Cypriot banks face the challenge of managing their exceptionally high non-performing loans (NPLs) amid a still weak economic environment. Fitch ratings agency has said.
“The Cypriot economy is set to recover gradually after several years of recession but the operating environment for the banking sector is still weak, with high unemployment and muted prospects for the property market,” the agency said.
Fitch said that despite the completion of the restructuring process of the island’s banking sector Bank of Cyprus’ and Hellenic Bank’s viability remained at risk from their elevated non-performing exposures, which accounted for 62 per cent and 58 per cent of their first half 2015 loans respectively.
The insolvency law passed by parliament in April 2015 should facilitate corporate debt restructurings and accelerate repossession processes, Fitch said.
The effectiveness of the reform is still subject to implementation risks, largely related to the political will to allocate the necessary resources, monitor the progress, and readjust the framework if required.
“We believe that the benefits of the reform will only feed through in the form of material reductions of problem loan volumes over the medium term,” the agency said.
Deposits remained broadly stable since the removal of all remaining capital controls in April 2015.
The banks’ equity raisings have helped restore investor confidence and Cyprus has maintained its tax-related attractiveness as an international investment platform, Fitch said.
However, reliance on foreign-related deposits remains high and makes the banking sector vulnerable to economic and political instability in other countries, primarily Russia and Greece and to fluctuations in foreign investor confidence in Cyprus.