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BoC makes timely progress implementing restructuring plan

The reduction in emergency liquidity assistance (ELA) owed by Bank of Cyprus (BoC) will lower the bank’s funding expense and strengthen confidence in its ability to continue implementing the restructuring plan it agreed on with the European Union in 2013, Moody’s ratings agency said on Monday.

Last Wednesday, (BoC) announced that it repaid an additional €500 million of ELA during July and August, reducing its stock to €5.4bln or 23 per cent of assets.

“The progress thus far allows the bank to continue focusing on its significant asset quality challenges, including non performing loans (NPLs) at 52.7 per cent of gross loans at the end of June.

Since April 2013, when ELA funding peaked at €11.4 billion, BoC has repaid around €6bln, reducing funding costs.

“We estimate that the cost of ELA funding is higher than the cost of European Central Bank funding and the return paid on deposits,” Moody’s said. “During the second quarter of this year, BoC’s deposits in Cyprus stabilised at €11.6bln, and as assets declined by €1.4bln, deposits increased to 53.7 per cent of assets from 51 per cent in March.”

In addition to the significant challenges that BoC’s high stock of NPLs pose, the bank runs the risk of its balance sheet repair efforts derailing if Greece were to exit the euro, but this is not its central scenario, Moody’s said.

Although the bank’s balance sheet exposure to Greece is modest at around 15.1 per cent of equity, a Greek exit from the euro would likely lead to market disruptions and negatively affect confidence in Cyprus, affecting the bank’s funding and asset quality.

However, new tools available to banks will support BoC’s efforts to repair its balance sheet.

On August 17, the first day of implementation of the revised legal framework governing foreclosures, the bank sent notice letters to around 25 defaulted corporate borrowers with €84.9mln of total loans outstanding regarding foreclosure proceedings on their real estate collateral.

Even though the amount is only a fraction of the bank’s €12.1bln of NPLs, the letters signal the legal change to strategic defaulters who have refused to repay their loans despite having capacity to pay, Moody’s said.

Such strategic defaults were facilitated by the previous legal framework, which delayed the auction of real estate collateral for more than 10 years.

Although the ELA repayment is ahead of plan, the agency said it expected BoC’s balance sheet repair process to be lengthy given its high stock of NPLs, and high provisions and write-offs will burden the bank for years.

Cyprus’ economic growth has been better than expected, with second-quarter real GDP growth at 0.9 per cent versus our 0.5 per cent estimate, but growth forecasts are jeopardized by recent heightened downside risks to global growth.



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