Identifier
Created
Classification
Origin
06NICOSIA1600
2006-09-20 13:27:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Nicosia
Cable title:  

CYPRUS: BANK OF CYPRUS CHAIRMAN STEPS DOWN AFTER EMPORIKI

Tags:  EFIN ECON CY 
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FM AMEMBASSY NICOSIA
TO RUEHC/SECSTATE WASHDC 6888
INFO RUEHTH/AMEMBASSY ATHENS 3667
RUEHLO/AMEMBASSY LONDON 1235
RUEHHE/AMEMBASSY HELSINKI 0376
RUEHBS/USEU BRUSSELS
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS NICOSIA 001600 

SIPDIS

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON CY
SUBJECT: CYPRUS: BANK OF CYPRUS CHAIRMAN STEPS DOWN AFTER EMPORIKI
BANK TAKEOVER FIASCO, SCANDALS; LAIKI BANK PRESIDENT ALSO OUSTED

REF: NICOSIA 1092

(U) This cable is sensitive but unclassified. Please protect
accordingly. Not for internet distribution.

UNCLAS NICOSIA 001600

SIPDIS

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON CY
SUBJECT: CYPRUS: BANK OF CYPRUS CHAIRMAN STEPS DOWN AFTER EMPORIKI
BANK TAKEOVER FIASCO, SCANDALS; LAIKI BANK PRESIDENT ALSO OUSTED

REF: NICOSIA 1092

(U) This cable is sensitive but unclassified. Please protect
accordingly. Not for internet distribution.


1. (SBU) Summary. The tumultuous summer for the Cypriot financial
sector continued with the Chairmen of Cyprus's two largest banks
losing their jobs, despite impressive financial results. On
September 1, Vasilis Rologis stepped down in the face of mounting
criticism from the Central Bank following the collapse of the BOC's
bid to take over Greece's fourth largest bank and several unrelated
scandals involving key board allies. On July 26, Kikis Lazarides,
Chairman of Laiki Bank, resigned after 30 years at the helm,
reportedly under pressure from new minority shareholders Marfin
Bank. A potential merger of Laiki with Greek banks Marfin and
Egnatia is now in the works. The leadership changes may reflect the
Central Bank's efforts to professionalize bank boards --
traditionally viewed as sinecures for the rich and famous -- as
Cypriot banks, fully recovered from the stock market crash, find
themselves increasingly more attractive targets for foreign
investors. End Summary.

Background
--------------

2. (U) As reported Reftel, the BOC launched a USD 8.2 billion
cash-and-shares public offer on June 22 to acquire 100 percent of
Emporiki bank - Greece's fourth-largest, but ailing -- bank. If
successful, the bid would have turned the combined BOC/Emporiki
group into the second-largest financial institution in Greece, with
a total market share of 12 percent of deposits and 15 percent of
loans. In Cyprus, the BOC enjoys 32 percent of deposits and 27
percent of loans. However, the takeover would have posed a
tremendous strain on BOC's capitalization. The bid was seen as a
bold move with potential serious consequences for the Cypriot
financial system. The success or failure of the takeover would have
made or broken the BOC - Cyprus's leading financial institution --
with all the implications that that would have for the Cypriot
financial sector.

Saved by the Bell
--------------

3. (SBU) Many analysts were skeptical from the start about the BOC's
ambitious plan to acquire Emporiki. Furthermore, many BOC Board
members were openly critical of the plan, citing insufficient

information regarding crucial aspects of Emporiki's liabilities. In
the end, the skeptics won out. On July 19, the BOC Board of
Directors decided unanimously to apply to the Greek Capital Markets
Commission to revoke its public tender offer on Emporiki, citing
uncertainty regarding Emporiki's pension system. The BOC's
back-pedaling came after a Greek court questioned the GOG's plans to
establish a single pension system for all Greek banks, exposing
Emporiki's owners to exposure to an additional 600-800 million euro
in pension liabilities -- something critics noted any basic due
diligence should have discovered.


4. (U) The Greek Capital Markets Commission reacted angrily, warning
the BOC that, under Greek law, it could withdraw its bid only if (a)
its shareholders rejected it; (b) if the Commission itself approves
the withdrawal, or (c) if the Central Banks of Greece or Cyprus
denied permission for the deal to proceed.


5. (U) Just two days later, on July 21, the Central Bank of Cyprus
bailed the BOC out by declining to authorize its bid for Emporiki.
Had the deal gone through, the BOC's capital adequacy ratio would
have declined to 6.4 percent -- well below the 8.0 percent minimum
level - directly threatening the viability of the new venture. The
BOC's withdrawal left Credit Agricole as the only suitor for
Emporiki in Greece. With an improved offer of EUR 25 per share of
Emporiki stock, the French bank ended up acquiring 72 percent of
Emporiki by July 31.

Rologis Pays with Job
--------------

6. (SBU) In the aftermath of this debacle, Greek Finance Minister
George Alogoskoufis slammed the BOC, saying that its U-turn was "not
in line with the seriousness and responsibility required by the
(privatization) procedure." A furious Cypriot Central Bank Governor
Christodoulou also lambasted the BOC for not conducting due
diligence and for failing to carry out the required legal or audit
checks. However, one Bank of Cyprus insider told us he thought the
hastily-prepared bid was never meant to succeed but was instead
intended as a means to discourage a potential take over bid from the
Greek Piraeus Bank. In this regard, he noted, it had been
successful.



