Troubled Bank of Cyprus, the island's largest lender, issued a profit warning on Thursday, saying its 2012 results would be a lot worse than last year's due to increased provisions for bad debt.
BoC said that the group's results for the financial year ending December 31 after tax and before the impairment of Greek government bonds are expected to have a "significant negative deviation" compared to the 2011 results.
Greece-exposed BoC posted after-tax losses of 1.37 billion euros in 2011 following a 74 percent Greek haircut on toxic debt.
The bank said the "negative deviation" was mainly due to increased provisions for impairment of loans as a result of the continuing deteriorating economic conditions as well as reduced operating income.
"As a result of the above, the group's capital adequacy ratios will be negatively affected," it said.
Global bond giant Pimco is expected to publish an asset review in mid-January on how much liquidity the Cyprus banking system needs to survive the euro crisis.
"As of September 30, the capital adequacy ratio of the BoC group amounted to 7.6 percent with the Core Tier 1 capital ratio and the Tier 1 capital ratio at 5 percent and 7.3 percent respectively," the bank said.
"On the basis of the above expectations, it is possible that the Core Tier 1 capital ratio may be lower than 5 percent as at 31 December 2012."
The bank asked for state assistance in June after it fell 500 million euros short in bolstering its regulatory capital as required by the European Union.
The island's second largest bank, Cyprus Popular, needs 1.8 billion euros to recapitalise, forcing a cash-strapped government to request an EU bailout to prop up the banking system.
Nicosia says it has a draft agreement with the troika -- the European Commission, the European Central Bank and the International Monetary Fund -- on the terms of a loan deal, with estimates putting the amount needed at around 17.5 billion euros.
But lenders and Eurozone finance ministers are awaiting the due diligence report on the Cyprus banking system to see how much the island's recession-hit economy actually needs.
The BoC group currently has 556 branches -- 190 in Russia, 181 in Greece, 126 in Cyprus, 44 in Ukraine, 10 in Romania, four in Britain and one in the Channel Islands.
At September 30, 2012, the group's total assets amounted to 36.23 billion euros.
Cyprus projects its economy will slip deeper into recession in 2013 by 3.5 percent from 2.4 percent in 2012.