25/11/2015 10:36
The process of evaluating loan portfolios by the European Central Bank changes the setting in the domestic banking sector, squeezing the capital cushion that banks had at their disposal to fuel economic growth.
The assumptions used by the ECB for assessing the loan portfolios of the Cypriot banks, seems to significantly increase the required impairment provisions, with a corresponding impact on their capital base.
This in connection with the impending increase in the minimum capital adequacy ratio of the ECB may cause problems as regards banks’ ability to lend.
Although the amount of the new capital limit is not specified, evidence to bankers so far point to a rise from 8% to 11.75%.
For some time banking circles have been reporting the disagreement of Cypriot banks with the ECB methodology used for the evaluation of loan portfolios, but they never referred to specific sizes.
The ECB appreciates - arbitrarily according to domestic bankers - that the coverage of red loans with provisions should be up to 50% from 33% it is today.
On Monday, for the first time, the Bank of Cyprus referred to the size of the potential difference with European supervisors in the context of announcing the 9m results of the bank.
According to BOCY, based on the ECB methodology there should be additional provisions of approximately €600 mn. Had this direction been implemented, it would reduce the common equity tier 1 ratio (CET1 ratio) by 2.4% from 15.6% on September 30, 2015.
This would bring the ratio to 13.2%. Even though this is above the minimum of 11.75%, it is likely to cause some concerns, as the cushion of about €360 mn will be fragile given the still uncertain course of the economy.
This might make lending more difficult, although it seems - for now - that the bank won’t need new capital in the near future.
In the case of the Cooperative, capital strengthening has already been formalized.
After the evaluation of the Cooperative’s lending portfolio, the government as the major shareholder will proceed to an injection of €150-200 mn.
This was deemed necessary as the capital adequacy ratio fell to 12%, which is close to the potential new minimum.
The decrease of the ratio at the second largest banking group was recorded due to recognizing more provisions for impairments (268%) compared with the corresponding period last year, while provisions for the first half of the year were down by 4%.
The Cooperative seems to have already proceeded to the recognition of additional provisions that may be required by the ECB.
Today the announcement of the nine months results of the Hellenic Bank is expected, which according to all indications, should also increase its provisions until the end of the year.
Most estimates refer to the need for a new but small capital support, which may change depending on the progress of negotiations with the ECB.
Provisions recognized for the first half of the year were significantly reduced by 76% compared to the corresponding period of 2014 (€47 mn from €194 mn).
A possible recognition of a high level of provisions can bring the capital adequacy ratio, which stood at 13.5% in the first half of the year, close to the possible new limit.
If banks are eventually forced to adopt ECB’s position as specified in BOCY announcement, Cypriot systemic banks will close 2015 with substantial losses.
The need for recognizing additional provisions is expected to continue, if there is no drastic change in the situation with non-performing loans.
As the CB announced on Tuesday, problematic loans remain at €27,4 bn despite legislative actions to reduce them.
The assumptions used by the ECB for assessing the loan portfolios of the Cypriot banks, seems to significantly increase the required impairment provisions, with a corresponding impact on their capital base.
This in connection with the impending increase in the minimum capital adequacy ratio of the ECB may cause problems as regards banks’ ability to lend.
Although the amount of the new capital limit is not specified, evidence to bankers so far point to a rise from 8% to 11.75%.
For some time banking circles have been reporting the disagreement of Cypriot banks with the ECB methodology used for the evaluation of loan portfolios, but they never referred to specific sizes.
The ECB appreciates - arbitrarily according to domestic bankers - that the coverage of red loans with provisions should be up to 50% from 33% it is today.
On Monday, for the first time, the Bank of Cyprus referred to the size of the potential difference with European supervisors in the context of announcing the 9m results of the bank.
According to BOCY, based on the ECB methodology there should be additional provisions of approximately €600 mn. Had this direction been implemented, it would reduce the common equity tier 1 ratio (CET1 ratio) by 2.4% from 15.6% on September 30, 2015.
This would bring the ratio to 13.2%. Even though this is above the minimum of 11.75%, it is likely to cause some concerns, as the cushion of about €360 mn will be fragile given the still uncertain course of the economy.
This might make lending more difficult, although it seems - for now - that the bank won’t need new capital in the near future.
In the case of the Cooperative, capital strengthening has already been formalized.
After the evaluation of the Cooperative’s lending portfolio, the government as the major shareholder will proceed to an injection of €150-200 mn.
This was deemed necessary as the capital adequacy ratio fell to 12%, which is close to the potential new minimum.
The decrease of the ratio at the second largest banking group was recorded due to recognizing more provisions for impairments (268%) compared with the corresponding period last year, while provisions for the first half of the year were down by 4%.
The Cooperative seems to have already proceeded to the recognition of additional provisions that may be required by the ECB.
Today the announcement of the nine months results of the Hellenic Bank is expected, which according to all indications, should also increase its provisions until the end of the year.
Most estimates refer to the need for a new but small capital support, which may change depending on the progress of negotiations with the ECB.
Provisions recognized for the first half of the year were significantly reduced by 76% compared to the corresponding period of 2014 (€47 mn from €194 mn).
A possible recognition of a high level of provisions can bring the capital adequacy ratio, which stood at 13.5% in the first half of the year, close to the possible new limit.
If banks are eventually forced to adopt ECB’s position as specified in BOCY announcement, Cypriot systemic banks will close 2015 with substantial losses.
The need for recognizing additional provisions is expected to continue, if there is no drastic change in the situation with non-performing loans.
As the CB announced on Tuesday, problematic loans remain at €27,4 bn despite legislative actions to reduce them.
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