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Saturday 20 September 2014

RBS veteran John Hourican pulls Cyprus Bank back from the brink

Maria Petrakis and Elisa Martinuzzi

Published 16/03/2014 | 02:30

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John Hourican
John Hourican

John Hourican is no stranger to a banking crisis.

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The Irishman spent 16 years at Royal Bank of Scotland Group, which in 2008 received the world's largest bank bailout to date. He left a year ago following a scandal over interest-rate rigging. Now, he's running Bank of Cyprus, where he must whittle down a lender that ballooned to twice the Mediterranean island's economy.

"This is a great case study in what you shouldn't do with an island bank," Hourican said in an interview in Nicosia, the Cypriot capital. "This is a story of the entanglement of the financial system with a country's destiny."

It falls to the 43-year-old to unpick the Gordian Knot of Bank of Cyprus, an endeavour key to the success of the €10bn international financial rescue of Cyprus a year ago this month. In the same way that RBS grew "too big to fail", Bank of Cyprus doubled in size and expanded abroad while being anchored in a country that couldn't afford the bank not to survive.

Hourican swapped offices in a glass building by the 17th Century Spitalfields market in the City of London financial district for the colourless surroundings of Nicosia's Seventies concrete in October. That was eight months after he resigned as investment banking chief of RBS in the wake of the Libor-rigging scandal, in which he wasn't accused of any wrongdoing.

"If he wants to go back to the City, he needs to save Bank of Cyprus," said Alexander Apostolides, a lecturer in economic history at the European University Cyprus.

"His skin is in the game in a way someone else's might not have been."

As chief executive officer, he is busy selling assets, poring over the daily movements of deposits and trying to recover money from bad loans. They soared to 53 per cent of gross lending in part as budget cuts demanded in return for European Union and International Monetary Fund aid weighed on the Cypriot economy. The number of branches in Cyprus has been cut to 130 from 203 and the workforce scaled back.

As part of the March 2013 funding deal for the island, the Bank of Cyprus absorbed its nearest rival, Cyprus Popular Bank, and seized nearly half of all uninsured deposits from its customers to resuscitate the bank.

The "bail-in," prompted by €4.5bn of losses at Cypriot banks from Greece's sovereign debt restructuring, was accompanied by the euro area's first capital controls.

Those restrictions, including the suspension of trading in the Bank of Cyprus's stock, remain in place 12 months after the rescue to provide a bulwark against total financial collapse and still fragile confidence. European leaders are trying to draw a line under the debt crisis sparked by Greece in 2009.

Ireland emerged from its bailout programme in December and Portugal is set to follow in May.

Cyprus's rescue, in which debt holders and uninsured depositors absorbed bank losses, is still a work in progress and one that may determine how future crises are tackled.

Finance Minister Haris Georgiades said on March 10 that while he was optimistic about the banks, the main challenge was to re-establish credit to the economy.

Hourican calls Bank of Cyprus "an experiment that cannot fail" and draws on his experience at RBS.

"We were very clinical about what we were doing, why we were doing it, who we were doing it for and how does it create value," Hourican said earlier this month.

The new management "seems to be addressing its problem loans and cutting costs," said Athanasios Vamvakidis, head of Group of 10 currency strategy at Bank of America Merrill Lynch in London. "The challenges ahead are still substantial, but they seem to be doing the right things."

A month after taking the helm in Nicosia, Hourican chaired his first annual meeting with aggrieved shareholders, people who eight months earlier had more than €100,000 in the bank before 47.5 per cent of their savings were seized.

The Bank of Cyprus shares received in return, one told Hourican, weren't worth enough to buy a bag of crisps. Hourican listened patiently. With bad loans rising and the economy contracting, he told them there would be no quick and easy fixes.

"He needs to walk a fine line because his shareholders are also his deposit holders whose money is stuck in the Bank of Cyprus," said Apostolides.

The Ukraine crisis has added another wrinkle: while Hourican says he's confident about the sale of the bank's Ukraine unit to Russia's Alfa Bank going through, the threat of EU visa sanctions and Ukraine's financial woes may further dent both business and tourism in Cyprus.

The country became a haven for Russian individuals and businesses to reinvest back home, forging tight financial links between Nicosia and Moscow.

"We have to be pragmatic as a small island nation," said Hourican. "This island has been far better served by its relationships with the north eastern geography than it has been with its western geographies. I think that Cyprus should look to where it is fed."

©Bloomberg

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