Cyprus crisis to hit European banks hard

The Cyprus banking debacle will strip €15bn annually from the profits of Europe’s biggest banks, according to a report from analysts at Barclays.

Many commentators have suggested that the Cyprus affair, particularly the troika plan to impose drastic “haircuts” on depositors above the €100,000 cut-off for deposit insurance, could spur a withdrawal of deposits by jittery bank customers across the EU.

Simon Samuels, the Barclays Bank analyst who wrote the report, says the only way that banks can offset this risk is by raising the interest rates payable on deposits over that €100,000 threshold to encourage customer loyalty.

Extrapolating from the cost of insuring the bonds of 16 European banks, Mr Samuels reckons interest rates will have to rise by up to 0.5 percentage points for the weakest banks in the eurozone periphery.

The hit to profitability will be an aggregate €8bn, he says, with a further €7bn overhead resulting from the cost of implementing an EU plan to see that all national deposit guarantee funds are pre-financed. Schemes in countries such as the UK and Italy currently have zero upfront funding.

The aggregate hit does not fall anywhere near evenly across the sector. Nordic banks, for example, will be barely affected. The biggest single hit under the Barclays modelling exercise would be to Royal Bank of Scotland, which would lose £1.6bn – or 22 per cent of its projected pre-tax profits next year. The biggest percentage hit would be at Commerzbank, where a third of profits would be wiped out.

Πηγή: Financial Times