SINGLE SUPERVISORY MECHANISM - 2014 COMPREHENSIVE ASSESSMENT RESULTS (Asset Quality Results & Stress Test)
ANNOUNCEMENT BY CENTRAL BANK OF CYPRUS ON THE RESULTS OF THE 2014 COMPREHENSIVE ASSESSMENT
The comprehensive assessment of the Cypriot significant credit institutions (Bank of Cyprus, Hellenic Bank, Co-Operative Central Bank and RCB Bank) was conducted in the framework of the comprehensive assessment of 130 banks across Eurozone by the European Central Bank (ECB). The assessment which started in October 2013 comprised two stages[1]:
1) The asset quality review
2) The stress test exercise
The aim of the comprehensive assessment, which was carried out in the context of the preparation for the taking over by the ECB of the direct supervision of significant banks within Eurozone as from 4 November 2014, is:
- Transparency: The improvement in the transparency through the improvement in the quality of the available information on the financial condition of each bank.
- Corrective action: The strengthening of the balance sheets of banks by taking corrective action to deal with any issues which may arise through the comprehensive assessment.
- Trust: The improvement in the trust towards banks by ensuring that, after taking the relevant corrective measures, the banks will be healthy and creditworthy.
Stage 1: Asset Quality Review (AQR)
The main aim of the first stage was the assessment of the value of the loan portfolios and their collateral as well as of the relevant provisions – that is the losses that are estimated to arise for the whole loan portfolio as at 31st December 2013, providing also the starting point for the stress test. The exercise was carried out on the basis of a common methodology and common definitions. Its extent was unprecedented leading to an extensive check of the financial health of the banks which will be directly supervised by the ECB. Upon completion of the asset quality review, the banks must maintain a Common Equity Tier 1 ratio of at least 8%.
The results show that the capital buffers of the Cypriot banks, including the recapitalization amounts that took place or were announced during 2014, more than cover the capital needs which were calculated through this exercise.
Stage 2: Stress test
The main objective of the second phase (namely stress test) was designed to simulate the capital of banks based on two three-year macroeconomic scenarios: the baseline scenario and adverse scenario. Under the baseline scenario, the banks should maintain in the three-year minimum capital ratio (Common Equity Tier 1) equal to 8%, while in the extreme scenario a minimum of 5.5%. This stage was conducted in close cooperation with the European Banking Authority (EBA).
The aim of the baseline scenario of the exercise was to assess whether existing capital reserves of banks are sufficient in a three-year macroeconomic environment which is largely consistent with the current macroeconomic forecasts.
The results of the baseline scenario of the stress test, calculated after taking into account the recapitalisations already made or announced in 2014, show that no Cypriot bank needs additional capital.
Finally, the adverse scenario was designed to examine the strength of the banking sector to extreme macroeconomic conditions for three years.
Even under these extreme adverse macroeconomic conditions, after calculating the capitalisations already made or announced in 2014, the banking sector in Cyprus appears largely adequately capitalised. Measures designed to fill small capital needs that arise have already been taken or initiated.
It is pointed out that the stress test was not conducted to predict accurately future economic indicators but to establish the strength of banks under very conservative projections.
Summary results:
The table below presents summary results of the comprehensive assessment, calculated after taking into account recapitalisations already made in 2014.
Bank name | CET1 after the AQR findings % | CET1 under the stress test baseline scenario % | CET1 under the stress test adverse scenario | Capital surplus/(deficit) €m |
Bank of Cyprus | 11,5 | 11,6 | 5,8 | 81 |
Co-Operative Central Bank | 13,6 | 14,1 | 9,3 | 331 |
Hellenic Bank | 7,4 | 8,4 | 1,7 | (176) |
RCB Bank | 16,7 | 15,7 | 11,6 | 112 |
As shown in the table above, in the case of Hellenic Bank, a small deficit is presented after taking into account the increase in capital during the 2014. This deficit will be more than covered by the conversion of convertible debt securities and issue of additional equity.
Any bank showing a net capital deficit through the comprehensive assessment will have two weeks to submit plans to meet these needs. As previously announced, the Board of Hellenic Bank intends to proceed with a share capital increase taking into account the results of the comprehensive assessment. For the other banks, and taking into account the recapitalisation that took place in 2014, no additional needs arise.
The results are very positive for the Cyprus economy, showing that the actions taken in 2014 and all the efforts and measures to strengthen the banking sector were beyond satisfactory. The results of this exercise should help to strengthen the confidence of depositors in Cypriot banks which will contribute to the efforts for economic growth. It is also expected that increased confidence will create the right conditions for the lifting of the remaining restrictive measures on the movement of capital.
A very important outcome of this exercise is that, the € 1bn available in the support program of the Cyprus economy by its international lenders, which was intended to cover capital needs of the Cypriot banking system, will not be used and will remain available as a buffer. Therefore, the country’s debt will be € 1bn lower than expected in the Memorandum of Understanding signed with its international creditors.
Extensive details on the results of the exercise per bank, and additional information on the banks' balance sheets have been published on the ECB website and reproduced below.
Note that this exercise has been carried out under ECB methodology for the asset quality review and under the EBA (European Banking Authority) methodology for the stress test. Details are posted on the ECB's website (http://www.ecb.europa.eu/ssm/assessment/html/index.en.html) and the website of the EBA (https://www.eba.europa.eu/-/eba-publishes-common-methodology-and-scenario-for-2014-eu-banks-stress-test). At each stage of the exercise there was thorough check by the ECB in order to ensure the validity of the calculations. The summary report of the results for all banks participating in the exercise as well as detailed results for each bank are available on the ECB's website (http://www.ecb.europa.eu/ssm/assessment) and EBA’s website (https://www.eba.europa.eu).
[1] Stage 1 (asset quality review) covered Bank of Cyprus, Co-Operative Central Bank and Hellenic Bank. Stage 2 (stress test) covered Bank of Cyprus, Co-Operative Central Bank, Hellenic Bank και RCB Bank.
Results of Bank of Cyprus Public Company Ltd
Results of Co-Operative Central Bank Ltd
Results of Hellenic Bank Public Company Ltd
Results of RCB Bank Ltd