Bank of Cyprus bid argues for lenders takeover

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A woman is silhouetted as she walks past a Cypriot flag painted on a wall in Nicosia, Cyprus July 7, 2017. REUTERS/Yiannis Kourtoglou

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LONDON, Sept 22 (Reuters Breakingviews) – Banks typically aim for tricky private equity targets. Denials include demanding regulators and high leverage, which prevents buyers from racking up new debt. But when the prices are low enough, the numbers can work. Lone Star’s roughly €700m bid for Bank of Cyprus (BOCH.CY) shows the sector may have reached such a high in Europe.

The US fund’s interest marks a sharp turnaround in fortunes for Bank of Cyprus, which was bailed out in 2013 amid the eurozone debt crisis and had to inflict losses on some depositors. Chief Executive Panicos Nicolaou achieved a respectable 7.3% return on tangible equity (ROTE) in the first half of 2022, excluding exceptional charges. This helps explain why the bank rejected three offers from US fund Lone Star, the last of which valued it at nearly 0.4 times tangible equity. The buyout group is considering making a new offer and has until September 30 to do so.

He can probably afford to pay more. Nicolaou is targeting a 10% ROTE next year, though analysts are expecting just 8% for 2025, based on Visible Alpha data. Even if the Bank of Cyprus hits that lower figure, a fair valuation could be closer to 0.8 times tangible equity, or around 1.3 billion euros – twice Lone Star’s offer.

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Investors have shrugged off Nicolaou’s ambitions, valuing the bank at around a third of tangible book value in recent months. This is partly because of previously high bad debts and a historical connection to Russia. Both risks have diminished: analysts expect the bank’s non-performing loan ratio to fall to 5% next year, from more than 30% at the start of 2020. Russia, Belarus and Ukraine represent only 1% of net loans and 5% of deposits. .

Low bank valuations in Europe could create further opportunities for cash-rich private equity buyers. Other potential targets include so-called UK challenger banks such as Virgin Money (VMUK.L) and Metro Bank (MTRO.L), which trade at 0.4x and 0.2x tangible book value respectively at term. Carlyle (CG.O) was sniffing around Metro at the end of 2021.

Private equity bidders could also help giants looking to lose weight, as HSBC (0005.HK) proved when it agreed to sell its retail business in France to Cerberus Capital Management. Other lenders like Societe Generale (SOGN.PA), which has a large collection of Eastern European assets, could in theory jump on the trend. By advocating for bank takeovers, Lone Star may be doing the whole industry a service.

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(The author is a Reuters Breakingviews columnist. The views expressed are his own.)

BACKGROUND NEWS

Private equity group Lone Star said on September 6 it was considering a revised offer for Bank of Cyprus after being rebuffed by three attempts earlier this year. The latest offer, at €1.51 per share, valued the lender’s equity at around €700 million.

Bank of Cyprus shares were trading at 1.43 euros on September 21.

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Editing by Neil Unmack and Oliver Taslic

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and non-partisanship by principles of trust.

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