Back in black

Bank of Cyprus is bank of choice for EU uber-bulls

2014 has been a good year for incurable euro zone optimists. Though the euro zone crisis is fresh in the memory, and deflation a risk, Greece's five-year bond yields are below five per cent. Greek banks have easily attracted foreign capital, helped by global funds flowing back into Europe after the US Federal Reserve started its tapering policy. Still, foreign investment into Bank of Cyprus would represent a new bullish peak.

It has been a year since the Cypriot banking system capsized, ushering in a haircut of uninsured depositors, capital controls, and an emergency deal to merge Laiki, the country's worst-off bank, into rival BoC, whose depositors still cannot access euro 1.5 billion of their cash.

There are some reasons for the rosy view. Cypriot GDP fell much less than the nine per cent predicted by the euro zone authorities for 2013. National deposit inflows turned positive in April, for the first time since December, 2012. John Hourican, BoC's chief executive, is getting to grips with bad debts by shoving euro 12 billion into a restructuring division. The bank made a profit in the first quarter, and the last significant internal capital controls were lifted on May 30. But there is more cause to worry. External controls remain in place, and non-performing loans are 49 percent, 39 per cent of which are covered by provisions. Two-fifths of BoC liabilities still come from central bank funding, due to emergency liquidity assistance inherited from Laiki. And while a 10.6 per cent core Tier-I capital ratio may look robust, the longer-than-expected Cypriot recession, and the coming European stress tests, may leave some holes to plug.

Foreign investors may well do the plugging. They have gobbled euro 100 million of sovereign bonds in a private placement in April. Foreign investors have, since the start of the year, shown increasing interest in BoC, according to a person. That gives the bank a decent chance of sorting coming problems on its own. Whether such a move is reassuring about investors' state of mind is another matter.