Bank of Cyprus: Why rejecting the Lone Star proposal was the right move

When the Management and Board of Directors of Bank of Cyprus in the summer of 2022 rejected the offer of the investment company Lone Star to acquire the organisation for €1.51 per share, obviously no one could be sure whether they had done the right thing, even though the conditions and the outlook at that time indicated that the creation of additional value was simply a matter of time.

About two and a half years later, the Bank of Cyprus has proved in practice that its decision at the time was wise and correct for its shareholders.

By the end of 2024, the bank's tangible book value amounted to €2.54 billion. The share price is around €5.5 and from the profits of the 2022-2024 period, shareholders will receive approximately €400 million as a dividend.

At the same time, with the recent announcement of the bank's results, it has now become clear that the high profitability of previous years was not due exclusively to the interest rate policy of the European Central Bank.

According to the bank's CEO, Panicos Nicolaou, “Looking ahead, as the interest rate environment normalises towards c.2%, we reiterate our 2025 target of delivering high-teens ROTE on 15% CET1 ratio or mid-teens ROTE on reported equity.

Our priorities going forward will centre on prudent capital management, driving new growth initiatives focused on loan book growth, non interest income diversification, maintaining cost discipline whilst re-investing in the business and protecting the fundamentals of our asset quality.

We recognise the importance of continuing to deliver attractive shareholder returns and hence we are also upgrading our Distribution Policy today by increasing the payout ratio range to 50-70%. We will also consider the introduction of interim dividends.”

Simply put, the bank's profitability rates will continue to be at high levels, even if interest rates are further reduced, and the bank's dividend policy will increase with a higher distribution rate and possible interim dividends.

Delayed payoff

While bank profitability may sound high to many, as does its dividend distribution, profitability is the ultimate indicator of a bank's financial health, especially in today's very strict regulatory environment.

Additionally, it should not be forgotten that the shareholders who are currently awaiting the new dividend checks are those who invested since 2013 and for many years not only did they not have any return on their investment, but in some periods they saw it lose value.

Today, more than ten years later, they are vindicated (and benefit) from the perseverance and trust they had shown in the bank during difficult times.

After all, it hasn't been long since the bank sent out the first dividend cheques, which were met with irony and sarcasm due to the small amount involved. Surely now the sarcastic smiles will turn into smiles of satisfaction...

There's a train coming...

In 2024, the bank achieved all the KPIs it had set:

• interest income → > €800 million
• Cost to revenue → 33%
• NPL→ 1.9%
• Cost of Risk→ 30 bps
• Creation of CET1→ 400 bp.
• ROTE→ 21.4%
• Dividend distribution → 50%

Going just as well in 2025

According to Panicos Nicolaou, who is known to measure his words before saying anything: “As we transition to an environment of normalised interest rates around 2%, our Return on Tangible Equity (calculated on a Common Equity Tier 1 (CET1) ratio of 15%) target at high-teens levels and our Return on Tangible Equity target at mid-teens levels remain for 2025.

Our priorities moving forward will focus on prudently managing our capital, promoting new loan portfolio growth initiatives, diversifying our non-interest income and disciplined expense management, while reinvesting in our operations and ensuring the strong quality of our loan portfolio.”

In more detail, the Return on Tangible Equity (ROTE) target takes into account current market assessments of the evolution of the interest rate environment, with the ECB deposit facility rate and the 6-month Euribor expected to average 2.3% each for 2025, compared to 3.7% and 3.5% respectively for 2024.

As a result, the net interest income target for 2025 is being updated, and is expected to rise to levels below €700 million, mainly reflecting current market interest rate estimates.

The bank's shareholders can therefore feel secure that the profitability of recent years (€500+ million for 2024) was not temporary or cyclical.

High profitability and by extension the highly efficient dividend policy will continue in the coming years, regardless of monetary policy decisions.

(Source: InBusinessNews)