* Dogged by NPLs, provisions hiked to €1 bln *
The Bank of Cyprus said it will more than double its provisions for 2015 to EUR 1 bln, effectively resulting in an after tax reporting of ERUR 400 mln, it announced on Tuesday, adding, however, that it will not need to raise further capital as its Common Equity Tier 1 (CET1) ratio “will continue to be strong” at 14%.
.jpg)
The bank, that was twice bailed out by depositors and shareholders, and burdened in 2013 with a colossal debt of about EUR 11 bln from the now-defunct Laiki Popular Bank, said that its non-performing loans will “improve” to 50% of its loan-book and that it has now reduced its ECB-funded ‘emergency liquidity allowance’ to EUR 3.5 bln.
In a statement for its preliminary financial results for 2015, that will be put to the board on February 25, the bank said that as a result of amendments to the assumptions in its provisioning methodologies, provision coverage levels against the Bank’s loans in arrears for more than 90 days will improve to levels approaching 50%. The bank also expects a EUR 0.7 bln reduction in the loans in arrears for more than 90 days, for the fourth quarter of 2015.
“The Bank expects to increase its provisioning levels by EUR 0.6 bln to a full-year charge of about EUR 1 bln, resulting in an expected full-year loss after tax of EUR 0.4 bln,” a press release said .
It noted that “were the bank not to make any changes to its provisioning assumptions, the profit after tax for the year 2015 would have been about EUR 100 mln. The bank’s CET1 ratio would, in these circumstances, exceed 16%”.
Bank of Cyprus announced profits of EUR 73 mln for the first nine months of the year, marginally down from the same three quarters the previous year, hampered by the loss-making Russian subsidiary Uniastrum that was only disposed of in September 2015.
The changes provisioning assumptions relate to extending recovery periods and applying additional realisation discounts on certain portfolios of problem loans and they “will significantly bridge the regulatory dialogue with the ECB and explicitly bolster the bank’s provisioning levels”.
The statement said that the bank’s CET1 ratio (transitional basis) will continue to be strong at about 14%, remaining higher than the minimum required ratio of 11.75% relating to the Pillar II capital requirement, “confirming that there is no need for the Group to raise additional capital”.
During the fourth quarter of 2015 and during January 2016, the bank said it completed the restructuring of a number of large lending exposures and that further reductions for the early quarters of 2016 are expected as the restructuring efforts continue.
It also said that the bank’s liquidity position continues to improve, benefiting from continuing deposit inflows, with customer deposits growing by EUR 0.6 bln during the fourth quarter of 2015 (4% increase) and that EUR 1.4 bln of ELA funding has been repaid post 30 September 2015, reducing it to a current level of EUR 3.5 bln.
Only last week, Moody’s warned that “while the recovering economy is supporting loan recoveries and depositor confidence, Bank of Cyprus’ and Hellenic Bank’s extremely weak loan quality will only gradually improve in 2016.”
“The economic recovery and a raft of new legislative measures to help lenders recover unpaid loans are improving Bank of Cyprus’ and Hellenic Bank’s restructuring prospects, funding conditions as well as their profitability. However, the large stocks of problem loans will take several years to work through, with the weak real-estate market hampering collateral sales,” said Moody’s analyst Melina Skouridou.
However, the rating agency recognised that “because of the increased economic activity and strengthening depositor confidence, customer deposits are starting to rebuild gradually.”
Although steadily declining, Bank of Cyprus remains dependent on ELA, while Hellenic Bank faced fewer outflows during the crisis and maintains a stronger deposit-based funding profile, the Moody’s report said.
Bank of Cyprus is ahead in terms of restructuring and recovering on problem loans. As a result, its profitability, which also benefits from recoveries on the discounted assets it acquired when it took over Laiki’s domestic business in 2013, is recovering at a faster pace. However, both banks’ profits will remain modest the coming years as they build up their low levels of provisions.
Accounting for around 41% of problem loans, the banks’ loan loss provisions provide a limited buffer against losses from their high stock of NPLs which continues to pose risks to their capital levels. The ratio of non-performing loans to gross loans, which stood at 56.9% of total lending for Hellenic Bank and 52.5% for Bank of Cyprus as of September 2015, will remain high over the foreseeable future.
