Winners & losers by Antonis Vidakis

banking

Winners & Losers

Bank (ECB) funding (Cypriot banks are no exception) with challenges on asset burden and collateral eligibility due to, for instance, rating downgrades, valuation effects on their collateral and an overall loss of market confidence. Rising levels of NPLs are placing pressure on banking systems, especially in Central and South Eastern Europe where NPL rates are higher, and the failure to move to sustainable capital structures and business models means that these might well go up further.

Funding remains a large challenge, especially for banks in the peripheral countries The table below illustrates the percentage of NPLs from the largest domestic and Cooperative banks in Cyprus. As of September 2013, NPLs of domestic banks in Cyprus represented 46% of gross loans, a rate in line with PIMCO’s projections. It also shows a worrying upward trend. One-third of the total NPLs is credited to corporate and SME loans in the construction and real estate sector. While the NPL ratio has been increasing, the profitability of the domestic banks has been declining; Bank of Cyprus

Non Performing Loans (NPLs) 1/ (Percent)

50 40

NPLs to Total Loans NPLs-PIMCO Provisions to NPLs

European Banking Sector Restructuring Continues

By Antonis Vidakis

ver the last few years, the European Union has been struggling with the effects of the global recession and threats from the financial sector that have yet to be fully addressed. In large part, they reflect weaknesses in the public, household and corporate sectors but the banks have also contributed to the problems as the financial sector constitutes a feedback channel that has reinforced negative tendencies elsewhere. Banks have been found to be insolvent as the rate of Nonperforming Loans (NPLs) to Total Loans has increased dramatically. The financial market is already in the process of restructuring, even though transparency and trustworthiness have not yet been fully recovered, especially in the countries under financial aid (e.g. Greece, Spain, Cyprus). While Europe’s troubled financial sector challenges the decision-making of companies and investors, weak global economic conditions, such as the growth slowdown in emerging markets, remain a serious concern. While financial collapse has been averted by the core eurozone and 36 of the most important banks elsewhere, 8,000 other European banks have made little progress in restructuring. Funding remains a large challenge, especially for banks in the peripheral countries, where taxpayer patience has diminished. Many such banks are heavily dependent on European Central

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Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Operations of the largest Cypriot domestic banks and coops.

Sep-13

reported losses of €1.8 billion through June 2013, and Hellenic Bank posted losses of €90 million through September 2013. So what is the outlook for the EU banking sector? At the macro level, gradual and cautious decisions are likely through incremental adjustments to the debt crisis, with an avoidance of taxpayer burdening and continued low interest rates. While bailouts for countries such as Slovenia and/or a revived bailout for Greece and Portugal seem likely with further mini-crises still possible, it appears that further bank bail-ins are expected, especially in tier-2 capital, to limit the direct burden on the taxpayer. A long-drawn-out process of change and restructuring is still to come in banking with up to $2.5 trillion left in deleveraging European banks. Management of NPL assets remains at the heart of the agenda, possibly allowing them to be picked up by non-European banks and large private equity (PE) funds. Consolidation, capital raising and further pullback to core geographies and products will increasingly become evident. Regulation will remain the primary driver of reform for the foreseeable future. EU bank resolution tools need to be strengthened, while the legal framework should not slow down restructuring but must maximize asset recovery. In addition to this, further development of the General Directorate for Competition’s (DG COMP) practices will be needed in systemic cases to ensure consistency with a country’s macro-financial framework and support the viability of weak banks, the recovery of market access, and credit provision. Increased transparency would give added credibility and accountability. In order to restore market confidence, disclosures should be significantly enhanced and harmonised by EBA. All things considered, financial sector restructuring in EU will divide banks into winners and losers and while a few could become ‘too big to fail’, only local and regional specialists will survive.

info: Antonis Vidakis is a CFA charter holder, and is currently leader of the Valuation and Business Modelling/Transactions team with EY Cyprus. the international investment, finance & professional services magazine of cyprus

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