Cyprus banks pass EU-wide “stress tests”

Financial Mirror (Cyprus) - - FRONT PAGE -

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.


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.


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.”


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.


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.


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 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.

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