29/10/2010 07:23
The outlook for the Cypriot banking system is negative, reflecting the challenging operating conditions in Cyprus and the rated banks' direct and sizeable exposure to the Greek economy, says Moody's Investors Service in its new Banking System Outlook on Cyprus.
According to its report, “asset quality and earnings for the rated Cypriot banks will remain under pressure in the near to medium term, given the muted economic growth in Cyprus and the anticipated economic contraction in Greece stemming from the Greek government's austerity measures”.
Christos Theofilou, Moody's Analyst and author of the report said that Cypriot banks have direct and sizeable exposures in Greece through branches or subsidiaries, accounting for 41% of total loans as of June 2010.
According to Moody’s, “the Greek exposures of Cypriot banks are affected by weak corporate earnings (due to the economic contraction) and reduced household disposable income (due to rising unemployment rates, additional tax measures and enforcement, and salary cuts). These factors will likely lead to substantially higher non-performing loans in Cypriot banks' loan books”.
Apart from Greece, Moody's also expects non-performing loans to continue to rise in Cyprus, where economic activity is expected to remain weak in 2011. The country's real-estate market--which is a significant component of the banks' loan books and represents the majority of collateral for loans--remains a risk area with weak demand and unclear growth prospects.
“"Bottom-line profitability for Cypriot banks will likely remain modest, slightly below 2009 levels, as it continues to be negatively affected by the weak macro-economic conditions in Cyprus and Greece, with elevated loan-loss provisions over the next 12 to 18 months. The contribution to overall profitability from Greece will likely remain minimal or negative due to high provisioning needs, high funding costs and low new business volume," the report added.
“The banks also remain highly reliant on offshore deposits (primarily short-term deposits), making the banking system vulnerable to a sharp deterioration in international market sentiment towards Cyprus.
Importantly, high liquidity levels and prudent regulatory requirements indicate that both the banks and the regulator are taking a cautious approach to these offshore deposits”, Moody’s said.
“Partly offsetting these negative factors is the Cypriot banks' reliance on a traditional banking model, where deposits fund most of banks' loan books. In Moody's view, this has enabled the banks to cope well with the financial crisis to date”, it said
Moody's expects that banks' high liquidity levels, defensible domestic deposit franchises and moderate market funding needs will continue to provide a degree of stability, despite challenging operating conditions.
According to Moody’s, recent capital raising efforts are supporting the banks' capital levels, which in conjunction with other loss-absorption resources are considered adequate to absorb losses anticipated under Moody's base-case scenario analysis.
“However, given the ongoing asset-quality deterioration, there is a risk that losses may exceed Moody's base-case assumptions, particularly for Cypriot banks' Greek operations”, it added.
“The downside risks to Cyprus' economic recovery also remain high, while certain systemic weaknesses--a small and undiversified economy, high private-sector indebtedness and a weak co-operative sector--could exacerbate an unexpected protracted economic downturn”, the report concluded.
Moody’s rating for Bank of Cyprus’ deposit and IDR is Α3/Ρ-2 and C-/Baa2, while that of Marfin and Hellenic Bank is Baa2/P-2 and D+/Ba1 and Baa2/P-2 and D/Ba2 respectively.
According to its report, “asset quality and earnings for the rated Cypriot banks will remain under pressure in the near to medium term, given the muted economic growth in Cyprus and the anticipated economic contraction in Greece stemming from the Greek government's austerity measures”.
Christos Theofilou, Moody's Analyst and author of the report said that Cypriot banks have direct and sizeable exposures in Greece through branches or subsidiaries, accounting for 41% of total loans as of June 2010.
According to Moody’s, “the Greek exposures of Cypriot banks are affected by weak corporate earnings (due to the economic contraction) and reduced household disposable income (due to rising unemployment rates, additional tax measures and enforcement, and salary cuts). These factors will likely lead to substantially higher non-performing loans in Cypriot banks' loan books”.
Apart from Greece, Moody's also expects non-performing loans to continue to rise in Cyprus, where economic activity is expected to remain weak in 2011. The country's real-estate market--which is a significant component of the banks' loan books and represents the majority of collateral for loans--remains a risk area with weak demand and unclear growth prospects.
“"Bottom-line profitability for Cypriot banks will likely remain modest, slightly below 2009 levels, as it continues to be negatively affected by the weak macro-economic conditions in Cyprus and Greece, with elevated loan-loss provisions over the next 12 to 18 months. The contribution to overall profitability from Greece will likely remain minimal or negative due to high provisioning needs, high funding costs and low new business volume," the report added.
“The banks also remain highly reliant on offshore deposits (primarily short-term deposits), making the banking system vulnerable to a sharp deterioration in international market sentiment towards Cyprus.
Importantly, high liquidity levels and prudent regulatory requirements indicate that both the banks and the regulator are taking a cautious approach to these offshore deposits”, Moody’s said.
“Partly offsetting these negative factors is the Cypriot banks' reliance on a traditional banking model, where deposits fund most of banks' loan books. In Moody's view, this has enabled the banks to cope well with the financial crisis to date”, it said
Moody's expects that banks' high liquidity levels, defensible domestic deposit franchises and moderate market funding needs will continue to provide a degree of stability, despite challenging operating conditions.
According to Moody’s, recent capital raising efforts are supporting the banks' capital levels, which in conjunction with other loss-absorption resources are considered adequate to absorb losses anticipated under Moody's base-case scenario analysis.
“However, given the ongoing asset-quality deterioration, there is a risk that losses may exceed Moody's base-case assumptions, particularly for Cypriot banks' Greek operations”, it added.
“The downside risks to Cyprus' economic recovery also remain high, while certain systemic weaknesses--a small and undiversified economy, high private-sector indebtedness and a weak co-operative sector--could exacerbate an unexpected protracted economic downturn”, the report concluded.
Moody’s rating for Bank of Cyprus’ deposit and IDR is Α3/Ρ-2 and C-/Baa2, while that of Marfin and Hellenic Bank is Baa2/P-2 and D+/Ba1 and Baa2/P-2 and D/Ba2 respectively.
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