THE ISLAND’S three major banks have significantly enhanced their profitability and asset quality in 2006, although challenges remain in sustaining their improvement. In a special report issued yesterday, Fitch Ratings said the banks – Marfin Popular Bank, Bank of Cyprus Public Company Ltd and Hellenic Bank Ltd – needed to stay focussed on the challenges.
“Maintaining the current level of income generation remains one of the key challenges for the banks,” says Paolo Fioretti, Director of Fitch’s Financial Institutions team.
All banks benefited from strong growth in their operating income, thanks to the enormous loan growth and a benign capital markets environment. Large gains from financial assets expanded at a rapid pace, contributing positively to the banks’ operating income in 2006.
However, Fitch views this revenue stream as less stable. The banks also benefited from foreign exchange income contribution, which will reduce with the introduction of the euro as the official currency. However, it will also give the banks opportunities to expand into new business areas and should partly reduce the volatility in financial gains from foreign exchange assets.
BOC and HB reported sound profitability and generated adequate internal capital. Both banks benefited from restructuring and improved asset quality, which resulted in smaller impairment charges in 2006. MPB was created by a merger of Cyprus Popular Bank Public Company (Laiki Group) and two Greek banks, Marfin Financial Group and Egnatia Bank in 2006.
Its profitability is slightly weaker than its Cypriot peers due to high integration expenses in 2006. However, the bank has given positive profit guidance for its early results and plans to complete the merger by the end of 2007.
The report said the three largest banks have only limited growth possibilities in Cyprus, given their dominant share of around two-thirds of the domestic market and can only expand on a small base by taking share from the co-operative banks.
Naturally, a key element of the major banks’ strategy is international expansion. All the three banks are already in Greece, which represents their second “local” market. Some Cypriot banks are considering expanding further in south-eastern Europe, targeting countries with fast-expanding economies, unsophisticated banking sectors and cultural affinities or large Cypriot communities, such as the Balkans, Romania, Ukraine and Russia. Fitch is watching these activities closely.
In 2006, asset quality at all three major banks continued to improve. All three banks strengthened their loan impairment coverage to more than 70 per cent. Fitch views this level as satisfactory, considering the banks hold a high level of collateral and guarantees against both performing loans and impaired loans.
However, average recovery period in Cyprus remains long. The three banks also improved their loan impairment ratios as they adopted a more conservative lending approach while the Cypriot economy continued to grow. The three largest banks in Cyprus have either improved their credit and recollection processes in the past few years or are overhauling them.
At end-2006 the Cypriot banks reported adequate solvency ratios. Although their capital ratios compare well with international standards, Fitch believes the banks need to maintain additional capital to offset their large stocks of impaired loans, strong loan growth and further acquisitions, especially in less developed markets.
n Fitch’s Special Report ‘Major Cypriot Banks: Annual Review and Outlook’ is available from the agency’s website www.fitchratings.com.
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