The war in the Middle East has moved beyond general warnings and into the adverse-scenario probabilities and expected credit losses calculated by Cyprus’ three largest banks.
Half-year reports published in recent days by Bank of Cyprus, Eurobank and Alpha Bank show three different approaches to assessing the financial risks arising from the conflict.
Bank of Cyprus assesses the situation as a Cyprus-based banking group, while the Eurobank and Alpha Bank figures come from reports by their Greece-based groups, which operate in Cyprus through subsidiaries.
Bank of Cyprus increased the weighting of its adverse scenario from 30% to 40%, resulting in an additional €5.5 million in expected credit losses. Eurobank temporarily raised its adverse-scenario weighting to 40% in the first quarter before returning it to 30% after incorporating updated macroeconomic forecasts. Alpha increased its group-wide adverse scenario from 20% to 25%, resulting in an additional €10 million in impairment losses, although it said updated variables specifically relating to Cyprus had no material impact.
Bank of Cyprus raises adverse scenario to 40%
As of 30 June 2026, Bank of Cyprus assigned a 40% probability to its adverse scenario, up from 30% at the end of 2025. It kept the baseline scenario at 50% and reduced the favourable scenario from 20% to 10%.
The bank said the adjustment was made “to take into account the heightened geopolitical uncertainty following the military conflict in the Middle East and the potential economic consequences”, resulting in an additional €5.5 million in expected credit losses.
Under its adverse scenario, Cyprus’ real GDP contracts by 3.1% in 2026 and 4.5% in 2027, while unemployment rises to 6.7% and 8.4% respectively. Inflation reaches 4.8% in 2026 and 3.9% in 2027.
Under the baseline scenario, economic growth remains positive at 2.3% in 2026 and 2.5% in 2027.
Direct exposure limited, but indirect risks greater
Bank of Cyprus also detailed its direct exposure to Middle Eastern countries affected by the conflict, describing it as “limited”.
As of 30 June 2026, the bank had exposure to Israel, Iran, Lebanon, Saudi Arabia, the United Arab Emirates, Qatar, Bahrain and Kuwait through bonds with a total nominal value of €61 million, classified at amortised cost.
It also reported gross loans and receivables from customers of €151 million. This includes loans linked to collateral or business activities in the countries concerned.
The bank said it is closely monitoring developments through dedicated governance structures, including a Crisis Management Committee. The events are also incorporated into stress-testing scenarios to assess their potential impact on its capital.
Taking into account its capital and liquidity position, risk profile and stress-test results, Bank of Cyprus said it remains “well positioned to withstand the volatility that may arise from a deterioration in the geopolitical and global economic environment”.
Eurobank reverses temporary increase
Eurobank temporarily increased the weighting of its adverse scenario to 40% in the first quarter of 2026, while reducing its baseline scenario to 40%.
The bank described the move as a “temporary measure to reflect heightened economic uncertainty”.
Following an update to its macroeconomic variables, the weightings returned to 30% for the adverse scenario, 50% for the baseline and 20% for the favourable scenario.
The updated variables resulted in approximately €12 million in additional expected credit losses, while the €24 million charge recorded in the first quarter was reversed. The amounts do not relate exclusively to Cyprus and cannot be attributed solely to the war.
For Cyprus, Eurobank’s adverse scenario assumes average economic growth of 1.25% between 2026 and 2029, unemployment of 6.05% and inflation of 3.28%.
Alpha raises group-wide risk assumptions
Alpha maintained the weighting of its baseline scenario at 60%, increased its adverse scenario from 20% to 25% and reduced its favourable scenario from 20% to 15%.
The report said the change was made “in order to reflect heightened geopolitical uncertainty and increased potential risks”, resulting in an additional €10 million in impairment losses at group level.
Alpha does not publish a separate impact for its Cyprus subsidiary. It said macroeconomic variables for 2026-2028 had been updated “without having a material impact on the calculation of expected credit losses”.
Five ways the war could affect Cyprus
The three banking reports point to five main channels through which a prolonged Middle East conflict could affect Cyprus: tourism, energy and inflation, transport costs, interest rates and trade.
The initial impact on tourism was already visible, although it subsequently eased. According to Eurobank, tourist arrivals fell by 28.6% in March and April, with the decline narrowing to 4.9% in May.
At the same time, annual inflation accelerated from 0.9% in February to 4.1% in June, driven mainly by energy and services.
For an economy heavily dependent on imports, increases in energy prices and freight costs can quickly feed through to consumer prices. If inflationary pressures persist, central banks could keep borrowing costs higher for longer or introduce further interest rate increases, affecting debt-servicing costs and investment decisions.
A slowdown in major economies could also affect Cyprus through tourism, services and international business activity.
Despite the pressure, Eurobank said the group’s core markets, including Cyprus, had “demonstrated remarkable resilience”. However, it warned that geopolitical tensions, inflation and uncertainty over monetary policy “continue to weigh on the economic outlook”.
Overall, the three banks do not point to an immediate threat to Cyprus’ banking sector, but their reports show increased preparations for the indirect financial and economic consequences of a prolonged Middle East conflict.
Also read: Egypt, ExxonMobil advance Cyprus natural gas export plans
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