Can we just start with your assessment on the current state of the Cyprus banking sector and the recent economic crisis?

 The banking sector has improved significantly. It has stabilized. It has showed remarkable resilience and recovery. One and a half or two years ago, it looked like an impossible mission even for the system to operate. Today, we have a banking system that is well capitalized, under very strict supervision; it is reorganizing itself and confidence has returned. At the same time, it has moved with relative success into operating in the same way that big European banks are operating. There are still a lot of things to do because we have unique banking challenges due to the size of the banking system and the problems we are facing. I can definitely say that there is a plan that has been followed with satisfactory success and there is also a plan to take us forward. So it is a banking system, it has accomplished things, and it is in a position to do more things claiming confidence and showing that under precarious conditions it is able to recover.

In terms of the bank itself as compared to the others—because, of course, we have just spoken to John Hourican and he said their bank doubled due to the popular banks’ collapse—what kind of market share would you say that you enjoy now?

I would say we are the biggest bank in terms of local business. We have about 25 percent of the market in terms of loans but we have more than 40 percent in terms of local deposits.

Forty percent? That’s a big number.

 It’s a big number. We are almost on par—

They trust you.

Yes. If we look at the total deposits, we are almost on par with Bank of Cyprus in total number of deposits. But if we are looking at deposits of local people, we are almost 70 percent bigger than the Bank of Cyprus. Everybody banks with Coop. We have the biggest number of clients in Cyprus, something like half a million members. We have more than a million IDs in our system, 1.2 million IDs. It is very rare to find anybody who is not a client of the Coop. We have the biggest branch network, 250 branches. We’re everywhere.

Can you tell us more about the ownership of the bank?

The cooperative credit sector was demutualized after the events of March 2013 because it had to be recapitalized and was bailed out by the state. Due to that, the shareholding passed from the members to the state. So we have 99 percent belonging to the Republic of Cyprus and the remaining 1 percent belonging to the old members. I would say that the Coop has what is called a popular shareholding base because it has this half a million members but they own 1 percent and then the state owns the rest. So basically it belongs to the people. It’s like a people’s asset actually.

Is that how you see the future? Will it remain the same or are you trying to possibly raise finances again?

Some of the conditions for the recapitalization were that until the end of 2018, there will be no change in the shareholding structure. In the beginning of 2019, the state will have the option of an exit.

In terms of the bank’s assets, do you have any other international investments? We’ve just been told that Bank of Cyprus sold off everything they had because they were overleveraged in many of their markets.

No; our business is 100 percent local. We don’t have any direct or indirect foreign exposure.

This is what the Bank of Cyprus is doing, closing all and selling all the others, right?

Yes. But we never had any subsidiaries abroad and no significant exposure in foreign bonds, so our book is 100 percent local and retail. The Coop is mostly retail. Throughout our 105-year history, we have been the primary lender for households regarding mortgages, student loans, agricultural loans, and consumer loans.

And how is your nonperforming loans portfolio doing?

Again, more or less on par with the rest of the big banks. More than half of it is classified as non-performing but the Coop was traditionally doing business in a more relaxed way. So it entered the crises with twice or three times more NPLs [nonperforming loans] than the commercial banks. Today, we have the lowest number of NPLs out of the three banks, but still it is fifty-seven or fifty-eight for us, fifty-nine for Hellenic, and over sixty for Bank of Cyprus. So going back to your question, the Coop today does not have any specific issues. The issues and challenges we are facing have more to do with the banking system and the country.

In terms of state-owned banking, how are you seeing recent fiscal policies affecting the banking sector? We believe there have also been some tax benefits.

Yes. It is extremely significant for the recovery of the banking system for the economy to start doing better. So there is a certain limitation to the things we can do on the micro level, on the bank side. A lot of things regarding our way forward depend on the actual economy. Again, we can definitely say that there is a story to be told for the banking system and for the economy as well. They were also against both and not only have they survived, but we have seen the economy stabilize and start showing signs of growth. We know that this is a small country and a small economy and this makes us more optimistic that with a continuous series of actions, we will be able to see exponentially positive results.

