Hourican's battle for Bank of Cyprus

Peter Lee
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Two years ago, John Hourican took over a bank flattened by haircuts on Greek bonds, whose depositors had seen their money seized and where borrowers were defaulting en masse. Somehow, through determination, hard work and maybe a little luck, he turned it round. Deposits are coming back, NPLs are being dealt with, assets shed and capital raised. The bank is profitable and confidence has been restored. As John Hourican steps down as CEO, the story of our banker of the year for 2015 is also one of redemption.



John Hourican

Bank of Cyprus

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Regularly hauled in front of committees of self-aggrandizing politicians for ritual public humiliation, constantly attacked and ridiculed in the mainstream media, assailed by regulators, defenestrated by increasingly impatient shareholders for under-delivering, bank CEOs across the world have had a pretty rough time of it since the financial crisis. 

But these things are all relative.

"I remember the morning I discovered my car had been burnt out outside the house," recalls John Hourican, soon to be ex-chief executive of Bank of Cyprus. 

"I’ve had some close security, but I never wanted them to be overly obvious and get in the way," he says, sounding like the quintessential unflappable British army officer. "I mean: they hadn’t attacked the house or anything. They had just burnt the car. It was a message: 'People are angry’. I understood that."

Hourican, of course, is not British, though he made his career at RBS, working in its leveraged finance unit, then untangling ABN Amro in the wake of the consortium takeover and finally running the whole investment banking division at RBS as it sought to retreat back to core strengths and find a new path to sustainable profitability. He is Irish. He is also a man with a sense of honour, who talks often about standing up for his people, defending them, demanding that they work hard and take responsibility but never asking them to do anything he wouldn’t do himself.

When the board of RBS wanted a senior banker to take the fall over Libor rigging, it was Hourican, who had no involvement in such wrong doing whatsoever, that did the decent thing.

Then, as if all those adventures had not been enough, in 2013 Hourican took on surely one of the toughest jobs in banking, to be chief executive of Bank of Cyprus in the wake of a severe financial crisis emanating from a broken banking system, and brought low by losses on Greek government bonds. 

The ECB, the European Commission and the IMF had bailed Cyprus out to the tune of €10 billion in spring 2013, but at a heavy price that required the island state to sign a memorandum of understanding with the dreaded Troika. Cyprus became the first eurozone member to be subject to capital controls and – still uniquely in the sorry and growing litany of eurozone crises – had seen depositors of the country’s biggest bank bailed in to recapitalize it. Fully 47.5% of any deposit over €100,000 was taken and exchanged for equity in the Bank of Cyprus, a desperate and broken institution left gasping for air in a now shattered economy. That equity looked, if not totally worthless, then not far off.

I came into a bank where assets representing more than half the balance sheet were non-performing and found that not only did it not have any work-out group, it didn’t even have a unit to contact borrowers going into arrears, or a collections department

Euan Hamilton

As so often happens, a crisis emanating from one devastating weakness – a concentration of exposure to the Greek sovereign in bonds written down as part of the banks’ so-called private-sector involvement in its larger neighbour’s own bailout in 2012 – had quickly revealed many others at Cypriot banks: an over-reliance on funding from overseas, mainly Russian depositors; some of questionable provenance; that had been recycled into injudicious over-lending to the Cypriot real estate sector in a headlong rush to grow assets in the aftermath of entry into the euro.

Bad loans at one stage made up over 55% of Bank of Cyprus’s balance sheet. Amid a population cynical about economic contraction and now hugely distrustful of the banks, defaulting to lenders became an easy option, even for those that could pay. The path ahead for Bank of Cyprus after the depositor bail-in in April 2013 looked gloomy and headed, probably sooner rather than later, straight back into insolvency.And on the asset side, the destruction of wealth following the bail in of depositors, collapsing property prices and rising unemployment in a sudden and severe recession led to a swift rise in non-performing loans in a country with weak legal protection of creditor rights, which hit banks spectacularly ill-equipped to deal with the problem. What’s more, the Bank of Cyprus had to absorb the smaller and weaker Cyprus Popular Bank (Laiki Bank), with which it had previously competed to be the biggest in the country, so doubling up concentrations of exposure to poorly analyzed problem credits.Capital controls had to be imposed because without them, the Cypriot banks would have been stripped of deposits. The Bank of Cyprus may have been recapitalized by a bail-in of depositors but that very approach naturally deprived it of what would normally have been the natural funding channel for any re-equitized national champion bank after a crisis. The Bank of Cyprus was left dependent on Emergency Liquidity Assistance funding. It was on life support.