Cyprus banks pass EU-wide “stress tests”
Four of Cyprus’ ‘systemic’ banks have survived a gruelling stress test by European banking regulators that conducted a health check on the Eurozone’s 130 leading banks to see if they could withstand major cash upheavals over the next three years. This also means that they will not need state support, thus releasing about 1 bln euros earmarked in the economic adjustment programme agreed to with the Troika of international lenders.
Recently recapitalised Bank of Cyprus, the state-owned Cooperative Central Bank and privately-controlled Hellenic Bank passed various test levels, but only just, thanks to a combined cash injection of nearly 2.6 bln euros this year, with inspectors saying Hellenic still faces a shortfall of over 100 mln years, that the government considers “manageable” and which it’s shareholders have vowed to cover.
Only RCB Bank (formerly Russian Commercial Bank), a wholly owned subsidiary of the Russian giant VTB, passed the stress tests with flying colours, having enough capital to resist even the harshest of ‘adverse scenarios’ imposed by the European Central Bank.
The stress test results on capital adequacy, hailed by Finance Minister Haris Georgiades and Central Bank Governor Chrystalla Georghadji as a “turning point” for the Cypriot banking system, will also pave the way for the ECB to take full supervisory control of all 130 banks and several thousand smaller or regional financial institutions.
GEORGIADES: BANKING STABILITY
Harris Georgiades said that the stress test results mark the final stabilisation of the banking system which, in 2011-2013, was led to the brink of collapse, noting at the same time that public debt has shown a downward trend for the first time in several years. The Minister of Finance said that the Cypriot banks, including the Cooperative sector, enter the banking union and the direct supervision of the ECB with capital adequacy, enhanced supervisory and regulatory framework, new administrations and significant participation of foreign investors and especially with the ability to contribute to the recovery of the economy.
He said that the challenges still remain that are related to excessive lending of past years, consequences of failed policies and supervisory decisions of that particular period, adding that there is no room for complacency. He said that “the rating agencies’ successive upgrades reflect the recorded correction of the economy, the recession has concluded its cycle, unemployment has recorded a decline for the first time since 2008 and public finances are under control.”
“But we have still a long way to go and we have to continue having a sense of responsibility,” he said. Georgiades concluded that efforts should now be directed towards dealing with the non-performing loans and lowering interest rates.
GEORGHADJI: OPTIMISTIC FUTURE
Central Bank Governor Chrystalla Georghadji said that the results of a comprehensive assessment for Cypriot banks by the ECB and the European Banking Authority published on Sunday are good cause to face the future with optimism.
“The results are particularly positive for the Cypriot economy, since they demonstrate that the actions taken during 2014 and all the efforts and actions for boosting the banking sector were more than satisfactory,” she said.
These results “will contribute to strengthening depositors’ trust, which in turn will be able to contribute to the effort for economic growth”, creating the right conditions in order to lift the remaining capital controls.
Georgadji said it is important that the reserve of EUR 1 bln provided for in Cyprus’ international bailout plan, intended to cover any capital needs of the banking system, will not be used. This means that public debt will be EUR 1 bln less than what has been projected based on the Memorandum of Agreement (MoU) of the Cyprus bailout.
According to the ECB stress test results, the Cooperative Central Bank (racpailised by the state with EUR 1.5 bln) recorded a surplus of EUR 331 mln, Bank of Cyprus (recapitalised by investors with EUR 1 bln) a surplus of EUR 81 mln, whereas RCB completed the exercise with a surplus of EUR 112 mln. Hellenic Bank, that raised EUR 100 mln in fresh capital earlier this year, registered a capital shortfall of EUR 176 mln. However the bank said that it will proceed with a a rights issue and other actions worth EUR 71 mln will help reduce the overall capital shortfall to EUR 105.
The Association of Cyprus Banks (ACB) has expressed satisfaction with the positive results of the stress tests, adding that the exercise strengthens the efforts at home and European level to achieve transparency, consolidating stability and building confidence in the financial system and the banking sector across Europe.
The results show that “our banks have responded positively to the strict quality control requirements of the assets and exercise stress test and that is in a position to cope with future risks that might arise from a possible rapid deterioration of economic data.”
BOCY: PRE-EMPTIVE CAPITAL COVERS SHORTFALL
The pre-emptive capital raise ensured that the Bank of Cyprus absorbed the capital shortfall that emerged from the comprehensive assessment carried out by the European Central Bank, the Bank of Cyprus said.
Stress test revealed a capital shortfall of EUR 919 mln in the adverse scenario, covered by the EUR 1 bln capital raise resulting in an overall surplus of EUR 81 mln.
“The positive result reaffirms the solid capital position of the bank, even under the most extreme, severe theoretical stress conditions,” said Chairman Cristis Hassapis, adding this “will further strengthen the confidence of depositors and other stakeholders towards the bank.”
On his part, CEO John Hourican said that “the well-timed and deliberate actions taken during 2014, and in particular the pre-emptive EUR 1 bn share capital increase, have ensured a positive result.”
“The share capital increase has generated a significant capital buffer, ensuring that the bank could weather even the adverse stress scenario envisaged by the authorities,” he stressed. The European bank for Reconstruction and Development (EBRD) subscribed to EUR 120 mln of the capital raise, with a group of other investors, headed by fund manager Wilbur Ross, taking up a further EUR 400 mln, and subsequently eyeing control in the November 20 shareholders’ meeting.
CO-OP: OUTCOME IS WELCOME
The Co-operative Central Bank has welcomed the outcome of the stress tests, which revealed a capital surplus of EUR 331 mn under the adverse scenario.
In a statement, the CCB said it would continue “the methodical work to enhance the traditional role of the Co-ops in the Cypriot society and economy”, based on these results.
It said that the baseline scenario of the stress tests revealed a capital surplus of EUR 526 mn and the adverse scenario EUR 331 mn.
HELLENIC: WILL COVER SHORTFALL
The Hellenic Bank said that the results of the comprehensive assessment, which resulted in a shortfall of EUR 105 mln, are in line with the capital plans of the bank.
According to ECB rules, the dozen banks that did not pass the stress test must submit a new business plan, which the bank said it has done and which it says is “manageable” even under adverse capital stress conditions.
“The bank is already at an advanced stage of raising capital through a rights issue, for an amount which will exceed the Comprehensive Assessment outcome,” a bank statement said.
Chairman Irena Georgiadou said that the EUR 105 mln shortfall under the adverse scenario “is fully in line with our capital raising actions.”
“Our planned rights issue will raise significantly more than the residual Comprehensive Assessment calculation, and this will allow us to pursue our ambitious strategic growth plans to gain market share and utilise our large liquidity buffer. Our major shareholders support these growth plans as well as the capital raising”.
RCB: SUCCESSFULLY PASSED
RCB Bank said it has successfully passed the asset quality review and the stress tests, suggesting that the Common Equity Tier 1 ratio (CET1) in the adverse scenario is more than twice the minimum requirements.
“We are satisfied with the results. Success in passing the stress tests demonstrates that RCB Bank has retained stability and is a reliable partner for its clients.
The availability of significant capital reserves will enable the bank to implement its plans on international business development, as well as to boost its lending to Cypriot companies and expand its business in Cyprus,” said Kirill Zimarin, CEO of RCB Bank.