Cyprus Mail
Business Cyprus

NPL’s must be addressed says troika

By George Psyllides

CYPRUS’ bailout adjustment programme remained on track, international lenders said on Wednesday, but warned the authorities that non performing loans was an issue and it had to be addressed.

In its fourth review of the island’s programme, the European Commission said reform in the financial sector has progressed, but the high level of non-performing loans (NPLs) remained an issue.

Large NPLs constrained the ability of banks to supply credit to the economy, the EC’s report said.

The EC said the slower than expected resolution of NPLs and a prolonged period of tight credit supply conditions could pose considerable risks to the real economy.

NPLs were around 50 per cent and on an upward path.

“As a result, the recovery is now expected to be more subdued than previously forecast, with growth projected at 0.4 per cent in 2015 and only gradually improving thereafter, as domestic demand is weighed down by the need to reduce very high levels of indebtedness.”

This was echoed by the International Monetary Fund (IMF) report.
“Conditions in the banking sector are normalizing, although non-performing loans remain very high, constraining the ability of banks to provide credit to the economy,” the IMF said.

The Commission said considerable efforts were being made to improve arrears management.

A new insolvency framework was in the pipeline, which should provide the right incentives for borrowers and lenders to find constructive solutions for dealing with non-performing loans, it said.

Overall, Cyprus’ programme remained on track and fiscal targets in the first quarter were met with a considerable margin “reflecting better than projected revenue performance and prudent budget execution.”

Fiscal performance remained strong, the EC said, and budgetary developments were on track.

“The 2014 government primary deficit is estimated at 1.7 per cent of GDP, broadly unchanged compared to the third review.”

“As agreed at the onset of the programme, an additional adjustment will be necessary in the outer years to attain the long run objective of a sustained 4 per cent of GDP primary surplus, which is needed to place public debt on a sustainable downward path.”

The IMF struck a note of caution however.
“The outlook remains challenging, although with a somewhat milder output contraction expected this year, followed by a more gradual recovery” it said.

“Overall, the economy remains weighed down by large private sector deleveraging needs.”

NPLs to corporations represented 45.2 per cent of banks’ total credit facilities and 40.3 per cent of coops’ loan book

– For households, these ratios stood at 42.5 per cent and 49.9 per cent in February

– Disaggregated data per sector indicates that close to 70 per cent of NPLs on the banks’ balance sheet stem from corporate loans.

– More than 80 per cent of NPLs on the coops’ balance sheet come from individual exposures

– For banks, delinquent assets concern primarily construction, household mortgages, real estate activities and wholesale and retail trade loans

– The level NPLs in Bank of Cyprus has reached about 55 per cent of gross loans, or equivalently €14.5bn, in the first quarter of 2014

– Managing NPLs is the key priority for Bank of Cyprus in the next years

– A growing number of staff has been assigned to the work-out of problem loans and the volumes being managed by these units have more than doubled

– Bank of Cyprus has appointed KPMG UK as an adviser to support the management of NPLs

– The unit for midand large-sized corporates is broadening the target from the top 30 corporates and real estate developers to other large exposures

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