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Can Cyprus banks withstand the stress?

02 May, 2014

 * BOCY, HB, Coop face harsher scenarios
 * EBA sees ‘modest growth’ in 2016 – property, stock price to continue falling

Cyprus banks will have to face tougher tests to see if they can withstand pressures from the economy, such as coping with a surge in unemployment and recession, as well as a fall of as much as 20% in property prices, all likely scenarios in the current crisis.
The European Banking Authority (EBA) published its revised methodology and the scenarios to be used for the 124 banks in this year’s stress tests, the results of which will be released in October as regulators aim to restore confidence in an industry that had to be rescued by taxpayers in the financial crisis.
According to the EBA, the stress tests “will identify remaining vulnerabilities in the EU banking sector and will provide a high level of transparency into EU banks’ exposures.”
In Cyprus, the stress tests will include the Bank of Cyprus and Hellenic Bank, as well as the nationalised Cooperative sector that was bailed out with a capital injection of 1.5 bln euros.
The EBA requirement are that the Core Tier-1 capital ratio of the banks be at least 8% according to the baseline scenario and at least 5.5% on the basis of the adverse scenario.
The adverse scenario for Cyprus foresees that GDP in 2014 will shrink by 1.5% further than the Troika of international lenders predict and will reach 6.3%, while it will be contained at 0.5% in 2015 with a modest 1.1% growth in 2016.
Unemployment will reach 19.6% in 2014, fall slightly to 19.4% in 2015 and to 18.4% in 2016.
The adverse scenario predicts that inflation will be recorded at about 0.4% in 2014, will rise to 0.8% in 2015 and reach 1% in 2016.
On the basis of the adverse scenario stock prices in Cyprus are also expected to fall by 19.9% in 2014, 20.6% in 2015 and 26.6% in 2016.
Home prices will fall by 4.0% in 2014, 6.4% in 2015 and 6.4% in 2016, as real estate prices in general are predicted to go down by 11.9% in 2014, 11% in 2015 and 7% in 2016.
Commercial property prices are forecast to be reduced by 7.9% in 2014, 6.5% in 2015 and 3% in 2016.
The adverse scenario also foresees that the impact of a shock in state funding will affect the increase of real GDP by 0.10% in 2014, 0.21% in 2015 and 0.29% in 2016.
As far as the baseline scenario for Cyprus is concerned, GDP is expected to follow Troika predictions and will shrink by 4.8% in 2014, achieving marginal growth of 0.9% in 2015 and 1.9% in 2016.
Unemployment will reach 19.2% in 2014, will fall to 18.4% in 2015 and will be reduced even further to 17.0% in 2016, the baseline scenario predicts.
Inflation will range at 0.4% in 2014, will go up by 1.4% in 2015 and 1.7% in 2016.
Real estate prices in general are foreseen to fall by 7% in 2014, 5.2% in 2015 and 2% in 2016.
At the same time commercial property prices are expected to go down by 4.9% in 2014, 3.5% in 2015 and 0.5% in 2016.
In the previous metrics for the 2010 and 2011 stress tests according to EBA predictions had Cyprus recording a 1.3% GDP growth in 2010 (-0.7% adverse scenario) and 6.3% unemployment (6.7% adverse).
For 2011, the GDP growth scenario was seen at 0.4% (-0.1% adverse) and unemployment at 7.9%, exceeding the adverse scenario or 7.3%.
For the 2012 predictions, the year when economy’s collapse was well underway, GDP was seen contracting -2.4%, once again exceeding the EBA adverse scenario of a 0.6% growth, while unemployment was seen at 11.9%, again exceeding the EBA scenario of 7.1%.

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