level of 8 times our GDP.  
At the end of 2012 the two biggest Cypriot banks were further affected by the haircut of the Greek bonds where they had invested most of their capital.  When the crisis hit Cyprus in March 2013 the deposits started flying out of the country and within 6 months we were left with EUR 67 billion in loans (mostly real estate loans) and EUR 42 billion in deposits.
The end result of the March 2013 crisis was the following: Cyprus Popular Bank (Laiki Bank) was closed and depositors holding over EUR 100,000 in their accounts lost their money, Bank of Cyprus had to revert to a bail-in of around 47 percent from all its depositors holding amounts higher than EUR 100,000 and the Cooperative Central Bank was bailed out by the government with the amount of EUR 1.5 billion.
Cypriots have had their share of disasters in the past and it was that experience that allowed them to simply roll up their sleeves and get back to work to fix things. In August 2013 the definition of non-performing loans (NPLs) was standardized by the Central Bank through a troika imposed directive, followed by directives regarding the arrears management and then provisioning and new loans granting, in September and December 2013 respectively.
At the same time, we were accused by other European countries of money laundering, despite a number of independent studies that came out stating the opposite. A final review conducted by Deloitte Italy found no such practices in Cyprus, but it concluded that Cyprus has too many complex company structures for its size and that there was a need for regulation enhancement. I think that this was a fair comment. The directive regarding anti-money laundering practices came out in February 2014, a preemptive measure ahead of a similar directive that came into force in the EU only recently.
To the credit of the troika, they did not force us to change our tax system, which is the major advantage attracting business to Cyprus. We haven’t increased our corporate tax and we haven’t changed the tax treatment on royalties, capital gains, tax dividend payment etc.  In general we haven’t imposed new taxes. This led to existing businesses remaining in Cyprus and allowed the flow of new business to continue.
Currently the system has recovered and it is now based on sound regulations.  The remaining big issue revolves around the NPLs.  A portion of them is based on the reduction in turnover which is likely to be fixed through restructuring in anticipation of the economy recovering in the near future. The biggest part of the NPLs however consists of real estate loans. There is currently a new bill allowing for a potential national agency for asset management to be created, which is a solution that was adopted by countries such as Ireland and Spain. I am very much in favor of that solution because it will accelerate the cleaning of the banks’ balance sheet.  The major issue is how to fund it.
BIU: How would such an agency be sustainably managed?
George Appios: Going forward it is important that the agency is managed by professionals, not by the government. The financing of the purchase of the loans has to be agreed with the EU so that our central bank can swap it with their emergency liquidity assistance (ELA). In simple terms ELA can become long term funding.
An important element to keep in mind is the value of the transfer. If this agency buys the loans from the banks at less than their nominal value, that means the banks will be forced to take extra provisions or extra losses which will then create more capital requirements. In any case, if you look at it from a business decision perspective, when you have a bad loan with a property underneath, effectively you have a property in your hands. If someone comes and wants to buy the property, in my mind this is a simple hold or sell exercise.  Do I hold it for a period of time and then sell it or do I sell it now at fire sale? A lot would depend on where the property is, what the prospects are, but the banks should not be forced to fire sell these assets and this agency’s main objective should not be short term profit. The main objective should be to help the system solve the problem for the long term because a real estate problem cannot be solved in a single year.
The government can set up the agency and use private investors to finance it as well, apart from the EU. The banks can also take an equity stake when they’re transferring, so part of the funding can be from the banks themselves in equity. The government can also set up Real Estate Investment Trusts with specific incentives that will be triggered in a period of time of 5 to 7 years so that the agency has an incentive to keep the asset. For me that would be a solution. I have described it on a very high level, there is a lot of technical work behind it but unfortunately at this point of time, things are moving very slowly in this direction in Cyprus.
BIU: Should the Ministry of Finance take the lead on this?
George Appios: For me, at this point in time, the only organization that can implement this is the Ministry of Finance. The banks can start doing it each on its own but this will not be effective. I don’t think there is enough cooperation between the banks to sit down and align their interests. The government can make sure that the interests of the banks, the economy, the government, the tax authorities, the EU, foreign investors, are all aligned. It’s a huge undertaking but we have to try.
BIU: Let’s zoom in a bit on Piraeus Bank in Cyprus as a subsidiary and its relationship with the mother bank in Greece.
George Appios: We are a full-fledged bank in Cyprus, with a banking license and regulated by the Central Bank of Cyprus. Since November 2014 when the Single Supervisory Mechanism was implemented for all European Banks, we have been categorized as a systemic bank in Cyprus because we’re a subsidiary of a systemic bank in Greece.
In 2014 we formed a new strategy where liquidity was a prime target. We launched products and a marketing campaign to cater to depositors who wanted to diversify their deposit position with different banks. We started gathering momentum and our deposit base grew by 34 percent in a year, which was fantastic.  As the same time, on the lending side we decided to “wait and see” because the country’s GDP was contracting. There wasn’t a lot of demand anyway.
The above strategy let to a position where we had about EUR 1.3 billion deposits and EUR 800 million loans at the end of 2014, so we had about EUR 500 million of excess liquidity in cash.
In January 2015 as a result of the Greek elections we found ourselves with a renewed Greek crisis caused by the change in government. We had to minimize all our positions in Greece, so we moved all our cash to Northern European countries by the end of January 2015. All our efforts and resources turned to deposits management and due to the fact that we managed to build so much cash we could protect the bank much better. We were in a comfortable position due to our excess cash liquidity being at 47 percent of our deposits. The week of the Greek referendum in July 2015 was the toughest one to manage but we still found our way out in the end. Once the situation in Greece settled, by September 2015, we had an increase of 12 percent in our deposits over 2 months. Building up liquidity is still a priority and lending is conducted in the same non-aggressive “cherry-picking” manner. We are also focusing on other areas to generate income from fees related to payments, transaction banking, private banking, custodianship, to avoid having to rely on loans for income.
BIU: With over 70 percent of its balance sheet dedicated to the corporate segment and the sound liquidity management that you previously mentioned, Piraeus Bank is uniquely positioned to cater as a reliable partner to the rigorous needs of international investors that are now considering Cyprus as a business destination due to the tax incentives, new building projects such as the marinas or the new casino resort, and the larger Eastern Mediterranean energy projects. Can Cyprus be a spring board for business in the region?
George Appios: There are many elements that make Cyprus attractive and the geostrategic position is possibly one of the most important ones. It is a European country in the Eastern Mediterranean with excellent relations with most of its neighbors and hopefully soon with Turkey as well. The long term prospects in energy correlated with a good, solid tax system, a valuable human resource base and a government that is undergoing fundamental restructuring, provide an excellent platform for a company to use Cyprus as a hub for regional development.

George Appios started his working career in London at an auditing firm and then continued in the finance department of a civil engineering multi-national company in London.  He joined Hellenic Bank in Cyprus in 1995 as Head of the Organization and Methods Department.  Promoted to CFO of the Group in 2000, he later became a Senior Manager and Member of the Executive Committee at Hellenic Bank.  He assumed the General Manager role at Piraeus Bank Cyprus since its establishment in January 2008, leading the International Banking Unit, Payments, Credit, Finance, Treasury Back Office, Organization and Methods, ΙΤ and Technical Services.  He was promoted to CEO of Piraeus Bank Cyprus in January 2013.  He holds a B.Sc. and M.Sc. from City University of London and is a Chartered Accountant member of the Institute of Chartered Accountants in England and Wales (ICAEW).
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