7. (SBU) Compounding Rologis's difficulties were a series of
scandals that intensified the Central Bank's criticism of Rologis
and the BOC and forced the resignation of several of his allies on
the board. Board Member and Rologis's ally Polakis Sarris (who is
also the cousin of BOC Cypriot operations CEO Charilaos Stavrakis)
resigned after the press revealed that the BOC was almost
exclusively using his legal firm, paying his company over CYP 1.7
million in fees in 2005. Following public allegations that the BOC
was failing to collect on a CYP 1.3 million personal loan to Board
member Demetris Pierides, Pierides --- another Rologis ally -- was
forced to step down (and a payment plan involving the partial sale
of Pierides's massive art collection was quickly announced).


8. (SBU) The loss of two critical allies may have tipped the balance
against Rologis, who was elected Chairman by the Board in 2005 by a
single vote. On September 1, Rologis tendered his resignation as
Chairman (but not from the Board),following a major Board battle
over policy differences and heavy criticism regarding the handling
of the Emporiki bid. Apparently, the massive increase in BOC's
expected profits for 2006 (up by 172 percent to around USD 355
million) was not enough to save his job. Under his chairmanship,
which began on May 18, 2005, the BOC share price rose from CYP 1.60
to its current level of CYP 4.33. On September 7, the BOC Board
elected veteran banker Eleftherios Ioannou, aged 73, as caretaker
Chairman until the next BOC shareholders' Annual General Meeting,
planned for May 2007. Ioannou had served as the Managing Director
of the Greek Alpha Bank's operations in Cyprus from 1990-2000.
Ioannou's election was widely regarded as a compromise between
Rologis's supporters and opponents.

Fallout Extends Further
--------------

9. (U) Following the scandals, Central Bank Governor Christodoulou
issued a clear public warning to the Boards of banks to clean up
their act and cope with the challenges and demands of new EU
directives on corporate governance, instead of running banks like
family businesses. Christodoulou slammed the practice of regarding
banks as "hereditary fiefdoms" and depending on "old boys'
networks." The Central Bank Governor also demanded more
representative boards and increased transparency in their
operations.


10. (SBU) The shakedown of senior bank positions in the wake of the
failed BOC bid claimed one more casualty at Laiki, Cyprus's
second-largest financial institution. Despite impressive results
for the first half of 2006, with profits up by 110.7 percent at CYP
38 million, Kikis Lazarides, the once-omnipotent Chairman and CEO of
Laiki Bank, who had held that job for over 30 years, tended his
resignation on July 26, 2006. Lazarides had made an effort to bow
out gracefully a year earlier, in September 2005, when he accepted
to stay on as Chairman but without executive powers. However, his
disagreements with the Greek financial group Marfin, which has
acquired 12 percent of Laiki's stock, finally forced Lazarides to
give up control.


11. (U) Neoklis Lysandrou, Laiki's most senior General Manager with
34 years of service, was appointed to the board and elected
Non-Executive Chairman. In announcing Laiki's new leadership,
Marfin Vice President and CEO Andreas Vgenopoulos said, "The Cypriot
banking system, though stronger than ever, contains some phenomena
of the past decades. Progress will knock down the status-quo and
lead to new structures. Structures where the boards are not the
chairs for placing one's friends or people who, at some point in
time were famous, bestowing them honorary titles. Boards need
people with knowledge, an appetite for work, and principles and
should be given the opportunity to operate freely for the good of
the company."

Laiki/Marfin/Egnatia Merger On Track -- More to Come
-------------- --------------

12. (U) Meanwhile, the wave of mergers and acquisitions promising
to change the face of Cypriot banking continues. The triple merger
between Marfin Bank in Greece, Egnatia Bank also in Greece, and
Laiki Bank in Cyprus remains on track. Marfin, which is 31.5
percent owned by Dubai Financial, currently has a 12 percent stake
in Laiki and a 40.6 percent stake in Greek bank Egnatia. The boards
of the two main players, Marfin and Laiki, approved the overall
concept on September 14, and September 19, respectively, although
details are still unclear. The merger promises to change the
balance of power among domestic banking institutions, creating the
largest financial group in terms of capital in Cyprus. The stock of
the new entity, which is likely to have a new name, will be traded
on three exchanges: Athens, Dubai and Nicosia. The Central Bank of

Cyprus is following developments closely and favors having the new
entity headquartered in Cyprus, as opposed to Athens or Dubai. The
merger is expected to take place at the end of 2006.


13. (U) Following the general trend, the island's third-largest
bank, Hellenic, is considering cooperation with other financial
institutions that will be of a "complementary nature." Hellenic CEO
(and former finance minister) Makis Keravnos recently presented the
bank's three-year strategic development plan for 2006 to 2008 and
described Hellenic's absence from the Balkans as a "great omission."
He also noted that the bank was in contact with banks in Greece,
as well as in other new EU members, with a view to pursue these
ambitions. Decisions are expected over the next six months.

SCHLICHER