* Squeeze on dividends and lending? *
Cyprus’ two main banks, Bank of Cyprus (BOC) and Marfin Popular Bank (MBP), have announced they need a capital buffer of amounting to EUR 3.6 bln in order to meet new capital requirements coming out of the eurozone rescue package, but add that they expect to meet these requirements through a mixture of convertible bonds, profits and other measures.
As part of a Capital Exercise conducted with the European Banking Authority (EBA) and the Central Bank of Cyprus, BOC identified a capital buffer of EUR 1,472 mln (EUR 1.5 bln) and MPB identified a capital buffer of EUR 2,116 mln (EUR 2.1 bln).
Earlier, the EBA had announced that the two banks combined needed to find EUR 3.6 bln.
The EUR 1.5 bln requirement for BOC is not far from the EUR 1.2 bln shortfall for BOC identified in an estimate by Sapienta Economics published by the Financial Mirror earlier today (27 October), while the EUR 2.1 bln MBP requirement is rather higher than the EUR 1.4 billion estimated.
Last night, EU leaders agreed on a comprehensive eurozone rescue package that includes the private sector taking a 50% haircut on Greek sovereign debt. As part of the deal, the EBA announced a new Core Tier 1 capital ratio requirement of 9% from June 2012.
As of mid-2011, the three biggest banks in Cyprus reported that they had lent the Greek government EUR 5.1 bln. BOC had lent EUR 2 bln, MPB had lent EUR 3 bln and Hellenic only EUR 110 mln. A 50% haircut will therefore have an impact on the banks’ capital ratios.
To meet its buffer, BOC is relying partly on the fact that the EBA intends to consider contingent convertibles, which means that it could accept BOC’s convertible bonds as capital.
BOC has issued EUR 887 mln Convertible Enhanced Capital Securities (CECS). These currently form part of Tier 1 capital and are Basel III compliant.
BOC said that taking into account the EUR 887 mln, the additional amount of capital buffer required, based on the preliminary estimate by EBA, is EUR 585 mln.
“Bank of Cyprus is in a position to cover the required additional capital buffer of EUR 585 mln through internal profit generation for the 12 month period ending June 2012 and other actions among which is the efficient management of risk weighted assets,” it said.
Similarly, MBP said that it expects to be able to make use of an exchange offer of capital securities worth EUR 738 mln, EUR 660 mln in convertible securities of which EUR 65 mln is already issued and a EUR 165 mln deferred tax benefit.
MPB said that it would also find other savings, including deleveraging, worth EUR 600 mln.
The banks’ estimates are the result of a capital exercise carried out on 70 European banks. The exercise assessed the banks’ “required capital buffers to reach a level of 9% Core Tier 1 ratio by the end of June 2012 assuming a severe and immediate impairment of sovereign debt holdings.”
The Capital Exercise was based on the balance sheet as at June 2011 and market prices as at 30 September 2011 of sovereign bonds held by banks. The figures are subject to change on the basis of end September data and will be reviewed by banks and supervisory authorities.
Any revisions to this figure will feed into plans for increasing levels of capitalisation in the period to June 2012.
Squeeze on dividends and loans?
The Central Bank of Cyprus issued a statement calling on banks to intensify their efforts to increase capital and saying that it was working in close cooperation with the Finance Ministry to ensure financial stability.
The EBA said “To reach the targets, banks will be expected to withhold dividends and bonuses”.
With both banks also mentioning risk weighted assets, it looks like bank employees, shareholders and borrowers are all in for a big squeeze.
Earlier this year the two banks raised EUR 2 billion between them fairly easily. But if the banks have to go abroad to find capital they will be competing this time with all the other banks in the eurozone dashing to meet the same deadline.
In the banks’ favour will be loan/deposit ratios below 100%, meaning that they have good liquidity positions.
Going against them are the EUR 20 bln they hold in private sector Greek debt.
Even if Greece remains within the euro, the hangover of Greek private debt is likely to affect their non-performing loans and their profits for many years to come.
Fiona Mullen
www.sapientaeconomics.com
