As part of the Cyprus Weekly’s special focus on the financial sector this week, I am going to compare the performance of the biggest three banks – Bank of Cyprus (BoC), Hellenic Bank and the Cooperative Central Bank (CCB) in 2015. Much of the following is drawn from my monthly Sapienta Country Analysis Cyprus reports.
To create a ‘score card’ for the three Cypriot banks, I have divided their performance into five categories, starting with the biggest problem facing the economy, namely the high level of non-performing loans (NPLs). First, I score the NPL ratios and second, the progress in cutting them.
Third and related to this, I score coverage ratios. While high coverage ratios negatively affect profits, they are good in an environment of risk-averse regulators and investors.
Fourth, I’ll rank profitability. This is of course important to shareholders but also employees, whose future depends on the bank’s ability to make profits
Finally, I shall look at liquidity, as an indication of how well placed the banks are to lend to the economy and increase profits. Once the ranks in each category are added together, the bank with the lowest score has the highest rank.
NPL ratio winner: Hellenic
When measured on the stricter European Banking Authority (EBA) basis, Hellenic Bank has the lowest NPL ratio, at 59.2% in December 2015, followed by the CCB. The CCB does not release the NPL ratio on an EBA basis but one can infer from other data that it was 59.4%. Last place goes to BoC, at 61.8%.
NPL reduction winner: BoC
While it has the biggest NPL ratio, BoC actually went further than the other two in cutting the absolute level of NPLs in 2015. NPLs (EBA basis) dropped by €1bn to €14.0bn in December 2015 from €15.0bn a year earlier. Hellenic saw NPL levels rise by €45m over the year to €2.6bn in December 2015.
However, the bank redeemed itself somewhat by cutting NPLs by €81m between September and December.
The co-ops come a definite third, with NPLs rising over the year by €287m to €7.6bn, although, like Hellenic, they also fell between September and December, by €80m.
Coverage ratio: winner CCB
The co-ops come out top, however, when it comes to how well banks are protecting themselves against NPLs. This risk can be assessed by looking at the coverage ratio: accumulated provisions (the amount set aside for bad loans) as a proportion of bad loans.
Again, the CCB does not report the coverage ratio on the basis of the stricter EBA definition (it reports it instead on the basis of NPLs more than 90 days past due).
But one can infer from the data that its coverage ratio on an EBA basis was just under 50% in December 2015 – not least because that is what the troika of international lenders forced it to do.
Second is Hellenic, with a coverage ratio of 50.1% and a long distant third is BoC, with a ratio of only 39%. One can assume that the EBA will keep up the pressure to raise the ratio to 50%. As I noted in the February Sapienta report, “to avoid the need to raise new capital, BOC will need to continue rapidly cutting NPLs”.
Profitability: winner Hellenic
Hellenic Bank, with already a fairly high coverage ratio, did not have to raise provisions as much as the other two in 2015. As a result, it was the only bank to report a profit for the whole year, at €13m.
Being forced to raise provisions directly hit the profits of the other two banks. The CCB, with a loss of €167m, comes second, while BoC comes last, with a loss of €438m.
Liquidity: winner Hellenic
Hellenic wins for liquidity with €1.7bn more on deposit than loans in December 2015. The CCB had €53m less on deposit than loans, meaning its liquidity was more or less balanced. BoC on the other hand, dumped with the big liquidity problems of the now defunct Laiki, had a loan-deposit gap of €8.4bn in December 2015, although this is much lower than in the past and it has slashed Emergency Liquidity Assistance (EAL) to just €3.4bn from a peak of €11.4bn in 2013.
The overall winner is Hellenic Bank. Good liquidity may also be why it was the only bank to be able to increase lending last year even while cutting NPLs. This is helping the economy but also puts Hellenic on a stronger profitability footing than the other two banks.