Wargaming: From Tanks to Banks, The Untold Financial Story (Part III of IV)
Part III: No One Told Me This Bank Could Tank
In Part III, we will discuss the present state and future of the Hellenic Bank of Cyprus, which WG owns a 26.2% stake in. Part III will reveal a dark and sinister side of the lovely little island country referred to as “Treasure Island,” and “Russia’s Laundromat.” It is not a pretty picture, but the story must be told.
Certain parts of this will be bland for some and will involve analyzing financial statements. I will do my best to try to explain what is going on and what it means for the bank. The truth will make you question the safety of your bank account, your investments, and everything you know about the world we live in.
This will be a very long read, therefore I will discuss how Donald Trump might find himself entangled in the mess going on at the banks in Cyprus and their links to Russian money laundering in an augmented Part III.V of IV that will follow instead. We will also talk about what might happen to Cyprus if they don’t make the changes necessary to their banking system as pressure mounts from the EU and US as I wanted to leave this discussion about WG and its financial circumstances.
The current state of the Hellenic Bank of Cyprus (all numbers in Euros)…
The bank currently has a market cap of 108.7 million, an enterprise value of negative 2 billion (yes negative), and a share price of 0.616. In the first half of 2017, the bank lost 23.4m. This loss includes writing off 82m for bad debts, and restructuring 296m of other debts.
“In March, the bank’s non-performing loans ratio was 57 per cent.” “Customer deposits stood at €5.8bn in June down from €6.1bn in March while total gross loans were €4.2bn against from €4.3bn three months before, Hellenic said.”
Explanation of the above section: The market cap is the value of all outstanding shares, it is figured out by multiplying the stock price (in this case 0.616) to the total number of shares. Wargamming owns 24.8% of the bank and they have 49,458,709 shares with a total cash value of $30.5 million, and there are approximately 200m total shares outstanding. The enterprise value is the value of a company including its debt. The bank has a lot of debt and therefore if someone were to buy it, this is what they would be taking on, because the debt would transfer to them. The writing off of 82m in bad debts are for loans that are impaired and are essentially written off to get them off the books and offset income (if there is any) to reduce corporate tax at the end of the year. The 57 per cent non-performing loans ratio is the amount of debts they are holding which are impaired in some way and not up to date on the repayment terms. When you do some math on the total gross loans above (57% x 4.2bn), you can see this number is very high at 2.4bn. That’s right, 2.4bn of their 4.2bn in loans are impaired.
Looking at financial statements is boring, but you get to know which numbers mean the most and can really set off the alarm. The above section is bad enough, but when you look at the statement of cash flows for 2016, you see two things that stand out as being especially bad (page 27 in the link below).
Net decrease in cash and cash equivalents:
Cash & cash equivalents at years end:
Note: All numbers are in 1,000s, so add 3 more digits to the end of both of these numbers on their financial statements. The net decrease in cash and cash equivalents is 303,733,000 (303.7m) and the cash and cash equivalents at the end of the year is 2,482,051,000 (2.48bn). They are bleeding cash, most likely due to trying to balance their debt write-offs each year with their income, so they come close to even.
The bad news:
1) As you know from Part II, Hellenic Bank was hit with a penalty for weaknesses in the “know your customer” framework.
3) Hellenic Bank lost its Cyprus Investment Firm (CIF) license. “As of this date, the bank is no longer licensed and regulated by CySEC and cannot provide financial or ancillary services. The regulator gave Hellenic Bank three months from that date to settle its obligations(…)”
The really bad news:
The bank has a lot of bad debt. They took it upon themselves to sell off some of the debt to other companies. They also transferred some of their employees there who held a strike due to the possibility of losing seniority or other job related benefits.
“It is noted that the Bank retains the ownership of the said non-performing loan and real estate portfolio. The contract is priced at arms’ length following a two stage competitive auction process. APS Cyprus is 51% owned by APS Holding and 49% by the Bank.”
When you look at the wording of this deal, which lasts for tens years, you get the impression that the bank is trying hard to transfer the worst of its bad debt from its books and really is nothing more than a dirty trick. APS Cyprus was a newly formed company from the parent company APS Holding. It is a private company and will not be under the same financial reporting requirements as a public company like Hellenic Bank would. They conveniently did this in 2017 because there will be a new financial requirement in 2018 that is mandatory for public companies, which will change the way impaired debt is classified and reported on financial statements (more on that in the “bag of shit on your front lawn news” section below).
They did another sale of bad debt early in 2018, for an undisclosed amount to another firm, this one to Norway’s B2Holdings ASA.
This deal “will reduce by 6.2 per cent the bank’s non-performing loans.” My take on this is that these debts were most likely sold to this company at a fraction of their of book value (maybe 15-33%). They are likely to be debt that doesn’t involve loans to Russia or other questionable entities that would raise any concerns.
The bag of shit on your front lawn news:
Why is Hellenic Bank in such a rush to sell off so much of its bad debt and restructure the rest?
Hellenic bank is a public company, and public companies have to adhere to financial reporting standards. Those standards were developed by an organization called the International Accounting Standards Board (IASB), and they created the International Financial Reporting Standards (IFRS) protocol. In 2018, there is a big change to one very important protocol as far as banks are concerned. It is called IFRS 9, and it involves the reporting of loan impairment, of which Hellenic Banks has a whopping 2.4bn.