I think I read somewhere that last year you made 85 million in profits?

I think it was less. We had a profitable year last year and again this year. The reason is that we have quite a basic business model; we’re well capitalized and well provided for in terms of our NPLs. So this allows us to show small profitability, but I would say the profits are on thin ice because of the number of NPLs is quite big. On the other hand, we’re talking about the bank cooperative credit sector. It has a balance sheet of 14 billion and we have something like 12.5 billion of loans, of assets. We have our provisions plus capital at 4.5 billion. So we have a pile of provisions and capital against, let’s say the NPLs, which, if things turn positive would bring a gold mine.

You mentioned most of the customers are local. Do you have corporate FDI [foreign direct investment] money coming in?

No. We don’t have FDI money coming in because as I said our group is mostly retail. On the other hand, as a coop we rely basically on cooperative principles and it is part of our strategy to finance, for example, bankable infrastructure projects that add value to the country as a whole or to specific communities.

Are you involved in any recent infrastructure projects?

There aren’t any recent ones.

Well the marina for example, I don’t know if you’ve heard.

No; these are old things. We are looking at a couple of smaller projects. We are involved in loaning to communities. For example, we are the primary lender for the municipalities, for the local governments.

Municipality level, right?

Exactly. So we have something like perhaps 65 to 70 percent of lending in that category.

Is that a very profitable business to be in?

I would say that compared to the rest of the lending it behaves very well. We know that it adds to the community, so it also has this element of social responsibility. At the same time, we’ve been seeing lately that a lot of these projects are primarily financed by European Union subsidies. So that is the definition of value adding.

And they are big. I am from Poland and we also have a lot of EU subsidies. You’re still getting it, right? The municipalities?

Yes. These are jointly financed projects.

Yes—50 percent, 40 percent, and sometimes 90, right?

Exactly.

So those are secure projects, big ones, like infrastructure, right?

Exactly. The problem for Cyprus has been that after the events of March 2013, a lot of working capital has vanished due to the cut of deposits. This makes it difficult to absorb significant amounts of EU funds. That is where we want to do more as a coop. Even though the new regulatory regime is very strict. So we see, for example, that we have gone from one end to the other in terms of bureaucracy, regulatory issues, and compliance. This is suffocating a small country and a small banking system like ours. We believe that things have to balance out so we have to come in the middle so that the banking system, especially the coop, will be able to really finance the economy when in a deleverage cycle. As a rule of thumb, we say out of three euros of loans that are getting repaid, we need to give at least one euro in lending. This is not something that is happening now. We need to do it because otherwise we have a credit less recovery. We should make it slower.

Minister Harris said that they are looking to sell some government land, and that they’re also possibly privatizing, in addition to possibly privatizing the stock exchange. What about you personally? You’re an ex–investment banker?

Yes. Well I’m coming from private banking investment services. So I spent most of my career working for international banks with Merrill Lynch in places like Geneva, London, and Athens. So it’s quite odd for me to be—

How do you compare working for the big boys like Merrill Lynch to coming to Coop? The management style, you know…

Let’s put it this way: I have to admit that the technology employed many years ago in these banks is a dream for us. On the other hand, there is this huge contrast between the mentalities. At the big investment banks, it was always profit oriented on a daily basis, take no prisoners, whereas here it’s based on principles. So now our motto, our mission, is to go back to basics and have principles and do responsible banking that will add value to the organization in the medium to long term.

So we’re looking for stable, growing profits year in, year out. We want to be running the Coop as a banking utility. This will safeguard, as I said, the long-term interests of any shareholder.

I’d like to ask a general question as well because you are in the banking sector. What do you think has to be done to make Cyprus a competitive place for investment and what are the steps you think have to be taken to get the economy back on track?

Ok, it is two things.

Yes, two separate things. Share your ideas with us.

