07/04/2008 10:46
International Credit Rating Firm, Fitch Ratings, believes that the prospects of the Cypriot banks in 2008 are good, despite the challenges from the international market crisis. In a report released on Friday, Fitch supports that despite the more difficult financial environment, their operating performance should remain satisfactory, supported by expected good economic growth in Cyprus, room for retail business development and good cost efficiency. “Fitch considers the prospects for the three largest Cypriot commercial banks (Marfin Popular Bank (MPB), Bank of Cyprus Public Company Ltd (BOC) and Hellenic Bank Ltd (HB)) to be substantially positive for 2008”, the report said.
“Although Cypriot commercial banks' 2007 profitability was not directly affected by the international sub-prime crisis, the continuing market turmoil may make it challenging for them to replicate strong operating results in the future”, Fitch added.
“Maintaining the current level of income generation, however, remains one of the key challenges for the banks' management, due to the changed global economic market conditions, a prudent approach from the Central Bank of Cyprus, which is aiming to reduce the pace of internal lending growth, and intensified competition, which may put their wide net interest margins under pressure”, the report noted.
“Cypriot banks will therefore need to continue their restructuring to maintain their good cost to income ratios and expand auxiliary services to counteract pressure on net interest margins”, it added.
According to the report, “in 2007, the three largest Cypriot commercial banks continued to report marked improvements in their operating profitability and cost efficiency on the back of a remaining good economic environment, strong loan growth and improved cost management. The banks' strong operating profitability also benefited from continued restructuring and improving asset quality, which resulted in reduced impairment charges, allowing the banks to generate good internal capital”.
According to Fitch, “capital adequacy of the top three Cypriot banks is satisfactory for the risks they face. Despite fast-growing loan books, at end-2007 the banks' core capital to total assets ratio remained good at 7.3% (2006: 7.1%), mainly due to strong internal capital generation. However, continued rapid loan growth may put capital ratios under pressure if the banks cannot maintain high levels of internal capital generation”.
“Despite the crisis in the financial markets, the banks' liquidity remained satisfactory. At end-2007, their loans represented 73% of their deposits on aggregate. In addition, since 2005 some banks have diversified their sources of funding by issuing senior long-term debt under EMTN programmes to improve their funding position further. All three banks are net lenders on the inter-bank market”, Fitch concluded.
“Although Cypriot commercial banks' 2007 profitability was not directly affected by the international sub-prime crisis, the continuing market turmoil may make it challenging for them to replicate strong operating results in the future”, Fitch added.
“Maintaining the current level of income generation, however, remains one of the key challenges for the banks' management, due to the changed global economic market conditions, a prudent approach from the Central Bank of Cyprus, which is aiming to reduce the pace of internal lending growth, and intensified competition, which may put their wide net interest margins under pressure”, the report noted.
“Cypriot banks will therefore need to continue their restructuring to maintain their good cost to income ratios and expand auxiliary services to counteract pressure on net interest margins”, it added.
According to the report, “in 2007, the three largest Cypriot commercial banks continued to report marked improvements in their operating profitability and cost efficiency on the back of a remaining good economic environment, strong loan growth and improved cost management. The banks' strong operating profitability also benefited from continued restructuring and improving asset quality, which resulted in reduced impairment charges, allowing the banks to generate good internal capital”.
According to Fitch, “capital adequacy of the top three Cypriot banks is satisfactory for the risks they face. Despite fast-growing loan books, at end-2007 the banks' core capital to total assets ratio remained good at 7.3% (2006: 7.1%), mainly due to strong internal capital generation. However, continued rapid loan growth may put capital ratios under pressure if the banks cannot maintain high levels of internal capital generation”.
“Despite the crisis in the financial markets, the banks' liquidity remained satisfactory. At end-2007, their loans represented 73% of their deposits on aggregate. In addition, since 2005 some banks have diversified their sources of funding by issuing senior long-term debt under EMTN programmes to improve their funding position further. All three banks are net lenders on the inter-bank market”, Fitch concluded.
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