Under the old protocol, a bank could offset the yearly impairment against that year’s gains. For example, lets say Joe Shmoe owes the bank $1,000 a month for 30 years and pays nothing for the first year, the bank could write off $12,000 for the year as bad debt and forget about the other 29 years Joe owes on the loan until next year comes and then write off another $12,000, even though that loan is most likely going to be impaired for its entire duration. With the new standard, the entirety of the loan has to be evaluated for impairment and a fair assessment made.
This new standard is why Hellenic Bank has been selling off bad debt at a fast rate this year and trying to tidy up the books. They transferred a lot of the bad debt to a newly created Cyprus company recently and retain “arms length” control over it. Anyway you look at it though, this looks like an absolute mess the next time they gather around the table to see what the numbers look like.
I wouldn’t want my money in the Hellenic Bank and the section below explains why. Hold on to your hats, hide the kids, take the dog for a stroll and wash your ass, because this is going to take a turn for the worse.
The nightmare scenario nobody wants to admit or accept news:
OK, breathe. Clear your mind. Your money at the local bank is safe right? After all, it has FDIC insurance, it has to be safe. Your checking and savings accounts should be safe up to the monetary limit ($100,000 Euros in Cyprus, and $250,000 in the US). That is, unless there is a financial crisis and the government decides they want to keep the bank closed to prevent a bank run (like what happened in Cyprus), and when the bank finally re-opens, a percentage of your funds are confiscated/stolen. The government can change the rules at any time and there has been talk of trying to convert the money in your account to stock in the bank (which would be worthless if the bank is tanking) when a crisis hits. This would be similar to Executive Order 6102 signed in 1933, which made it illegal to own gold in the US, and if you had any, you would have to bring it in to be converted to US dollars for $20.67 per Troy ounce. You would be forced to sell something of value for useless dollars or bank stock. The best advice is to get your money out of the bank and put it under your mattress or buy gold if the economy crashes or a major financial crisis occurs.
Checking and savings accounts = SOMEWHAT SAFE ( with monetary limits and possible emergency forfeiture)
Stocks, bonds, 401ks = NOT SAFE
Stocks, bonds, 401ks are not safe. Imagine a bank like the Hellenic Bank or any other bank in the world holding on to your money. Now imagine this. FDIC insurance (in the US) does not cover bank fraud. Read it and weep. FDIC insurance essentially lets banks regulate themselves. Your safety deposit box, not covered. Annuities and US Treasury securities, not them either. If those funds were embezzled, you might get reimbursed, but then again, you might not.
“Robberies and Other Thefts – Stolen funds may be covered by what’s called a banker’s blanket bond, which is a multi-purpose insurance policy a bank purchases to protect itself from fire, flood, earthquake, robbery, defalcation, embezzlement and other causes of disappearing funds. In any event, an occurrence such as a fire or bank robbery may result in a loss to the bank but should not result in a loss to the bank’s customers.”
What a shitty thing to think about.
Why is any of this important in terms of Hellenic Bank?
Well, this is my theory. The bank has 2.4 billion in impaired loans. It also has 5.8 billion in customer deposits. Who are those loans to? Are they to Russian shell companies created by the bank or some other criminal entity? Did they essentially loan out all of the money to fake Russian companies who they own and then default on those loans to the bank because they weren’t designed to be repaid?
“The ratings agency Moody’s estimates that there is about $31bn (£21bn) of Russian money in Cypriot bank accounts – $12bn from banks and $19bn from businesses and individuals. Moody’s also estimates that about $40bn has been loaned to Russian companies based in Cyprus.“
Let this sink in a minute. Imagine owning a bank and being in charge of who you lend money to. The money isn’t yours, but that doesn’t matter. You create some phony companies in your homeland and lend them money. The loans are all going to be impaired because you never intended to pay them back in the first place. You simply write it off on your financial statements as bad loan expense. You legally steal money, at least in the eyes of outsiders.
It really can’t get any worse than this. The sad part is, the people who will pay for this fraud are the owners of an account at the bank and the taxpayers, as the EU deposits guarantee will come from bank insurance (if any exists) and eventually taxpayer money. In essence, taxpayers and people with money in the bank will be paying for the mishandling of money and fraud by the people in ownership of the bank.
What a kick in the ass! A truly sad spectacle and something everyone who has their hard earned money at a bank in any country should be weary of. It can’t get much worse than this. Time will tell what is going to happen, but with the new regulations and pressure from the EU and US increasing on Cyprus, this house of cards could come crumbling down soon.
In Part III.V, “Kaiser Don, the Money Laundering Con,” I will discuss how Donald Trump might find himself entangled in the mess going on at the banks in Cyprus and their links to Russian money laundering, along with what might happen to Cyprus if they don’t make the changes necessary to their banking system as pressure mounts from the EU and US to come clean on dirty money.
Disclaimer: My name is John Smith but you can call me Bubba. Everything I have said and will say in this series is only my opinion and is for entertainment purposes only. My current location is on a small boat docked next to a small island (not Cyprus) in a yet undiscovered island chain which lies in a large body of water.