I would say Cyprus is quite an odd place because it is very, very small. So somebody needs to come here and do his overseas business. To locate here is to have Cyprus as a business base. That makes perfect sense. Perfect legal system. We need to improve on the application of the law in terms of speed. It has a very good account system, very good lawyers. It has I would say quite a basic but professional banking system. It is a very small place; you can meet everybody and anybody and do things. Fast, safe place, nice place, cheap place for international standards I would say.

We heard you can get the quality of service you would get in London at a fraction of the cost.

Exactly. So it needs more promotion and it needs to package all these things better altogether. Also, it needs to upgrade its service in terms of, let’s say, information, on how it communicates with investors or with the companies. It needs more technology and automation and packaging. If you ask about the economy, we need more structural reforms. We need to keep walking along the path of structural reforms. Structural reforms have to do with the way we do business on the government side and in the same government organizations even in the banking system, especially in terms of change of culture. We need to become more efficient and more business driven. We need to make significant, instead of just cosmetic, cuts. We need to cut deeply into the red tape. Set the benchmark very, very high. We have to compete with the best in Europe and abroad so being better than Greece or the others doesn’t matter.

Don’t compare yourself only to Greece. John was saying you should divorce Greece economically, and mentality-wise too. He said to focus on British education and English. It takes time to change the mentality.

It takes time. We need to push harder and the way we do it in Coop, we try to do it and many times it works. We don’t try to modify things, but we go and say, “Ok, here is a blank piece of paper. Let’s design how we want to work.” This is something that we need to do on a lot of issues. We are quite disciplined people. We are isolated geographically, but we are also a hub. There is huge potential, especially if there is a solution to the Cyprus problem. I would say that if managed properly, there will be phenomenal positive outcomes out of this.

Thank you very much for the interview. That’s interesting to know that everybody is so positive. We also talk to the private businesspeople and they appreciate what the government is trying to do as well, even though it’s not easy—it’s hard. Even when you talk to the normal people, they have loans and they know that they have to cut down expenses. They say, “We will not have as big a house,” or whatever, but they understand the need to go down a little bit, the level. It’s painful. But I would call you people because you serve people here. It’s not easy to handle this because people are used to spending too much, having a beautiful lifestyle. When I talked to John in Spain or Europe or whatever, you live, but the lifestyle is like a normal family, it’s not a fancy house that you have like middle class. It’s a normal, nice apartment but not over the top. Here everybody wants a huge mansion, wants huge apartments and the greatest car possible. I think that Babel was there and now people have to understand for our kids to have a better life, we have to sacrifice a bit. It’s not easy change, right?

You’re absolutely right. We are focusing a lot on the family. We know for example, that the families in Cyprus place children’s education first.

And that’s good.

That’s why we’re reducing interest rates on performing student loans. Then we launched a very ambitious scholarship program. When it is at its full operational level, we’re going to have three hundred scholarships every year. People are receptive to cutting back their expenses for the kids, even exchanging their houses as part of the loan and moving to a smaller house. A lot of people are willing to do this. That’s the reason why—

To cut the expenditures. We met a single mother with a family and a small boy. The kids go to fancy schools, British education. But the mother says, “I don’t need the fancy bag.” They cut their other expenses for the education of the kids.

This was in the mentality of the people many years ago. From 1900, they wanted to invest in education and this strengthened in the Turkish invasion in 1974 when people lost multiple things.

My grandma said, “If you study, this nobody can steal from you.”

Exactly. So if people have suffered wars and disasters they know what is left is what you carry in your head. This is the mentality of this place. In terms of the Coop, what we want to do with our NPLs is to revive, restructure and revive the relationship we have. That is, put these distressed loan owners back into the credit cycle. It is a small place; you cannot foreclose or you’re going to foreclose half of the population. So you need to give them in a viable way, time for them to recover and reenter the market. So that’s the way forward.

Thank you, Mr. Nicholas Hadjiyiannis, for meeting with us.