Lombard Bank’s intention to bid for a 49.01 per cent shareholding of Cyprus Popular Bank raises financial, regulatory and ethical concerns as well as potentially legal ones, according to sources.
The Cypriot bank had to be bailed out during the financial crisis. All its foreign operations were put into the hands of an administrator and the Cyprus Resolution Authority is now overseeing the sale of the relevant shares.
An international bid was launched through CPB’s subsidiary, the Investment Bank of Greece, but no details have been made public about the bidding process. Lombard Bank announced recently it would be bidding itself and would seek shareholder approval at the annual general meeting next week.
In last week’s The Sunday Times of Malta, stockbroker David Curmi highlighted a number of concerns about Lombard Bank’s proposal to bid for the shares, which he described as “unorthodox”.
Financial services sources contacted by the Times of Malta shared some of Mr Curmi’s concerns, with two key issues emerging: how Lombard would finance such a bid and the impact of its intention to bid on potential investors.
The bank could use its €50 million in retained earnings to purchase the shares but risk depleting its capital, which banks were being urged to increase, not decrease, the sources noted. Although Lombard has a strong total capital ratio (the measure of a bank’s capital strength) of 16.8 per cent, it would drop by almost half, according to one source.
Apart from questioning whether this is the most appropriate use of the bank’s hard-earned reserves, the sources also pointed out that the bank would most likely have to replace the capital by selling the shares it had just purchased, either to its existing 1,300 shareholders or to other investors. How acceptable the latter option was depended on whether the buyer was a financial institution or a handful of individual investors, the sources noted, adding that the regulator, the Malta Financial Services Authority, had in recent cases been reluctant to go for individual investors, preferring institutional investors “with deep pockets, able to buffer the bank in ‘rainy days’”.
The MFSA declined to comment on whether it had any misgivings about Lombard’s intention to bid, saying only it had to approve any change in shareholding in any licensed institution. “It has not yet received any such request regarding Lombard,” a spokesman said.
Mr Curmi also wondered what impact the news of Lombard’s intention would have on other prospective bidders, speculating that the bank’s far more extensive knowledge of the granular detail of its own operations would give it an advantage over outsiders.
The sources agreed, asking whether the bank would be allowed to bid under the terms of market abuse regulations, which aimed to prevent such scenarios to ensure fair competition and a level playing field.
Mr Curmi noted that Lombard had not reaped any strategic benefit from its major shareholder over the past years.
The bank’s profits declined in 2016 when adjusted for the one-off sales of its shares in Visa Europe. Its return on equity –5.2 per cent in 2016 - has been considerably lower than that of the other main banks in Malta for a number of years.
Questions sent to Lombard Bank and to the Cyprus Resolution Authority remained unanswered at the time of writing.