18/06/2010 13:20
The condition in the Greek market is the key to the subsequent course and ratings of the Cypriot banks, Fitch noted in a special report for the Cypriot banks. The credit rating firm is worried about the exposure of the Cypriot banks in the Greek market but assures that they have adequate capital and liquidity.
In its report, the firm said that the Cypriot banks' sizeable credit exposure to Greece will largely determine the banks' performance in 2010. However, the agency also notes that Cypriot banks' favourable funding and liquidity profiles and a relatively resilient domestic market should help limit the negative impact from a further anticipated deterioration in Greece's operating environment.
“However, the Cypriot banks' favourable funding and liquidity profiles and a relatively resilient domestic market should help limit the negative impact from a further anticipated deterioration in Greece's operating environment”, it said.
“All three rated Cypriot banks have significant operations in Greece, their second home market and at end-2009 Greek loans and deposits accounted for 52.6% and 44.9% of group loans and deposits respectively at Marfin Popular Bank (MPB, 'BBB+'/Negative), 36.9% and 38.2% respectively and Bank of Cyprus Public Company Ltd (BoC, 'BBB+'/Negative) and 18.7% and 16.2% respectively at Hellenic Bank Ltd (HB, 'BBB'/Stable), the report noted.
According to Christian Kuendig, Director in Fitch's Financial Institutions team, “During 2009 and Q110, the overall profitability of the major Cypriot banks has been negatively affected by the performance of their Greek operations, which experienced significant asset quality deterioration, as well as by rising retail funding costs due to significant deposit gathering competition in Greece and, to a lesser extent, in Cyprus”.
“However, profitability in Cyprus has generally held up well, helped by resilient earnings, adequate cost control, and higher contributions from international activities, Greece excepted”, he added.
“Impaired loans as per Cypriot definition increased in all countries, notably in Greece, and at end-Q110 accounted for 6.0% of total loans at BoC, 6.3% at MPB and 8.9% at HB. Given the weakening environment in Greece and, to a lesser extent, in Cyprus, Fitch expects impaired loans to rise during 2010, the report stressed.
“Cypriot banks are still exposed to considerable downside risk due to anticipated further asset quality and profitability pressure in 2010, expressed in the Negative Outlooks on BoC and MPB," says Mr Kuendig. "However, Fitch has conducted balance sheet stress tests for the banks and the results suggest that Cypriot banks are in a position to absorb relatively sizeable further credit losses without significantly compromising their capital position”, the report added.
“Cypriot banks remain largely retail-funded, with end-Q110 loans/deposits ratios ranging from 85% at HB to 109% at MPB. This limits reliance on wholesale funding and represents a distinct advantage in the currently difficult debt capital market environment”.
“However, all banks are significantly reliant on non-resident commercial deposits, mostly from Russian and Commonwealth of Independent States (CIS) corporates, which to date have proved a stable funding source. BoC's and HB's Greek activities are self-funded while Greek funding needs at MPB are somewhat higher which also partly explains MPB's higher reliance on ECB funding. Given the forecast low loan growth and manageable funding maturities in 2010 and 2011, Cypriot banks' funding needs are likely to remain limited”, it stressed.
“Unlike its Greek and many of its western European peers, Cypriot banks' capitalisation has not been supported by government measures. At end-Q110, the capitalisation of all three banks was in Fitch's opinion adequate, with regulatory tier 1 capital ratios of around 10% at end-Q110”, it concluded.
Bank of Cyprus is rated with BBB+ with negative prospects, Marfin with BBB+ with negative prospects and Hellenic Bank with BBB with stable prospects.
In its report, the firm said that the Cypriot banks' sizeable credit exposure to Greece will largely determine the banks' performance in 2010. However, the agency also notes that Cypriot banks' favourable funding and liquidity profiles and a relatively resilient domestic market should help limit the negative impact from a further anticipated deterioration in Greece's operating environment.
“However, the Cypriot banks' favourable funding and liquidity profiles and a relatively resilient domestic market should help limit the negative impact from a further anticipated deterioration in Greece's operating environment”, it said.
“All three rated Cypriot banks have significant operations in Greece, their second home market and at end-2009 Greek loans and deposits accounted for 52.6% and 44.9% of group loans and deposits respectively at Marfin Popular Bank (MPB, 'BBB+'/Negative), 36.9% and 38.2% respectively and Bank of Cyprus Public Company Ltd (BoC, 'BBB+'/Negative) and 18.7% and 16.2% respectively at Hellenic Bank Ltd (HB, 'BBB'/Stable), the report noted.
According to Christian Kuendig, Director in Fitch's Financial Institutions team, “During 2009 and Q110, the overall profitability of the major Cypriot banks has been negatively affected by the performance of their Greek operations, which experienced significant asset quality deterioration, as well as by rising retail funding costs due to significant deposit gathering competition in Greece and, to a lesser extent, in Cyprus”.
“However, profitability in Cyprus has generally held up well, helped by resilient earnings, adequate cost control, and higher contributions from international activities, Greece excepted”, he added.
“Impaired loans as per Cypriot definition increased in all countries, notably in Greece, and at end-Q110 accounted for 6.0% of total loans at BoC, 6.3% at MPB and 8.9% at HB. Given the weakening environment in Greece and, to a lesser extent, in Cyprus, Fitch expects impaired loans to rise during 2010, the report stressed.
“Cypriot banks are still exposed to considerable downside risk due to anticipated further asset quality and profitability pressure in 2010, expressed in the Negative Outlooks on BoC and MPB," says Mr Kuendig. "However, Fitch has conducted balance sheet stress tests for the banks and the results suggest that Cypriot banks are in a position to absorb relatively sizeable further credit losses without significantly compromising their capital position”, the report added.
“Cypriot banks remain largely retail-funded, with end-Q110 loans/deposits ratios ranging from 85% at HB to 109% at MPB. This limits reliance on wholesale funding and represents a distinct advantage in the currently difficult debt capital market environment”.
“However, all banks are significantly reliant on non-resident commercial deposits, mostly from Russian and Commonwealth of Independent States (CIS) corporates, which to date have proved a stable funding source. BoC's and HB's Greek activities are self-funded while Greek funding needs at MPB are somewhat higher which also partly explains MPB's higher reliance on ECB funding. Given the forecast low loan growth and manageable funding maturities in 2010 and 2011, Cypriot banks' funding needs are likely to remain limited”, it stressed.
“Unlike its Greek and many of its western European peers, Cypriot banks' capitalisation has not been supported by government measures. At end-Q110, the capitalisation of all three banks was in Fitch's opinion adequate, with regulatory tier 1 capital ratios of around 10% at end-Q110”, it concluded.
Bank of Cyprus is rated with BBB+ with negative prospects, Marfin with BBB+ with negative prospects and Hellenic Bank with BBB with stable prospects.
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