A Greek exit from the euro area could have negative consequences on Cypriot banks Moody’s ratings agency said on Thursday.
“Although Cypriot banks hold insignificant direct exposures to Greece following the sale of their Greek operations in March 2013, a worsening of the situation there poses downside risks. While not our central scenario, a Greek exit from the euro area could have negative consequences on Cypriot banks’ asset quality and performance because various Cypriot corporates have operations in Greece that could undermine the banks’ efforts to improve their asset quality” Moody`s said in an analysis.
The rating agency also noted that Cypriot banks would benefit from a new Code for handling borrowers in financial difficulty, that was published by the Central Bank of Cyprus last Thursday, noting however that their “asset quality metrics will remain weak for several years to come”.
“The code, which is required as part of the country’s support programme from the European Commission, European Central Bank and International Monetary Fund, will benefit Cypriot banks because it raises awareness regarding borrowers’ financial obligations and speeds up loan workouts of borrowers with financial difficulties”.
The rating agency`s analysis added that the code also sets clear timeframes for each step of the restructuring process, which will likely speed up the process and reduce the number of uncooperative borrowers.
“Cypriot borrowers to date have been largely unwilling to engage their banks to restructure their loans owing to a widespread belief that they can get away with not repaying their loans because of the legal framework’s past weaknesses,” Moody’s said. “The published code can also be used by the newly established financial ombudsman and newly licensed insolvency practitioners to raise awareness and help borrowers understand banks’ rights”.
According to the rating agency, “although the code’s application will likely help the banks rehabilitate their loan books, given the large volume of non-performing loans (NPLs) that Cypriot banks are facing, asset quality metrics will remain weak for several years to come”.
The ratio of NPLs to gross loans was a high 46 per cent as of March 2015, and was even higher for principal domestic banks. Bank of Cyprus reported an NPL-to-gross-loan ratio of 51.3 per cent, while Hellenic Bank’s ratio was 54.6 per cent. (CNA)