Fitch said its rating actions reflect its view that even though the ultimate impact on the economy remains unclear, the risks to the banks’ credit profiles from the fallout of the coronavirus outbreak are clearly skewed to the downside.

Fitch’s baseline scenario for the eurozone is a sharp GDP contraction this year of 4.2 per cent before recovering in 2021.

“We also see downside risks to the estimates due to the rapidly evolving nature of the pandemic. As a result of the challenges, Fitch has changed the outlook on the operating environment for banks operating in Cyprus to negative from stable.”

Fitch said it expected government measures to ease asset quality pressures in the short term, but “we believe that the banks will remain vulnerable to an adverse scenario of a lengthier stress extending into 2021.”

“At least initially we consider the Cypriot banks to be more vulnerable to corporates and SMEs experiencing distress and drawing down on overdrafts and credit facilities. This is due to the banks’ significant exposure to sectors such as tourism, which have been directly impacted by the coronavirus outbreak.”

The banks are also sensitive to a more permanent rise in unemployment levels in an economy that is highly indebted.

To limit short-term impacts of the outbreak on unemployment, the government introduced a wage compensation schemes to protect jobs and avoid layoffs.

“We expect asset quality to deteriorate relative to our previous expectations from already weak levels and for earnings pressures to intensify due to lower business volumes and revenues and rising loan impairment charges. We still believe the two banks should remain structurally profitable as long as the coronavirus crisis is short-lived.”

Source: Cyprus Mail