04/01/2016 06:30
Banks are entering the new year facing large accumulated problems in their balance sheets and more demanding European supervisors.
In 2015, major Cypriot banks managed to stabilize their deposit base and continue the gradual deleveraging of their large balance sheet.
However, big problems that accompanied banks into 2015 remain, as the recovery of billions of bad loans accumulated on their balance sheets is still difficult.
The implementation of the law on foreclosures and the insolvency framework has not yielded the necessary results so far, as banks only make moves for restructuring large loans, the effectiveness of which will be judged in the future.
The reduction of interest rates through the supervisory intervention of February brought banks and problematic clients closer on the negotiating table of loan restructuring, affecting however the revenue base of banks.
Banks accepted significant income loss that they were unable to offset with spending cuts. In some cases they proceeded to selective salary increases and recruitments, and continued to remunerate their external consultants with large amounts.
New supervisors
The biggest change in the banking environment was the rigor that the new European supervisors of the banking system seem to have demonstrated.
Despite disagreements between banks and the domestic Central Bank, the three systemic banks are facing increased pressure to identify additional bad debt provisions that will significantly change their capital profile.
By the first nine months of the year the cooperative, which is the only bank that fully implemented the provisions of the ECB reported significant losses, while the other banks reporded profits due to low provisions. The state is asked to cover the Cooperative’s losses, paying €175 mn in capital support for the Cooperative Central Bank - an amount corresponding to 1% of GDP.
It is expected that both the Bank of Cyprus and the Hellenic Bank will significantly increase their provisions in the last quarter, coming very close to the new, increased supervisory threshold that will be set on a European level.
Results
The financial results of banks so far, reflect the progress made in stabilizing their deposits and their revenue and also the major challenges they face.
Positive points for banks include the increase in their deposits. Deposits continued to grow during the third quarter, especially for BOCY.
Deposits increased by 8% for the Bank of Cyprus, by 3% for cooperative institutions and fell by 1% for the Hellenic Bank.
At the same time, the amount of net loans decreased.
NPLs still remain at unsustainably high levels despite signs of stabilization while all systemic banks emphasize the importance of improving the situation.
As regards the index of the common equity tier 1 (CET1), it moved in two directions for major banks.
In the case of the Bank of Cyprus, it was improved to 15.6% from 14% earlier this year, which is partly due to the disposal of the majority of Russian operations, while for Coops it deteriorated to 12% from 13.6% as a result of increased provisions which led to a new state support of €175 mn.
The index fell marginally to 13.3% for HB, but following the EBRD's investment after the third quarter, it improved to 13.8%.
If case BOCY and HB adopt the methodology of the ECB, there will be a negative impact on the CET1 index by 2.4% and 1.52% respectively.
In 2015, major Cypriot banks managed to stabilize their deposit base and continue the gradual deleveraging of their large balance sheet.
However, big problems that accompanied banks into 2015 remain, as the recovery of billions of bad loans accumulated on their balance sheets is still difficult.
The implementation of the law on foreclosures and the insolvency framework has not yielded the necessary results so far, as banks only make moves for restructuring large loans, the effectiveness of which will be judged in the future.
The reduction of interest rates through the supervisory intervention of February brought banks and problematic clients closer on the negotiating table of loan restructuring, affecting however the revenue base of banks.
Banks accepted significant income loss that they were unable to offset with spending cuts. In some cases they proceeded to selective salary increases and recruitments, and continued to remunerate their external consultants with large amounts.
New supervisors
The biggest change in the banking environment was the rigor that the new European supervisors of the banking system seem to have demonstrated.
Despite disagreements between banks and the domestic Central Bank, the three systemic banks are facing increased pressure to identify additional bad debt provisions that will significantly change their capital profile.
By the first nine months of the year the cooperative, which is the only bank that fully implemented the provisions of the ECB reported significant losses, while the other banks reporded profits due to low provisions. The state is asked to cover the Cooperative’s losses, paying €175 mn in capital support for the Cooperative Central Bank - an amount corresponding to 1% of GDP.
It is expected that both the Bank of Cyprus and the Hellenic Bank will significantly increase their provisions in the last quarter, coming very close to the new, increased supervisory threshold that will be set on a European level.
Results
The financial results of banks so far, reflect the progress made in stabilizing their deposits and their revenue and also the major challenges they face.
Positive points for banks include the increase in their deposits. Deposits continued to grow during the third quarter, especially for BOCY.
Deposits increased by 8% for the Bank of Cyprus, by 3% for cooperative institutions and fell by 1% for the Hellenic Bank.
At the same time, the amount of net loans decreased.
NPLs still remain at unsustainably high levels despite signs of stabilization while all systemic banks emphasize the importance of improving the situation.
As regards the index of the common equity tier 1 (CET1), it moved in two directions for major banks.
In the case of the Bank of Cyprus, it was improved to 15.6% from 14% earlier this year, which is partly due to the disposal of the majority of Russian operations, while for Coops it deteriorated to 12% from 13.6% as a result of increased provisions which led to a new state support of €175 mn.
The index fell marginally to 13.3% for HB, but following the EBRD's investment after the third quarter, it improved to 13.8%.
If case BOCY and HB adopt the methodology of the ECB, there will be a negative impact on the CET1 index by 2.4% and 1.52% respectively.