08 October 2013

Fitch: Cyprus bank recaps should boost confidence, risks remain

Although the completion of the recapitalisation and restructuring process for the Cypriot banks should improve confidence and contribute to funding stability in the system, the banks will remain vulnerable to funding and liquidity risks, says Fitch Ratings.

Fitch expects Cyprus' GDP to contract by 8.9 per cent in 2013 and a further 4.9 per cent in 2014. A much deeper and longer recession could aggravate already poor asset quality and profitability and renew pressures on capitalisation. This may put further pressure on funding and liquidity profiles. We see this as the major risk for Cypriot banks. 

The banks' recapitalisations and restructurings, due to be completed by end-2013, are milestones on the roadmap for the full lifting of capital and deposit restrictions first introduced in March 2013. The completion should reactivate capital flows and help mitigate liquidity risks, especially at Bank of Cyprus (BoC) - the largest bank, which was exposed to the greatest losses. 

Fitch believes it is likely that the banks' revised Long-Term IDRs will be driven by their stand-alone intrinsic strength rather than sovereign support, as the Cypriot authorities have limited ability to support the banks. This is reflected in Cyprus' weak credit profile (Foreign Currency IDR 'B-') and the €10 billion IMF/EU bailout package it received.

Capital controls are likely to remain in place for some time, to help the stabilisation of the Cypriot economy and banking sector. But this will not prevent Fitch from upgrading the banks' ratings. 

BoC's pro forma core capital ratio stands at 11.8 per cent following the recapitalisation, which forced losses onto junior and senior creditors, including a 47.5 per cent deposit-to-equity conversion of uninsured deposits (exceeding €100,000). However, funding and liquidity remains affected by continuous deposit withdrawals. BoC remains reliant on central bank funding, largely through the Emergency Liquidity Assistance mechanism, despite regaining its counterparty status with the ECB. It has most to gain if confidence for the sector improves.

Hellenic Bank has until end-October to meet the regulatory minimum 9 per cent core capital ratio by private means. If unsuccessful, the bank will receive state aid without forcing losses onto senior creditors. Its funding and liquidity may be more resilient. Despite the crisis, loans/deposits were close to 80 per cent at end-H113, partly supported by the capital controls and the bank does not rely on ECB funding. 

Finally, the credit cooperative banks, which represent the bulk of the remainder of the system, will be recapitalised with a €1.5 billion capital injection directly from the Cypriot state under the IMF/EU support package. They will also be significantly restructured.

Press release

© Fitch, Inc.