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Cypriot banking system second to last in capital ratio in the EU

July 20, 2018 at 5:14pm
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Cyprus is in the penultimate place in the European Union, at the same place with Italy and ahead of Portugal on its banking system’s Common Equity Tier 1 capital (CET1) according to the risk dashboard that the European Banking Authority has published for March 2018.

In particular, the Cypriot banking system’s CET1 dropped at the end of March to 13.2%, down from 13.9% at the end of 2017, 15.1% at the end of 2016 and 14.9% at the end of 2015.

This drop reflects an increase in provisions but also the dampening effect the effort to reduce non-performing loans has had on banks’ equity.

According to the EBA, although the EU’s equity tiers are high, they have presented a small deterioration in the first quarter of 2018. The EU average presents a drop of 50 units of base down from 14.9% to 14.4% due, among others, to the impact the international accounting standard 9.

The EU average of the CET1, fully loaded, fell by 40 base units to 14.2%. Cyprus is in the penultimate place with 12.10% ahead of Spain whose CET1 is 11.2%.

As far as bad loans are concerned Cyprus remained in the second worse position with its total NPL’s corresponding to 39% of its total loan portfolio, behind Greece whose NPLs corresponded at the end of March to 45% of total loans.

At EU level the NPL index dropped to 3.9% which is a new low from the fourth quarter of 2014.

Cyprus is marginally under the EU average of 46.3% on the NPL coverage ratio, which at the end of March stood at 46.1% up from 45% at the end of 2017 and 45.5% at the third quarter 2017.

It is further noted that all countries with high NPLs have increased their provisions. Italy has increased its provisions by 5% in one quarter, Greece by 3% as well as Portugal.

The EBA expresses concern over the return on equity dropping to 6.8%.

However, in the first quarter of 2018 the Cypriot banking system had a positive performance of 8.9% compared to 16.5% at the end of 2017.  Within 2017 important increased provisions took place which affected Cypriot banks’ profitability.

Cyprus has the fourth worse cost-to-income ratio in the EU with 73.04% something which seems to constitute a key challenge for Cypriot banks’ profitability. Germany is in first place with 84%.