WHAT BANKS FEAR FROM THE WAR - Filenews 19/4 by Theano Thiopoulou
Although the banks' results for 2025 impressed many investors, the banking system is moving into 2026 under the weight of the data of the war in the Middle East and especially under the fear of inflationary pressures that are expected in the coming period.
Seven weeks after the start of hostilities, the picture is twofold: On the one hand, a strong capital base and increased profitability, on the other hand, new risks that may affect bank balance sheets.
Fileleftheros compiled the estimates of the three systemic banks in Cyprus on the military conflict in the Middle East, as described in their annual reports, which data are of more concern and whether they can give a safe prediction for the next day.
Bank of Cyprus
"The new significant escalation in 2026 in the Middle East is disrupting the geopolitical balance and shaking international markets, especially in terms of energy. While both the Cypriot and global economies are entering the current crisis from a relatively strong starting point, despite the existing trade and geopolitical tensions, this new conflict is expected to have an impact on energy markets, as the production of the Gulf states has already been affected, while freight rates have already increased," the Bank of Cyprus states in its annual report. Given the group's exposure to sectors of the domestic economy that may be affected, such as tourism and trade, we continue to monitor these developments closely," says the Bank of Cyprus.
The impacts, he adds, will in turn affect inflation and broader financial conditions, but the magnitude of the impact depends significantly on the duration of the conflict. Therefore, the report points out that "the quantification of potential impacts remains uncertain, including, but not limited to, economic developments, asset valuations, interest rate expectations and exchange rates. Accordingly, inflation and any central bank actions will depend on the duration of the conflict and the impact of monetary policy, with inflation stemming from rising oil prices expected to maintain pressure on interest rates and dampen expectations of further easing."
It is also noted that "the current conflict may lead to increased and prolonged geopolitical instability, trade restrictions, disruption of global supply chains, as well as increases in energy prices, which are expected to intensify inflationary pressures at the global level, with a possible negative impact on financial markets and global economic activity. Possible spill-overs resulting from these developments, such as the reaction of central banks or the adequacy of energy supply in Europe, as well as their economic impact, are difficult to predict but could be significant."
Although the group's direct exposure to the Middle East region is limited, the conflict may have negative effects on the Cypriot economy, including, inter alia, negative effects on the tourism sector, increases in import costs through higher freight rates and effects on the administrative services sector, increases in energy prices resulting in inflationary pressures, as well as trade disruptions, says the Bank of Cyprus in its annual report.
"The Group continuously monitors current developments, the impact of projected macroeconomic conditions and geopolitical developments on the Group's strategy for the proactive management of emerging risks. Where necessary, specific solutions for the affected exposures are proposed and closely monitored continues. In addition, it is noted, "the complex includes relevant events in the stress scenarios in order to gain a better understanding of the potential impacts",
Eurobank Group
In its annual report, the Eurobank Group, which has a presence in Cyprus through Eurobank Ltd, states that the main macroeconomic risks and uncertainties for the next 12 months in Greece and in our region are related to the geopolitical tensions caused by the war in Ukraine and the fragile situation in the Middle East, in particular due to the war between Iran and the US/Israel in the region.
This latest development, he points out, "has drastically increased geopolitical and economic uncertainty worldwide and especially in nearby countries, has caused turbulence in maritime trade through important maritime routes in the Middle East - especially in the movement of energy products - and has strengthened financial instability".
In the event of a prolonged duration, the ensuing supply chain problems are likely to exert inflationary pressures internationally and, in an adverse scenario, even halt the deflationary trend of the last two years in many economies, the increased geopolitical and economic uncertainty stemming from US foreign and trade policy decisions and their effects, (e.g. increased financial volatility in equity and bond markets).
The risks could also have a negative impact on the fiscal planning of the Greek government, as it could slow down the expected pace of economic growth, liquidity, asset quality, capital adequacy and profitability of Greek banks. In this context, the annual report states, the group's management and board of directors are constantly monitoring developments in the macroeconomic, financial and geopolitical fields as well as the evolution of the group's key asset quality and liquidity assessment indicators. They have also maintained a high level of readiness in terms of decision-making, initiatives and policy formulation for the protection of the group's capital, asset quality and liquidity, as well as the fulfilment to the maximum extent possible, of its strategic and business objectives in accordance with the business plan for the period 2026-2028.
Alpha Bank Group monitors and evaluates
Regarding the geopolitical risks related to credit risk, the Alpha Bank Group states in its annual report that the bank assesses, monitors and manages geopolitical risk in parallel with developments in the external environment, in accordance with the respective guidelines.
The resurgence of geopolitical tensions in the Middle East, in particular in Iran, which is one of the most important oil-producing countries, as well as in the Red Sea, may lead, among other things, to an increase in international oil prices and transport costs, as well as delays in the supply chain resulting in a resurgence in inflation.
The bank has adopted a number of measures/changes regarding credit risk. At the level of individual borrowers, communication with Wholesale Banking customers is strengthened, in order to identify cases of customers affected by geopolitical events, with an emphasis on businesses that are either directly dependent on specific countries, due to the scope of their activity, or are active in specific sensitive sectors. In addition, for Wholesale Banking customers, close monitoring is carried out at Council level through sensitivity analysis in order to assess resilience levels.
