Cyprus Mail

Swiss franc conversion creates moral hazard, a credit negative for banks – Moody’s

Forced conversion of Swiss franc mortgages would create a moral hazard and make restructuring of non performing loans (NPLs) more challenging, Moody’s ratings agency said on Monday.

According to a Central Bank report submitted in parliament, conversion of these mortgage loans to euros at the proposed rates, would cost Cypriot banks €250mln in losses.

“But the bigger credit negative is the moral hazard that the proposal creates among borrowers of the much larger amount outstanding of euro-denominated mortgages,” the agency said.

The proposal makes the banks’ restructuring of their high stock of NPLs more challenging as it would encourage all mortgage borrowers to delay loan restructuring in hope of more debt relief.

It would also delay the recovery of Cypriot banks’ profitability since they would likely continue to be loss-making for a fifth consecutive year, Moody’s said.

Cypriot banks face a large stock of problem loans, with the ratio of NPLs to gross loans as of June 2015 at 52.7 per cent for Bank of Cyprus and 54.9 per cent for Hellenic Bank

The Bank of Cyprus, with a €1 billion portfolio of Swiss franc loans, has the highest exposure among banks operating in the country.

Bank of Cyprus would face losses of around €147 million and Hellenic Bank around €11 million

Given the relatively high median net wealth of individuals, which was €266,900 in 2010 — the latest data available –, according to the European Central Bank, and the high savings rate in the country averaging 19.7 per cent before the financial crisis, “we believe 10 per cent to 20 per cent of delinquent small and midsize enterprise and retail borrowers are strategic defaulters that have the capacity to repay but opt not to do so.”

The banks’ progress in restructuring NPLs has been slow, and although Moody’s expects that the recently amended legal framework expediting auctions of foreclosed assets will support banks’ restructuring efforts, the framework has not been tested yet.





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