The two leading lenders on the island, Bank of Cyprus and Marfin Popular Bank, have passed the stress test conducted by the European Banking Authority, simulating a financial shock.
Eight of the 91 banks failed the test, two of them in Greece – ATEbank and EFG Eurobank.
According to the announcement issued locally by the Central Bank of Cyprus, “the estimated consolidated Core Tier 1 capital ratio of Bank of Cyprus would change to 6.2% and for Marfin Popular Bank to 5.3% under the adverse scenario in 2012 compared to 8.1% and 7.3%, respectively, as of end of 2010.”
“Adding to the results for 2012 under the adverse scenario the additional mitigating measures as reported in the results endorsed by the EBA, the ratio of Bank of Cyprus increases to 9.5% and the ratio of Marfin Popular Bank increases to 9.2%,” the announcement said.
A week earlier, the central bank had set a new core tier 1 minimum capital requirement of 8% for the island's banks, replacing the capital adequacy ratio as the new benchmark. Under previous regulations, the minimum core tier 1 requirement could have been as low as 2.0%.
Cypriot banks have sizeable exposure to Greek debt, and the island's ratings have been downgraded by all three agencies on concern of a spillover effect from a possible Greek default.
Fitch had said Cypriot banks could absorb the impact of an assumed 50% haircut on Greek bonds, but that worse-case scenarios could have a knock-on effect on Cyprus's own debt profile.
Industry sources said that the new central bank directive would seek to incrementally increase core tier 1 based on assets of the bank and the country's GDP. Under that assumption, Bank of Cyprus and Marfin Popular would have to have a minimum core tier 1 capital ratio of 10% from 2014 onwards.
Both banks have recently raised capital through issues. Bank of Cyprus's core tier 1 ratio at the end of March stood at 8.2%, excluding a 890 mln euro issue of Convertible Capital Securities (CoCos). Marfin Popular's core tier one ratio is now at 9.4%.
STRESS TESTS
Bank of Cyprus said that the result of the stress test exercise reaffirmed “the solid financial fundamentals of the bank which by maintaining adequate capital ratios, strong liquidity and profitability successfully faces even the adverse stress scenarios.”
The bank’s CEO, Andreas Eliades, said in a statement that “the Group always worked on a strategy of maintaining a strong capital adequacy ratio.”
He said that results of the stress tests “justified our strategic choices” and proved the bank’s resilience under the most extreme conditions.
Eliades added that the bank will continue on its development plan, suggesting that the 890 mln euro CoCos issued will be used to enhance liquidity and probably expand operations.
Marfin Popular issued an announcement saying that contributing factors included the sale of its Australia subsidiary, the conclusion of the issue of new enhanced convertible capital securities in July and the replacement of existing capital securities worth 738 mln euros with new Basel III-compliant bonds.
The bank added that it will continue its medium-term plan to enhance its capital adequacy and help improve its resilience to extreme market conditions.
It concluded that its exposure to European debt in June totaled 3.9 bln euros, of which 2.8 bln were Greek bonds, 380 mln in short-term 12-month Greek bonds, 50 mln in Irish bonds and none in Portugal.
GREEK FAILURES
State-controlled ATEbank and EFG Eurobank, Greece's second largest lender, failed the European stress test but the other four lenders tested passed the simulation, the banks said on Friday.
Eurobank scored a core Tier 1 capital adequacy ratio of 4.9%, below the 5.0% pass mark under the simulation's adverse scenario, and ATEbank said it had a capital shortfall of 713 mln euros.
Central Bank chief George Provopoulos said the banks which had followed instructions to raise capital boosted their position and lenders must continue to do so.
EFG Eurobank’s deputy chief executive Michael Kolakidissaid it will not need to raise capital as it sold a majority stake in its Polish operation Polbank to Austria's Raiffeisen and is in talks to sell its Turkish unit Tekfen.
"If we include corporate actions taken until end-April, the Core Tier 1 ratio comes to 6.8%," he said.
