Since my last article about Bank of Cyprus (BACPY), some major developments have been taking place.
First of all, progress has been made regarding the listing on the LSE. In the Extraordinary General Meeting, Shareholders voted in favor (99.74%) of the LSE listing as described in the circular (for the details, check this article). The district court of Nicosia also approved the plan (here) and thus only regulatory approval is missing. It is expected the new shares will start trading on the LSE on 19 January 2017 provided regulatory approval is obtained. Personally, I can't think of a reason why regulators would not approve the relisting. Existing shares will stop trading on January 10, 2017. So if you are a current shareholder, make sure you fill in the Share Election Form before that timeline of your wish for your shares to be traded on the LSE.
Secondly, some significant economic developments are playing out. The Central Bank of Cyprus expects the country to grow at 3% annually until 2019 (here). Historically, these 'official projections' hardly work out and therefore I don't even take them into consideration in my investment thesis. However, what I do find encouraging is that a recession seems not to be in the playbook. Another encouraging economic data-point is that the number of property transactions in Cyprus rose an annual 43% in 2016 (here). This is important because most of the collateral of BOC is property related, and more activity will hopefully benefit the fair value of BOC's collateral. The combination of positive growth figures and more valuable collateral provides confidence for the downside to be protected.
Third, BOC just announced they fully repaid the Emergency Liquidity Assistance. This is great news and exactly in line with what management previously predicted during the Q3 financial results presentation. The funding costs of BOC are likely to fall this year as ELA funding is more expensive than deposits. The main challenge still ahead for BOC will be the amount of non-performing loans.
Fourth, Wilbur Ross will step down as vice chairman of Bank of Cyprus because he will serve as commerce secretary in the administration of Donald Trump. I would have liked him to stay on the board of BOC, but honestly don't think him leaving will materially reduce the chances of a solid recovery. Besides that, Ross is not obligated to sell his stake in the Bank and I will be very surprised if he did. His estimated cost base was around Euro 0.24 per share, so with a current share price of approx. Euro 0.15 cents he would make quite a loss. For that reason, I expect him to stick around as a passive shareholder.
Finally, a potential catalyst may play out in 2017. Cyprus has been divided since 1974 in a 'Greek' Cyprus and 'Turkish' Cyprus and reunification talks have been going on for 40 years now. Greek Cypriots now live south of a ceasefire line and Turkish Cypriots to the north of it. The two parties will meet this month in Geneva to discuss a potential peace deal (again). Among the main issues is one relating to the possessions Greek Cypriots lost on the Turkish Cypriot side and vice versa. The reason this reunification talks can be a catalyst for BOC is twofold. First of all, it could be that BOC has legally valid claims on property in the North that it lost in 1974, which would raise the book value after reunification. I checked the annual reports of BOC but couldn't find anything related to this. So it's more prudent to assume nothing will be gained. Another thing is that BOC is currently not doing any business on the northern part of Cyprus. If reunification talks succeed, BOC has a great opportunity to serve new clients. The population in the South is 800k, while the North counts 500k. This means the addressable market for BOC will grow 60%. CEO John Hourican has publicly talked about this potential opportunity in this Bloomberg interview and hints that they will most likely address the market via digital channels instead of the existing (physical) channels.
My thought about it is pretty straightforward: both as a responsible citizen and as an investor I hope the island gets reunited and peace will finally be signed. But if it doesn't for whatever reason, it will not destroy the investment thesis for BOC. Reunification is simply a free potential upside you didn't paid for with the current share price.
Disclosure: I am/we are long BACPY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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