— FINANCIAL MIRROR ANALYSIS —
Fitch Ratings has placed five Greek banks on negative watch and has downgraded the long-term borrowing ratings of two Cyprus banks, prompting questions whether the Cyprus government can sustain its large banking sector in case of a need for state intervention, especially after Eurozone leaders agreed last week to activate a support mechanism only if the whole system is under threat.
Fitch placed National Bank of Greece, Alpha Bank, Eurobank, Piraeus Bank and ATEbank on a negative rating watch (RWN) and has downgraded the long-term borrowing ratings (IDRs) of Marfin Popular and Hellenic Bank by one notch to BBB and BBB-minus, respectively. It also maintained the long-term IDR of the island’s largest financial institution, Bank of Cyprus, at BBB-plus. The outlook on HB is ‘stable’ while those on the other Cypriot banks remain ‘negative’, according to Fitch.
The rating agency also downgraded the support rating floors (SRF) of all three banks to BBB-minus from BBB.
All the rating actions, regarded as negative by analysts, but not unexpected, reflect Fitch's opinion that the operating environment in Greece where the Cypriot banks have their second largest exposure, and to a lesser extent in Cyprus, will remain challenging, affecting profitability and asset quality.
According to a note from Marfin CLR, Fitch estimates that the Cypriot state is too small to "lift" the large banking sector, with its assets reaching 864% of GDP, adding that, although there is a strong desire by the government to support the banking sector under a theoretical crisis scenario, the problems of the banks may be too large for such a small economy.
Also, due to the large exposure of local banks in the Greek economy, the need for support — if ever needed — could have been higher than initially expected because of the deteriorating economic conditions in Greece.
Independent analysts suggest that Cyprus’ weight within the Eurozone is measured at a mere 0.2% and has so far escaped strict supervision. They added that it is also unfortunate that the ratings came at a time when Bank of Cyprus successfully pumped the market for a capital increase of 330 mln euros in October, yet Marfin Popular Bank’s rights issue expected in February and worth some 488 mln euros, has only now been approved by the stock market regulator.
All three bank stocks closed lower on Thursday, with Bank of Cyprus shedding 0.75% to close at 2.63 euros, Hellenic Bank down 1.14% at 87c and Marfin Popular losing 2.63 euros to end the day at 1.11 euros.
CYPRUS “NO PROBLEM”…
However, the Cyprus government is confident that the economy will expand by 0.8% in 2010 and will see double growth to 1.5% in 2011 provided the global economy continues to recover and there is no domestic fiscal slippage.
Finance Minister Charilaos Stavrakis said Cyprus may also tap international markets for its financing requirements towards the end of next year, as the government’s financing requirements are expected to reach 1.3 bln euros in 2011.
Despite emerging from recession in the first quarter of 2010, Cyprus is still burdened with a high public debt that is expected to reach 61% in 2010, and 61.6% next year, with the government doing little in the way of austerity measures for fear of upsetting voters and jeopardising the ruling coalition’s hopes in the May parliamentary elections.
"The plan is to cover financing with short-term domestic borrowing for the first eight to nine months of the year. We may possibly go to the international markets for longer term financing towards the end of the year," Stavrakis said.
Cyprus tapped international markets on two occasions in 2010, for 1.0 bln euros in a 10-year euro bond in February, and for another 1.0 bln in a 5-year euro bond in October.
However, it is unsure if the downgrading of bank bond ratings will also be hampered by the Fitch downgrade.
In October, Moodys Investor Services said that the outlook for the Cypriot banking system was negative, reflecting the challenging operating conditions and the rated banks' direct and sizeable exposure to the Greek economy.
"Asset quality and earnings for the rated Cypriot banks will remain under pressure in the near to medium term, given the muted economic growth in Cyprus and the anticipated economic contraction in Greece stemming from the Greek government's austerity measures," explained Christos Theofilou, a Moody's analyst.
Moody's sais at the time that weak corporate earnings and reduced household disposable income in could lead to substantially higher non-performing loans in the Cypriot banks' loan books.
Moody's also expected non-performing loans to continue to rise in Cyprus, where economic activity is expected to remain weak in 2011. The country's real-estate market — which is a significant component of the banks' loan books and represents the majority of collateral for loans — remains a risk area with weak demand and unclear growth prospects.
"Bottom-line profitability for Cypriot banks will likely remain modest, slightly below 2009 levels, as it continues to be negatively affected by the weak macro-economic conditions in Cyprus and Greece, with elevated loan-loss provisions over the next 12 to 18 months. The contribution to overall profitability from Greece will likely remain minimal or negative due to high provisioning needs, high funding costs and low new business volume," added Theofilou.
The EU has started legal action against Cyprus for running a fiscal shortfall exceeding 3.0% of GDP. The deficit, which Stavrakis said was partly caused by fiscal expansion to stimulate growth, was expected to hit 5.5% in 2010.
Under the EU deficit process, the island must curb the shortfall to 4.5% of GDP in 2011 and below 3.0% in 2012.
A 2011 budget approved last week calls for increases in VAT on food and medicine from January 10, while the government also plans to tax large bank deposits and start a dialogue for pension reform in an inflated public sector.
Stavrakis said he could not rule out new taxes. "I believe we should speak about a reduction in spending, and not exclusively new taxes…(but) I don't think any responsible economist can rule anything out."
