Cyprus Mail

Banks need more creativity to speed up NPL reduction, financial advisor says

Cypriot banks may have to resort to standardised restructuring procedures in order to speed up the reduction of their non-performing loan portfolio which make up half of their loan portfolios, a financial advisor said.

“It may take three to five years until we see non-performing loans drop to around 30 per cent and a decade until they drop to a level comparable to the rest of Europe,” financial advisor George Mountis managing partner at the Nicosia-based Delphi Partners which offers advisory services on real estate and transaction management said in an interview on Tuesday.

Banks, Mountis said, “cannot examine every case separately and therefore, will have to apply standardised procedures and hire external advisors with experience and a proven track record handling such situations if they are to make significant progress”.

Total non-performing loans in the Cypriot banking system stood at below €27.4bn in November which is 46 per cent of their total loan portfolio, according to the latest Central Bank of Cyprus data. The sum of restructured loans stood at slightly over €14bn or 51.3 per cent of total bad loans. The amount of restructured loans increased by below €1.2bn in November compared to December 2014.

“Restructurings are on a good path, but banks still need more tools and need to task external advisors to speed up the process, which is a slow one,” Mountis said. “Systemic and smaller banks alike, including the co-ops, have overhauled their internal systems, but current procedures still take time”.

The Cooperative Central Bank, Cyprus’s second largest lender introduced in May 2015 standardised restructuring procedures in an attempt to speed up the restructuring of its delinquent loan portfolio, which consists of a large number of small loans extended to an also large number of customers.

The delay in reducing their bad loans is forcing banks to increase provisions for loan impairments. Bank of Cyprus increased its provision levels on Tuesday citing an “ongoing regulatory dialogue with the European Central Bank” by €0.6bn thus reducing its core equity tier 1 capital ratio to 14 per cent from 15.6 per cent in September which remains above minimum capital requirements. The Cooperative Central Bank, which was bailed out with €1.5bn by the government in 2014, also announced in November an additional €527m in provisions which reduced its capital requirement to 12 per cent, prompting the lender to request a fresh capital injection of €175m from the government.

The co-op’s bad loan ratio rose to almost 60 per cent in September from 56 per cent in December 2014. Bank of Cyprus, which focused from the beginning on its “top-30” borrowers with bad loans initially totalling almost €6bn and sold its Russian subsidiary in July, was able to reduce its non-performing loan ratio to 62 per cent in September from 63 per cent nine months earlier. Hellenic Bank which has not announced any increase in provisions in recent months, saw its non-performing loan ratio rise to 61 per cent in September from 58 per cent in December 2014.

“Things are moving faster with larger companies, but it takes considerably more time with households –there are laws protecting the primary residence- and small businesses where outdated information gathering procedures and overly complicated bureaucracies, combined with a misguided approach, keep things from moving forward,” Mountis said.

According to the Central Bank of Cyprus, Cypriot banks restructured until November roughly 44 per cent and 48 per cent of household and small and medium-size enterprise non-performing loans. The restructuring rate in the case of larger companies stood at roughly three quarters.

“Bankers are accustomed to an outdated mindset, specifically extending loans but restructurings require a different mindset if long-term non-performing loan reduction is to be achieved,” Mountis said. “Banks need to embrace fresh ideas and an entirely new mindset to loan restructurings and their internal non-performing loan workout procedures, adopting best practices that where employed to see countries in similar crises out of their non-performing loan burden”.

If lenders fail to do so, there is a risk that the problem could “swallow the entire economy and property market,” he said.

Therefore, “banks need to think out of the box with respect to households and businesses alike and be more creative”.

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